VZCZCXRO6690
RR RUEHAST RUEHBI RUEHCI RUEHDBU RUEHLH RUEHNEH RUEHPW
DE RUEHNE #1392/01 1871357
ZNR UUUUU ZZH
R 061357Z JUL 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 7318
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 02 NEW DELHI 001392 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/INS AND EEB 
USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD 
DEPT OF ENERGY FOR A/S TCUTLER, MGINSBERG, 
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:  INDIA'S ECONOMIC SURVEY FOCUSES ON GROWTH AND FISCAL 
CONSOLIDATION, AHEAD OF BUDGET 
 
¶1. (U) Summary: The Economic Survey for India's Fiscal Year (IFY) 
2008-09 (4/1/2008 to 3/31/2009) presented by Finance Minister Pranab 
Mukherjee in India's Parliament on July 2 paints a resilient picture 
of the Indian economy.  The Survey sees a 'U shaped' recovery for 
growth in IFY 2009-10 (4/1/2009 to 3/31/2010) with GDP growth to be 
as high as 7.75%, if the global economy turns up by September 2009, 
and a reasonable growth of 6.25% if the global recession drags on. 
The survey proposes an ambitious list of reform measures - some of 
which have been suggested in the past - including a 49% foreign 
direct investment (FDI) cap in insurance, allowing "multi-format" 
retail starting with food retail, and restructuring expensive 
subsidies.  Some of these measures were announced in the Budget 
Speech given by Finance Minister Pranab Mukherjee on July 6 (more in 
detail septel).  End Summary. 
 
India's Growth Revival 
---------------------- 
 
¶2. (U) India's Economic Survey for IFY 2008-09, presented by Finance 
Minister Pranab Mukherjee in Parliament on July 2, states that the 
Indian economy withstood the adverse global conditions and grew by 
6.7% in IFY 2008-09 versus 9.0%   IFY 2007-08.  Agriculture growth 
moderated to 1.6% in IFY 2008-09 from 4.9% in the previous year, 
mainly on account of the high base effect.  Industry grew by 2.4% in 
IFY 2008-09 versus 8.5% in IFY 2007-08, led by weaker exports and 
lower domestic demand.  Even so, India continues to retain its 
position as a preferred destination for foreign investments. 
Foreign direct investment (FDI) flows to India grew 85% in 2008 to 
US$46.5 billion from US$25.1 billion in 2007.  On the back of a 
narrowing trade deficit as well as continued resilience in 
remittance flows, the Survey expects a current account surplus of 
0.3% to 2.8% of GDP in IFY 2009-10, assuming crude prices of 
US$70-80 per barrel. 
 
¶3. (U) The Survey asserts that reviving growth is the key priority 
for ensuring inclusive growth and generating revenues needed for 
meeting the social welfare objectives.  The Survey forecasts real 
GDP for IFY 2009-10 to reach between 6.25% to -7.75%.  The speed 
with which the Indian economy returns to a high growth path depends 
on the revival of the global economy, particularly the U.S. economy 
and the GOI's ability to push policy reforms.  In the event of a 
more prolonged external economic downturn, with the revival of the 
global economy/US economy being delayed until 2010, the Survey 
projects that Indian growth would moderate to the lower end of the 
range.  The economy is poised for a U-shaped recovery, with the last 
two quarters of FY 2008-09 (October 2008-March 2009) and the first 
two quarters of FY 2009-10 (April-September 2009) forming a trough. 
The Survey assumes a normal monsoon, leading to 3% growth in the 
farm sector.  The Survey highlights underlying domestic strengths - 
including the high contribution of services, strong rural incomes, 
and a rising savings rate, thrust for infrastructure, and buoyancy 
in foreign direct investment - as key factors supporting growth. 
 
