VZCZCXRO7591
RR RUEHAST RUEHBI RUEHCI RUEHDBU RUEHLH RUEHNEH RUEHPW
DE RUEHNE #1222/01 1631314
ZNR UUUUU ZZH
R 121314Z JUN 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 6971
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS SECTION 01 OF 04 NEW DELHI 001222 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/INS AND EEB 
USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD 
DEPT OF ENERGY FOR A/S KHARBERT, TCUTLER, CZAMUDA, RLUHAR 
DEPT PASS TO USTR CLILIENFELD/AADLER/CHINCKLEY 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
USDA PASS FAS/OCRA/RADLER/BEAN/FERUS 
EEB/CIP DAS GROSS, FSAEED, MSELINGER 
 
E.O. 12958: N/A 
TAGS: ECON EAGR EAIR ECPS EFIN EINV EMIN ENRG EPET ETRD
BEXP, KBIO, KIPR, KWMN, IN 
 
SUBJECT: New Delhi Weekly Econ Office Highlights for the Week of 
June 8 to June 12, 2009 
 
¶1. (U) Below is a compilation of economic highlights from Embassy 
New Delhi for the week of June 8-12, 2009, including the following: 
 
-- MOF Preparing for Budget Session 
-- Indian Commerce Minister Meets with USTR, Others on WTO 
-- Tax Concessions Proposed for Broadcast & Film Industry 
-- Will Govt Give Bailout for Air India's Mounting Losses 
-- IT Industry Threatens Retaliation If US Tax Breaks Are Withdrawn 
-- Chennai Breaks Ground on Metro Rail Project 
-- Local Distiller to Produce Smirnoff in Tamil Nadu 
 
MoF Preparing for Budget Session 
------------------------------- 
 
¶2.  (SBU) In a meeting on June 11, Ministry of Finance Joint 
Secretary (Capital Markets) KP Krishnan told Emboffs and visiting 
Deputy Assistant USTR for South Asia Claudio Lilienfeld about the 
preparations underway in his Ministry for the upcoming Budget 
Session of Parliament next month.  Krishnan noted that the prebudget 
"number crunching" had been done.  While the Prime Minister was 
aware of the fiscal deficit, which acted as a constraint on 
spending, he also felt challenged to deliver on the social promises 
made by the government.  The media has been correctly characterizing 
the budget, Krishnan stated, as a vehicle for signaling policy 
intent and announcing policy changes.  He indicated that only the 
last stage of the budget proposal process was left - the Finance 
Minister meeting with the Prime Minister.  Krishnan described the 
Finance Minister, based on their meetings together, as someone who 
is not concerned with minutae but wants to focus on policy goals and 
the political issues surrounding change in order to address the 
political hurdles. 
 
¶3.  (SBU) Krishnan then spoke more broadly about the policy review 
efforts underway across the government.  The Joint Secretary stated 
that the Prime Minister had tasked ministries back in February to 
identify "unfinished business" that needed completing.  He said the 
PM wanted it done before elections so that, if they won, the UPA 
could hit the ground running.  If they lost, the PM reportedly said 
the plans would be left as suggestions for the new Prime Minister. 
That way, the policy reviews done from February to May were either 
going to be the PM's own plan or his legacy.  Krishnan told Emboffs 
that the Prime Minister had decided to chair three cabinet 
committees himself in the new government, as priority areas where he 
wanted to ensure progress: Human Resource Development, 
Infrastructure, and Financial Services.  Krishnan said that the 
Prime Minister had also tasked several ministries with drafting 
legislation to be introduced in the July session with the goal of 
trying to pass some of the legislation before the session ended 
sometime in August.  (Comment: A very ambitious timeline for Indian 
legislation. End comment.)  Ministries are being pushed because of 
the government's view that it must accomplish its policy goals in 
the first two years, ideally this year or next. 
 
