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O 101346Z JUL 09
FM AMEMBASSY NEW DELHI
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RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
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UNCLAS SECTION 01 OF 04 NEW DELHI 001433 
 
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 
July 6-10, 2009 
 
REFTEL: NEW DELHI 1401 
 
¶1.  (U) Below is a compilation of economic highlights from Embassy 
New Delhi for the week of July 6-10, 2009, including the following: 
 
-- Sharma Sees Recovery Signs in Exports 
-- Update on India's Balance of Payments 
-- Price Rise for Petrol and Diesel 
-- Lower House of Parliament Passes Railway Budget 
-- Reforms Have Life Outside of Budget 
-- US-India Advance Cooperation on Biofuels Program under the Energy 
Dialogue 
 
Sharma Sees Recovery Signs in Exports 
------------------------------ 
 
¶2.  (SBU) Commerce and Industry Minister Anand Sharma told 
Parliament this week that India's exports are now starting to 
respond to the stimulus packages announced by the Government of 
India (GOI) during the past six months.  Sharma commented that, "The 
figures for the last three months indicate that there is now a 
turnaround which is visible ".  Stimulus measures since October 2008 
including easier credit availability, larger import duty rebates, 
and a service tax exemption to lower costs for exporters.  According 
to the preliminary data released by the Commerce Ministry, 
merchandise exports from India dropped 29 percent in May 2009 to $11 
billion compared with the May 2008 level, after sliding 33 percent 
in April 2009, which was the biggest decline so far during the 
decade.  [Comment: Sharma's views that there may be green shoots in 
the Indian export sector seem very optimistic and based on a few 
data points.  At best, the rate of decline in this sector seems to 
have stabilized in the past few months and may possibly have 
troughed for this cycle.  However, a return to early 2008 growth 
levels may still be some time off.  End comment.] 
 
¶3.  (U) Industry and government sources continue to cite the impact 
of the global recession for the fall in demand in markets abroad, 
particularly traditional destinations which include the U.S., UK, EU 
and Japan.  A GOI labor bureau survey for the October-December 2008 
period estimated 500,000 jobs had been cut due to declining exports. 
 The survey covered mainly 10 export sectors, namely, mining, 
textiles, metals, automobiles, gems and jewelry, transport, 
construction, computer services, leather and hand-made textiles.  A 
follow up survey for the January-March quarter indicated some 
improvement in employment in the covered sectors, by as much as 
250,000. 
 
Update on India's Balance of Payments 
-------------------------------- 
 
¶4.  (U) India's balance of payments (BoP) turned a modest surplus of 
$0.3 billion in the last quarter (January-March 2009) of FY 2008-09 
after registering a deficit in the previous two quarters 
(July-December).  The current account for January-March stood at a 
surplus of $4.7 billion, a marked improvement from the deficits of 
$13 billion in each of the earlier two quarters.  The trade deficit 
fell sharply to $14.5 billion in the last quarter vis-`-vis an 
average of $35 billion in the previous three quarters, mainly due to 
the steep fall in imported crude prices.  Exports for the quarter 
totaled $40 billion from an average of $45 billion during the first 
three quarters of FY 2008-09.  The capital account deficit widened 
to $5.3 billion in the fourth quarter (versus $4.3 billion during 
the previous quarter) due to net outflows of banking capital, 
portfolio investment and short-term trade credit, although foreign 
direct investment (FDI) saw a recovery in the fourth quarter.  FDI 
inflows totaled $3 billion in the fourth quarter, an increase of 
$0.4 billion over the third quarter. 
 
¶5.  (U) For the full FY 2008-09, the current account deficit rose to 
$29.8 billion (2.6% of GDP), from $17 billion a year ago, driven by 
the widening trade deficit ($119 billion in FY 2008-09) due to 
 
NEW DELHI 00001433  002 OF 004 
 
 
higher oil prices and a fall in export demand. (Note: India's trade 
deficit is likely to narrow to $88 billion in FY 2009-10 due to 
lower oil prices and newer hydro carbon discoveries.  End note.)  In 
the current account, net invisibles (software, travel and 
remittances) totaled $89.6 billion during FY 2008-09 versus $74.6 
billion in the FY 2007-08, showing more buoyancy than many expected. 
 Software exports rose by 19% to touch $44.2 billion versus $37.2 
billion in the previous year. Similarly remittances have held up 
with inflows at $44 billion in FY 2008-09 versus $41.7 billion in FY 
2007-08.  If this trend continues in FY 2009-10, overall invisibles 
would more than offset the trade deficit, thereby resulting in a 
current account surplus. 
 