Fiscal Consolidation 
------------------- 
 
¶4. (U) India's fiscal deficit for IFY 2008-09 slipped sharply to 
6.7% of GDP in IFY 2008-09 from the budget target of 2.5%.  The 
slippage was largely due to falling revenues, implementation of the 
Sixth Pay Commission Award, the Agriculture Debt Relief Scheme, as 
well as to the stimulus packages announced between December 2008 and 
February 2009.  The Survey emphasizes that the GOI should announce 
reform measures to restore the Center's fiscal deficit to 3% of GDP 
as per the Fiscal Responsibility and Budget Management Act target. 
Tax and expenditure policies need to be restructured for improving 
fiscal transparency to achieve fiscal consolidation.  It calls for 
the abolishment of the fringe benefit tax, securities transaction 
tax and the commodities transaction tax.  The Survey encourages the 
government to introduce a new Income Tax Code, as well as implement 
the Goods and Service Tax (GST) by April 2010. 
 
¶5. (U) The Survey stresses 'revitalizing' the disinvestment program 
to generate Rs 250 billion (roughly US$5 billion) per year as a 
feasible way to lower the deficit.  Other fiscal measures which the 
 
NEW DELHI 00001392  002 OF 002 
 
 
Survey says could reduce the fiscal deficit include streamlining 
oil, food and fertilizer subsidies to reduce leakages and the 
possibility of direct cash transfers to targeted groups.  The Survey 
suggests that a new cooking gas subsidy of a maximum of 6-8 
cylinders per annum per household should be given and that the 
kerosene supply-subsidy should be phased out by ensuring that every 
rural household (without electricity and cooking gas connection) has 
a solar cooker and solar lantern.  Further, the Survey recommends 
converting the fertilizer subsidy from a part-producer subsidy to a 
wholly farmer-user nutrient related subsidy, with freedom for 
producers to set prices of formulations with different mixes of 
nutrients. 
 
Inflation Still a Concern 
------------------------- 
 
¶6. (U) Wholesale price index (WPI) inflation was very high for much 
of last year, peaking at nearly 13% in August 2008, followed by 
sharp falls after that.  The average annual WPI inflation for the 
year ending March 31, 2009 was 8.4%.  WPI inflation is currently in 
the negative territory, having fallen to -0.13% for the week ended 
June 20.  On the other hand, the consumer price index (CPI) 
continues to remain high (8.6% in May 2009), largely due to food 
price pressures.  The food group has a high weight of 46% in the CPI 
for industrial workers and 69% in the CPI for agricultural workers. 
The Survey points out that the supply chain is unable to cope with 
accelerating growth in income and consumer demand and it has raised 
concerns of another inflationary cycle.  The Survey suggests that 
the government should increase production of food items to increase 
supply and reduce food inflation.  The discrepancy between the CPI 
and WPI could be resolved by land and real-estate sector reforms, 
strengthening the public transport system, building food supply 
chains and an updated WPI. 
 
Call for Reforms 
---------------- 
 
¶7. (U) The survey calls for wide ranging reforms to boost 
investments and revive industrial growth.  Some of the new reforms 
include allowing for private sector entry into coal mining and an 
amendment to the Atomic Energy Act permitting foreign participation 
in the nuclear power sector.  The Survey advocates FDI in retail, 
calling for FDI in "multi-format" retailing, especially food 
retailing, where foreign investment can help create cold supply 
chains.  It also supports raising the FDI cap in defense, insurance 
and banking sectors.  The Survey suggests early passage of the 
Pensions Fund Regulatory and Development Authority bill for giving 
statutory power to the regulator as well as liberalization of the 
spot and futures currency markets of India. 
 
Comment 
--------- 
 
¶8. (U) Much like last year, the Economic Survey has outlined a 
number of encouraging, even ambitious, reform initiatives.  Also 
like last year, implementation is key.  As a precursor to the 
introduction of the budget, the Survey has sketched reasonable 
growth expectations and emphasized the need for reforms across 
government delivery of services.  It acknowledges that the country's 
growth in recent years has benefited from a benign global economy. 
Now that global growth is forecast to shrink, India can no longer 
afford to delay improvements in education, health, efficient subsidy 
delivery, and infrastructure.  The Survey, a product of the Ministry 
of Finance, spells that out and the reforms needed to return India 
to its potential high growth path.  It remains to be seen whether 
there is sufficient agreement within the UPA coalition to enact 
these reforms. 
 
BURLEIGH