¶4.  (SBU) Krishnan himself had been tasked with rewriting the 
pension reform bill (the PFRDA Act), as old age income security was 
a high priority of the Prime Minister, which he sees as a key part 
of inclusive growth.  The bill would, among other things, 
consolidate into the New Pension Scheme (NPS) disparate existing 
pension schemes for workers in different sectors, like handlooms, 
cigarette rollers, and plantations.  He said the Finance Minister 
was trying to keep an FDI provision out of the legislation, since 
any future changes would then require additional legislation.  They 
are not wed to any FDI cap in general, Krishnan acknowledged, but 
the Finance Minister is aware of the time and energy it took to move 
on the insurance bill amendment raising the FDI cap from 26 to 49%, 
since he chaired the Group of Ministers on the issue, and has 
signaled his intent to keep FDI issues out of the legislation and 
leave it for the notification process.  Krishnan then shared that 
the Prime Minister wants the pension reform bill passed and notified 
by August 15, so that he might reference it in his Independence Day 
Speech, as something accomplished, not just promised.  The 
government did not view promises as adequate. 
 
 
NEW DELHI 00001222  002 OF 004 
 
 
Indian Commerce Minister Meets with USTR, 
Others on WTO 
----------------------------------------- 
¶5.  (U) Media widely covered Commerce Minister Anand Sharma's first 
bilateral meetings with his counterparts, including USTR Ron Kirk, 
during the Cairns Group ministerial in Bali this week.  Sharma, 
since taking charge as Commerce Minister in late May, has asserted 
India's commitment to conclude the WTO Doha Round, with an emphasis 
on the development aspects of the trade talks.  At the Bali 
conference, Sharma emphasized that the "development dimension of the 
Doha round must be central to all discussions and the aspirations of 
all developing countries for a fair trading regime must be 
recognized."  In addition to USTR Kirk and WTO Director General 
Lamy, the Indian minister also held talks with representatives from 
New Zealand, Australia, Malaysia and Indonesia, broadly highlighting 
the need to arrive at an early conclusion of the trade talks.  Ahead 
of his departure for Indonesia, Sharma had reportedly said he hoped 
to re-start the process for the successful conclusion of the Doha 
Round and looked forward to his meeting with other trade ministers, 
especially USTR Kirk.  Indian media reported there was considerable 
interest in the meetings Sharma had with other trade ministers, as 
India holds the key, along with the U.S., to the conclusion of the 
trade talks. 
Tax Concessions Proposed for 
Broadcast & Film Industry 
--------------------------------- 
¶6.  (U) Press reported that the Ministry of Information & 
Broadcasting (MI&B) has recommended to the Ministry of Finance a 
"rationalization," i.e., lowering, of the tax/tariff structure on 
digital television set top boxes (STBs) and digital head-end 
equipment used by India's broadcasting and film industries.  The 
proposals include: removal for five years of the current special 
additional 4% duty and the prevailing 8% duty on set top boxes in 
order to promote the conditional access system (CAS).  MI&B also 
recommended that the Broadcasting, Cable, and Direct-to- Home (DTH) 
television industries be included in the "infrastructure sector," 
thereby granting to them the special benefits and incentives 
applicable to this sector.  MI&B also recommended a 100% tax 
exemption on profits for digital cable service providers and DTH 
operators for the first five years.  These proposals will be 
presented in the Parliament in early July during the budget session. 
 
¶7.  (SBU) Arvind Kumar, Director, MI&B confirmed to Post that these 
recommendations have been submitted, noting the Ministry of Finance 
has authority to accept or reject any or all of them.  The USG, 
through the U.S.-India Information and Communication Technology 
Working Group (ICT-WG), has been advocating tax rate reductions, 
implementation of CAS, and tighter regulation of the cable industry 
as a whole to stimulate consumer demand and to help reduce pirating 
of broadcasts. 
 
Will Govt Give Bailout for Air India's 
Mounting Losses 
-------------------------------- 
¶8.  (U) The government-owned National Aviation Company of India Ltd. 
(NACIL), the holding company for the merger of Air India and Indian 
Airlines, is facing mounting losses.  NACIL has requested a bailout 
of $2.8 billion from the central government in the form of equity 
infusion, soft loans, and grants.  The bailout demand is higher than 
the carrier's actual operating revenue of $2.4 billion in 2008-09. 
While NACIL's accounts for 2008-09 are still being finalized, losses 
are estimated to be around $1 billion instead of the projected $600 
million at the beginning of the fiscal year.  Given that this 
estimated loss is five times the combined losses of the two carriers 
before the merger in 2007, the merged entity continues to face 
criticism for underperforming and higher revenue losses.  Industry 
observers have noted that part of the problem, amidst the global 
recession and downturn in aviation, is the large number of NACIL 
employees - including 33,000 direct hires and 20,000 contract 
employees - who have not been downsized to streamline costs of the 
merged entity.  Press reports that NACIL has already used up a $3.2 
billion working capital loan facility; the company now faces the 
risk of lenders invoking the sovereign guarantee provided by the 
 