¶6.  (U) Capital flows registered a massive slowdown to $9.1 billion 
during full FY 2008-09 from $108 billion in FY 2007-08, despite 
higher FDI and non-resident Indian deposits.  FDI during FY 2008-09 
remained steady at $35 billion, compared to $34.2 billion in FY 
2007-08.  The manufacturing sector witnessed the highest FDI inflows 
followed by the financial services and construction sector. FDI 
inflows reflect the attractiveness of India as a long-term 
investment destination.  NRI deposits witnessed higher inflows since 
September 2008, responding to government permitted hikes in the 
interest rate ceilings of such deposits.  On the other hand, foreign 
institutional investors pulled out $15 billion during FY 2008-09 due 
to the slowdown in the global economy and heightened uncertainty. 
Net External commercial borrowings slowed down to $8.2 billion in FY 
2008-09 compared to $22.6 billion in FY 2007-08, mainly due to tight 
liquidity conditions in the overseas markets.  Citigroup's India 
economist expects capital flows to recover to $44 billion in FY 
2009-2010, given an improvement in risk appetite in the coming 
months. 
 
Price Rise for Petrol and Diesel 
--------------------------------- 
¶7.  (U) GOI's Ministry of Petroleum and Natural Gas (MPNG) announced 
on July 1, 2009 a nationwide increase in the refined petroleum 
products' controlled retail prices varying from 6%-9%.  Petrol 
(gasoline) increased by Rs. 4 per liter from Rs 40.63 to Rs 44.63 in 
Delhi (about US$0.93 per liter or US$3.52 a U.S. gallon).  Diesel 
went up by Rs. 2 per liter from Rs 30.87 to Rs 32.87 in Delhi ($0.68 
a liter or $2.60 per gallon).  Liquid petroleum gas (LPG - "cooking 
gas") and kerosene prices were left untouched, reflecting their 
perceived importance to the average citizen.  The price hike in 
refined product prices is the first since June 2008, just before the 
July 2008 peak in world crude prices near $140 a barrel when 
GOI-owned refiners and marketers faced large losses with the GOI 
selling oil bonds to cover part of the deficit or 
"under-recoveries."  At that time, the average price of India's 
crude imports was $113 a barrel; refined product prices were cut in 
December 2008 and again in January 2009 when world crude prices fell 
to the $40s range. 
¶8.  (U) Although the new refined product prices still do not fully 
cover the expense of current world oil prices ($60 to $70 a barrel), 
the increase in the controlled prices is seen as a positive move and 
bodes well for the GOI reform process and better fiscal 
consolidation.  The increase will help improve margins of the 
GOI-owned oil refining and marketing companies, which import crude 
at world prices but must sell refined products at GOI-controlled 
prices.  MPNG officials say the GOI marketing companies can break 
even at the new price level when world crude prices are at $53 a 
barrel.  GOI-owned exploration and production firms,  such as India 
Oil Company and Oil and Natural Gas Corporation (ONGC), are also 
absorbing part of the marketing companies' losses.  In another 
policy shift, the GOI plans to compensate the GOI product marketing 
companies mainly through direct budgetary provisions, whereas for 
the last few years, the GOI has depended largely on large volumes of 
off-budget oil bonds. 
¶9.  (U) The government and MPNG have signaled that deregulation of 
oil prices is on the GOI reform agenda.  The GOI is considering 
allowing fuel retailers to adjust pump prices of petrol and diesel 
as long as the average price of crude oil used in domestic 
 
NEW DELHI 00001433  003 OF 004 
 
 
refineries stays below $75 a barrel.  Above that level, the GOI 
would step in.  Even under the cap, refined product companies would 
not be allowed to increase retail prices beyond 15-20% at any one 
time.  The frequency of fuel price revision will also be specified. 
During the annual budget session speech on July 6, Finance Minister 
Pranabh Mukherjee stated that the GOI will set up an expert group to 
advise on a viable and sustainable system of pricing refined 
products.  With India depending on imports at world prices for over 
75% of its crude oil consumption, domestic prices of petrol and 
diesel should be broadly in sync with global crude prices, he said. 
 
Lower House of Parliament Passes Railway Budget 
--------------------------------------------- 
 
¶10.  (U) India's Railway Budget for FY 2009-10, presented by Railway 
Minister Mamata Banerjee last week, was approved by the Lok Sabha 
(the lower house of parliament) on July 9. The budget, in a bid 
towards inclusivity, left passenger fares and freight rates 
untouched.  Minister Banerjee plans to extend the rail network to 
every corner of the country and thus announced the introduction of 
14 non-stop superfast trains, 57 new train services, extension of 27 
trains, and the purchase of 18,000 new wagons in the current fiscal 
year.  Banerjee pledged to establish more than fifty world-class 
stations (to be paid for through "innovative financing" and 
public-private partnerships), with shopping malls and budget hotels, 
as well as the addition of 375 "Model Stations" with improved basic 
amenities.  Some of the other investment initiatives include mega 
logistic hubs in eastern and western dedicated freight corridors; a 
new coach factory and a 1,000 MW power plant in West Bengal and 
43,000 acres of railway land bank to be used for industrial 
development.  Minister Banerjee wants to set up an expert committee 
headed by Sam Pitroda, who heads the Knowledge Commission, to 
suggest innovations to utilize optic fiber cable networks of 
railways and take information technology to remote areas.  All this 
opens up new opportunities for the infrastructure sector. 
 
