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DE RUEHNE #1237/01 1670325
ZNR UUUUU ZZH
O 160325Z JUN 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7006
RHEHAAA/WHITE HOUSE WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
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RHEHNSC/NSC WASHDC
RUCNDT/USMISSION USUN NEW YORK 8191
RUEHGV/USMISSION GENEVA 8426
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INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE

UNCLAS SECTION 01 OF 04 NEW DELHI 001237 
 
STATE FOR SCA/INS JASHWORTH AND SCA/RA MURENA 
USDOC FOR 4530/ITA/MAC/OSA/LDROKER/ASTERN 
DEPT PASS TO USTR FOR SOUTH ASIA - CLILIENFELD/AADLER 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA - MNUGENT 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD EAGR PREL PGOV PTER IN
SUBJECT: INVESTOR APPETITE FOR INDIA RETURNING BUT GOVT BETTER NOT 
DISAPPOINT 
 
REF: NEW DELHI 1162 
 
¶1.  (SBU) Summary.  Econoff and ConGenoffs met with Mumbai contacts 
on June 1 and 2 to gauge investor reaction to the elections and 
signs of recovery in the Indian economy.  In contrast to reports at 
the beginning of 2009 that investors were waiting for political 
uncertainty to end with the May elections, contacts noted that 
investors have a "lot of money on the table" for foreign investment 
and India and China increasingly stand out among emerging market 
destinations.  However, market observers and fund managers also 
cautioned that the recent rise in the bellwether Sensex stock index 
since elections has built in expectations of improved government 
performance and service delivery.  If those heightened expectations 
are not met by the end of the year, contacts warned that the markets 
could retreat and foreign investors could rethink their currently 
bullish perspective on India.  In the meantime, new GDP data 
(reftel) provided upbeat news, with the fiscal year that ended in 
March growing 6.7%, above expectations, raising some economists' 
outlook for the coming year. 
Elections Have Improved Sentiment 
But Not Fundamentals 
---------------------------------- 
 
¶2.  (SBU) Several investors pointed to the election results as the 
reason for the recent runup in the Bombay Stock Exchange, especially 
as tracked by the benchmark Sensex, which has risen more than 2000 
points since the parliamentary election results were announced May 
¶16.  Krishnakumar G., Managing Partner, IL&FS Investment Managers 
Ltd., opined that market investors have perceived that the large 
gain in Congress seats will create a stable and solid coalition 
government absent the Left and inordinate influence by the regional 
parties.  The Prime Minister's apparent firmness in limiting 
requested ministerial positions to one of the coalition partners who 
has underperformed was also well received.  Similarly, Sreekumar 
Chatra of Macquarie Capital called it a decisive election. 
Blackstone Advisors India's Chairman and Managing Director, Akhil 
Gupta, went even further, seeing the election results as a "huge 
inflection point" for the country, where voters chose performance. 
 
¶3.  (SBU) Reflecting this outlook, institutional investors have 
raised their profile in India since the elections.  Chatra estimated 
$2 billion had entered the country in the last two months in 
qualified institutional placements (QIPs), a highly liquid kind of 
equity purchase only permitted by stable, experienced funds like 
pension funds.  Sanjay Agarwal of Bank of America's Investment 
Banking Group noted that $5 billion came in foreign institutional 
investment (FII) flows in April and May, with $1 billion alone in 
the week after election results were announced.  This was in sharp 
contrast to the previous fiscal year, where FIIs withdrew a net $10 
billion.  He also saw a substantial amount coming in the form of 
QIPs and expected that to continue in at least the short term. 
¶4.  (SBU) Contacts noted, however, that although sentiment has 
improved, India's fundamentals remain the same as several months 
ago, leaving in place several key constraints, especially governance 
and infrastructure.  Vivek Kudva, President, Franklin Templeton 
Asset Management, claimed there was no rationale for the Sensex 
rise, as India still has issues.  He pointed to poorly targeted 
subsidies, lack of "world class" infrastructure and the dampening 
effects of the global economic slowdown on India via the export 
channel.  Blackstone's Gupta assessed the gap between India's 
potential and actual achievements as that of governance.  He pointed 
to weakness in India's courts, where millions of cases are stuck, to 
poorly trained and incentivized police, and even to Parliament. 
However, the election results have made him very bullish and he 
anticipated political stability for at least the next ten years, and 
more stability than China. 
5)  (SBU) On infrastructure, Macquarie's Chatra anticipated there 
was $6-9 billion in international infrastructure funds ready to come 
into India, if the government could fix the project finance 
structures.  He zeroed in on necessary amendments to the concession 
agreements the government offered to infrastructure developers, 
noting that the definition of total project cost was not viable, nor 
the bar on cross-holdings which disqualifies otherwise experienced 
developers.  He viewed Kamal Nath's assignment to the Roads and 
Surface Transport Ministry as a positive step, given Nath's 
reputation for "efficiency and effectiveness."  Overall, he thought 
 