NEW DELHI 00001222  003 OF 004 
 
 
GOI. 
¶9.  (U) Civil Aviation Minister Praful Patel has recommended an 
initial public offer of NACIL's shares to help the airline get back 
on track.  The public and aviation industry will also expect the 
ministry to impose tough pre-conditions on NACIL before approving 
such a hefty bailout.  This may include a variety of measures to 
reduce costs, such as downsizing flights on unprofitable routes; 
reducing incentives, allowances, and placing a moratorium on wage 
escalation agreements for employees; returning leased planes; and 
minimizing the number of foreign pilots (which earn higher salaries 
than domestic pilots).  However, despite the various problems facing 
NACIL, the company still plans to accept delivery of 111 new 
aircraft, of which 30 will be inducted this year.  In contrast, 
private Indian carriers have withdrawn purchase orders and have 
deferred expansion plans.  The aviation ministry will have to make a 
strong case for a government bailout of NACIL as well as outline 
measures to help NACIL turn around into a performing, profitable 
airline. 
IT Industry Threatens Retaliation If 
US Tax Breaks Are Withdrawn 
--------------------------------------- 
¶10.  (U) President Som Mittal of the National Association of 
Software and Services Companies (NASSCOM) commented to media that 
any protectionist actions taken by the US that would adversely 
impact the outsourcing industry may trigger "counter-protectionist" 
measures by India.  Mittal was referring to the Obama 
Administration's proposal to eliminate tax breaks that create 
incentives for U.S. companies to locate jobs overseas.  Mittal did 
not elaborate on what "measures" would be taken, but estimated that 
ending tax incentives would affect approximately one million Indian 
IT professionals, a large portion of India's business process 
outsourcing (BPO) industry.  The Indian IT industry has been closely 
monitoring President Obama's administration since the announcement 
of the proposal. 
Chennai Breaks Ground on Metro Rail Project 
------------------------------------------- 
 
¶11.  (SBU) Chennai Metro Rail Limited began construction of a light 
rail link connecting northern Chennai to the city's international 
airport, southwest of town.  The 23-kilometer rail project is 
officially slated for completion in 2015.  Skeptics, however, have 
their doubts.  An official at Chennai's Metropolitan Development 
Authority (which authorizes permits for buildings and other 
projects) told Consulate General Chennai that land acquisition for 
the corridor continues to be problematic as much of the required 
land belongs to private owners in the city's central business 
district.  He expects lengthy litigation to surround the acquisition 
process and that the project may run out of money as the acquisition 
process becomes more and more costly. 
 
Local Distiller to Produce Smirnoff in Tamil Nadu 
--------------------------------------------- ---- 
 
¶12.  (SBU) International beverage giant Diageo has reached a deal 
with SNJ distilleries, a local bottler, to produce Smirnoff "Red" 
vodka for the local market, starting in September.  Some Diageo 
products have been available at local "wine shops" (run by Tamil 
Nadu's state monopoly, known as TASMAC) since November 2008, but 
they have generally been too expensive to make much headway in the 
local market.  The tie-up with a local distiller will allow Diageo 
to avoid paying the state's notoriously high import taxes and to 
therefore price "Red" more competitively.  The marketing director 
for TASMAC told us that the new arrangement will allow Diageo to 
expand its customer base and revenue growth, emphasizing that 
TASMAC's customers are very price-conscious.  (Comment:  The owner 
of SNJ distilleries is politically well-connected, known to be a 
close friend of M.K. Stalin, Tamil Nadu's Deputy Chief Minister, who 
is also the son of Tamil Nadu's Chief Minister.  While we do not 
have any direct information that these connections played a role in 
this venture, we suspect that they may have played a role in 
Diageo's decision.  End Comment.) 
 
¶13. (U) Visit New Delhi's Classified Website: 
 
NEW DELHI 00001222  004 OF 004 
 
 
http://www.state.sgov/p/sa/newdelhi. 
 
BURLEIGH