¶11.  (U) Minister Banerjee's budget also promises improvement in 
passenger amenities, cleanliness, hygienic food catering and safety, 
as well as new information technology services.  Some of the 
passenger amenities approved include introduction of air-conditioned 
double-decker coaches for inter-city travel, streamlining booking 
and charging extra on short notice scheme, concessional tickets for 
women, youth, students, journalists, low income groups, facilities 
for the handicapped and onboard availability of doctors and 
infotainment services.  Computerized tickets are also supposed to be 
made available through post offices and mobile ticketing vans, with 
automated ticket vending machines to be installed at 200 stations. 
Safety measures would include timely track renewal, modernization of 
signals and use of digital ultrasonic flaw detectors and integrated 
security at vulnerable stations. 
 
¶12.  (U) Budget figures indicate that revenues from freight and 
passengers fares remained sluggish last year, due to the economic 
slowdown and increased expenditure on salaries (railway staff of 1.4 
million), on account of implementing the Sixth Pay Commission 
report.  The Railways will be left with less investible surplus in 
FY 2009-10.  Despite this setback, Banerjee has set the total 
investment plan for FY 2009-10 at Rs. 408 billion ($8.5 billion), up 
from Rs. 363 billion ($7.9 billion) in FY 2008-09.  The Finance 
Ministry has approved issue of tax-free bonds by the Indian Railway 
Finance Corporation for the current year.  That will give the 
Railways leeway to target borrowings of Rs. 92 billion ($2 billion) 
in the current year and also avail of budgetary support of Rs. 158 
billion ($3.3 billion). 
 
Reforms Have Life Outside the Budget 
------------------------------- 
 
¶13.  (SBU) Two days after the Budget disappointed many observers by 
its near silence on divestment and other reforms (reftel), the 
Economic Times claimed the Finance Minister sent a quiet signal on 
 
NEW DELHI 00001433  004 OF 004 
 
 
divestment that the markets missed.  A Finance Ministry official was 
cited as stating that some of the largest Indian state-owned 
companies may have to lower single-investor stakes, to meet a 
requirement the Finance Minister laid out in his Budget Speech that 
state-owned companies have a minimum 25% public shareholding. 
Meeting this threshold could obligate the government to lower the 
size of some of its holdings, in order to allow 25% of equity to be 
listed on the stock exchanges.  This would in effect require 
divestment, a much anticipated reform by the markers. 
 
¶14.  (SBU) This quiet move is consistent with what new Planning 
Commission member Saumitra Chaudhury told econoff on July 8.  He 
observed that it was Finance Minister Mukherjee's style to do things 
quietly and to avoid drama.  As such, Chaudhury believed that the 
government would still go ahead with its stated reform agenda, but 
had decided the budget was not the proper place to take a stand on 
the issues.  Further, Chaudhury opined that the budget omitted any 
mention of foreign direct investment (FDI) because the government 
still needs to resolve the confusion caused by Press Notes 2,3, and 
4 earlier in the year on expanded FDI before it moves forward on 
retail or other sectors. 
 
US -India Advance Cooperation on 
Biofuels Program under the Energy Dialogue 
---------------------------------------- 
 
¶15.  (SBU) Under the U.S.-India Energy Dialogue's New and Renewable 
Energy Technology Working Group (NTRE-WG), the US Department of 
Energy (USDOE) and India's Ministry of New & Renewable Energy (MNRE) 
signed a Memorandum of Understanding on Cooperation in Biofuels 
Development on February 3, 2009 as previously reported.  The purpose 
of the MOU is to establish a framework of cooperation covering 
scientific, technical and policy aspects of production, conversion, 
utilization, distribution and marketing of biofuels in a sustainable 
and environmentally friendly manner, in accordance with national 
priorities and socio-economic development strategies and goals.  Mr. 
Zia Haq from USDOE's Office of Biomass Program visited New Delhi on 
June 29, 2009 and met with Indian official from MNRE and the Indian 
Oil Company (IOC) to share information on the USDOE's biofuels 
program and gain an understanding of the status and needs of the 
Indian biofuels program.  Also participating in the meeting were 
representatives from Central Salt and Marine Chemicals Research 
Institute (CSMCRI), Indian Oil Corporation (IOC), General Motors 
(GM), Indian Oil Company, Praj Industries, Indian Council for 
Agricultural Research (ICAR), Defense Research and Development 
Organization (DRDO), and the Department of Biotechnology (DBT). 
 
¶16.  (SBU) Both sides agreed on preparatory steps towards 
implementation of the MOU.  To begin with, MNRE will identify 
biofuels experts and institutions and invite them to discuss and 
prioritize possible joint projects under the MOU.  The group will 
include biologists, chemists, chemical engineers, and agricultural 
scientists among other professions.  USDOE will similarly identify 
biofuels experts and institutions and discuss possible collaborative 
projects.  An exchange of visits could take place by Indian and U.S. 
experts to either country for detailed interactions with their 
respective counterparts and visits to important research facilities 
and field projects.  These activities will culminate in a joint 
workshop to be held in the United States in early December 2009 
between officials and experts from both sides to discuss the 
projects short listed by the experts and to finalize specific 
projects that need to be included under the MOU.  The workshop could 
be hosted at the USDOE National Renewable Energy Laboratory (NREL) 
in Golden, Colorado. 
 
¶17.  (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi. 
 
BURLEIGH