NEW DELHI 00001237  002 OF 004 
 
 
infrastructure ministries were looking strong.  Shubhada Rao of Yes 
Bank said there was global interest in investing in India's 
infrastructure sector.  She thought investors were "piqued by" 
government signals since elections, but that they needed to be 
confident of the policy framework and were looking for stability 
there. 
Government Better Deliver 
------------------------ 
 
¶6.  (SBU) Several interlocutors assessed that the markets have 
factored in expectations that a lot more will get done in this 
Parliamentary session than in 2004-2009.  As such, many expressed 
the view that the government has 6-12 months to demonstrate 
progress, or else euphoria will turn to frustration and possible 
capital outflows.  Vivek Kudva, President, Franklin Templeton Asset 
Management, does see a window now to push through reform, in the 
areas of tax and subsidy rationalization that could boost revenues 
and more effectively spend existing government funds.  JP Morgan 
India Chief Economist Jahangir Aziz also saw a risk to sustained 
market levels if expectations are not met by December.  Besides the 
strengthened position of the Congress party and the coalition, Aziz 
perceived that the Prime Minister, Finance Minister Mukherjee, 
Planning Commission Deputy Chairman Montek Singh Ahluwalia, and even 
Home Minister Chidambaram were nursing bruised egos because of their 
inability to deliver significant reforms before.  This, according to 
Aziz, had increased their determination to achieve their goals, as 
it was probably the last chance for most of them, given their age. 
 
¶7.  (SBU) Others were more worried about the government's ability to 
deliver.  Bank of America's Agarwal speculated that the West Bengal 
coalition partner, the Trinamool Congress, might act like the Left 
parties in blocking reform, while Kudva wryly noted that the 
ministerial assignments were encouraging, and they were a "good lot" 
of ministers, but they were also "the same lot" that was in the last 
government.  Madhav Bhatkuly, Director of New Horizons Investments, 
also worried that corruption remained a serious impediment to 
effective governance and service delivery.  Yes Bank's Chief 
Economist, Shubhada Rao stated that she had upgraded India's 
economic outlook after the elections.  But she cautioned that the 
Congress party still needs to build consensus on reforms, even 
within the party, claiming that the government had "no other choice 
but to perform."  However, she was upbeat about new Finance Minister 
Mukherjee, describing him as open to reason, candid and honest. 
Government Borrowing Problematic 
--------------------------------- 
 
¶8.  (SBU) Kudva pointed out that government yields have risen since 
the elections, anticipating significant government borrowing to 
address a large fiscal deficit.  Macquarie's Chatra looked to 
University of Chicago economist Raghuraman Rajan's assessment that 
there was not much additional impact to be gained from further 
monetary and fiscal stimulus.  Deosthalee of Larsen and Toubro and 
Bank of America's Agarwal felt it was imperative that the government 
get its "fiscal house in order".  The markets need clear signals 
from the government on its borrowing plans, they said, since the 
huge deficit suggests heavy borrowing in the months ahead. 
Deosthalee saw that just the anticipation of the government's needed 
borrowing has already created upwards pressure on government yields. 
 Agarwal anticipated that the large size of the council of ministers 
would make it harder to rein in expenditures, since there would be 
more demands for funding.  Yes Bank's Rao noted that the central 
bank was signaling the end of its loose monetary policy and that 
crowding out had not yet happened because of subdued domestic 
corporate demand, implying crowding out could become a problem in 
the near future as the economy improved. 
 
Economic Outlook 
----------------- 
 
¶9.  (SBU) Franklin Templeton's Kudva is skeptical that the Indian 
economy is yet out of the woods, feeling that the government salary 
raises last year under the Pay Commission artificially and only 
temporarily boosted consumer power.  Krishnakumar observed that sea 
freight container traffic to India is still about half of what it 
was at its height in 2008, so that port activity and road traffic is 
still lower than some investors find attractive.  He expects another 
 
NEW DELHI 00001237  003 OF 004 
 
 
year or two before traffic recovers.  JP Morgan's Aziz does not 
think there is sufficient domestic demand to sustain higher economic 
growth beyond 6-12 months.  He thinks the decent GDP growth rates of 
the last six months have come from government workers spending more 
from their Sixth Pay Commission salary increases, which will not 
sustain growth, a view echoed by New Horizons' Bhatkuly.  Aziz 
anticipated that, by the second half of 2010, India will need the 
global economy to recover and boost exports in order for its GDP to 
sustain growth above 7 percent.  Some interlocutors, though, were 
more upbeat.  Macquarie's Chatra said that his firm had raised its 
India GDP projection for FY10 after the elections to 7%.  Likewise, 
Yes Bank's Rao noted her upward bias on a 6% growth projection, 
saying she needed a "clearer picture of agriculture" before raising 
the projection.  She expected Indian company expansion plans to go 
slowly, as global demand was key to many of the expansion 
projections. 
 
Investment Outlook 
------------------ 
 
¶10.  (SBU) IL&FS' Krishnakumar said that in his recent roadshow 
meetings with several hundred European investors, he saw a focus on 
India and China as the only two countries still growing.  As such, 
whether India's growth rate was 6% or 7% was of lesser concern, 
since no other country besides China was close to that kind of 
growth rate.  While investors are re-examining emerging markets 
after 9 months, Krishnakumar also noted that the economic slowdown 
is generating new opportunities in Canada and Europe with rare, 
attractive 8-10% returns, noting that country risk in India requires 
20-25% returns.  When asked if India was rising in investor 
estimation given its current higher growth, Agarwal temporized, 
placing India as a new "star" in emerging markets portfolios, but 
not breaking free from that category.  Agarwal looked to the third 
quarter of 2009 for capital markets to really open for the US, 
followed by Europe, then lastly by emerging markets. 
 
¶11.  (SBU) Kudva still does not yet see long term funds coming into 
the markets.  Agarwal also noted the lack of medium and long term 
financing, seeing only 2-3 year short-term money available in the 
market right now.  He noted this is especially detrimental for 
infrastructure financing, which needs such long-term financing to 
match the 10-20 year gestation period of projects.  Agarwal 
estimated that banks have put $20-25 billion in mutual funds in the 
last few months, rather than on-lend, because of concerns over 
credit quality.  Larsen & Toubro's Chief Financial Officer, Y 
Deosthalee, echoed that, lamenting that long term project finance in 
the West has not yet adequately improved.  He acknowledged that 
availability has increased somewhat but affordability of foreign 
financing is still a problem.  Deosthalee pointed to the 
government-administered high-interest savings schemes that capture 
much of long-term savings, preventing them from becoming long term 
lending instruments.  For Gupta of Blackstone as well as Yes Bank's 
Rao, they saw the Budget, expected in July, as a major signal to 
investors of government priorities, including how to handle the 
budget deficit. 
 
Comment 
------- 
 
¶12.  (SBU) Economists and investors in Mumbai had mixed views on 
whether the economy was yet recovering, but most agreed that the 
next six months were critical for the government to signal ability, 
not just intent, to achieve policy goals.  There was general 
agreement that the markets had risen too quickly and priced in 
performance, adding pressure to the government's need to demonstrate 
policy success or else see a retreat in foreign institutional 
investment.  The election results had removed a major uncertainty to 
investors, but many seemed unwilling to more fully commit funds 
until the policy framework was made clearer.  The government's 
stated priority for infrastructure development requires significant 
private (read foreign) investment and so the ball is now solidly in 
its court to convince foreign investors who stand poised to commit 
billions to India's future. 
 
¶13.  (U) Mumbai contributed to this cable. 
 
 
NEW DELHI 00001237  004 OF 004 
 
 
BURLEIGH