VZCZCXRO7364
PP RUEHAST RUEHCI RUEHDBU RUEHLH RUEHNEH RUEHPW
DE RUEHBI #0327/01 2191146
ZNR UUUUU ZZH
P 071146Z AUG 09
FM AMCONSUL MUMBAI
TO RUEHC/SECSTATE WASHDC PRIORITY 7385
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHCI/AMCONSUL KOLKATA PRIORITY 1880
RUEHCG/AMCONSUL CHENNAI PRIORITY 2092
RUEHBI/AMCONSUL MUMBAI PRIORITY 2610
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 8612
RHEHAAA/NSC WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEAIIA/CIA WASHDC
RUEIDN/DNI WASHINGTON DC

UNCLAS SECTION 01 OF 03 MUMBAI 000327 
 
SENSITIVE 
SIPDIS 
 
STATE PLEASE PASS TO USTR CLILIENFELD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND EINV ETRD EAGR IN
SUBJECT: FOREIGN INVESTORS CHASE INDIAN ECONOMY'S GOOD NEWS BUT WEAK 
IT SECTOR AND A MISSING MONSOON COULD SPELL FUTURE TROUBLE 
 
MUMBAI 00000327  001.2 OF 003 
 
 
¶1.   (SBU)  Summary:  According to investors and finance 
professionals in Mumbai, economic sentiment in India is on the 
upswing.  Key indicators, including rising capital markets, 
corporate earnings, and manufacturing indices confirm this 
belief.  Foreign institutional investors (FII) are returning to 
India, bringing with them much-needed cash infusions to the 
capital markets.  In addition, domestic companies have raised 
almost $8 billion from foreign and domestic investors in recent 
months, after almost a year of poor prospects.  Certain sectors, 
however, remain in precarious positions.  The IT industry, which 
largely served U.S. markets and the financial services industry, 
projects a severe drop in earnings growth.  The agricultural 
sector, too, is likely to suffer from a weak monsoon season, 
with rainfall levels hovering approximately 20 percent below 
average, barely above drought level.  Despite continued public 
spending on rural development, low agricultural outputs may lead 
to consumer inflation and lowered GDP growth, further stumbling 
blocks on the road to economic recovery.  End Summary. 
 
 
 
 
 
Foreign Investors Put Their Money on India 
 
 
 
--------------------------------------------- 
 
 
 
¶2.   (U)  According to market participants, corporates, and 
economists, the Indian economy is seeing a renewal of investor 
confidence and a rise in economic sentiment.  The Bombay Stock 
Exchange's SENSEX - a barometer for Indian stock market 
performance - stands at around 15,900, approximately the level 
it was in June 2008, and up 90 percent from late-November 2008. 
Volumes on the derivatives market have doubled since March 2009. 
 A number of large Indian companies have posted better than 
expected corporate returns for Q1 2010 (average profits were up 
23 percent, y-o-y), including auto and motorcycle manufacturers, 
buoying stocks prices.  The purchasing manufacturer's index 
(PMI) shows an increase in manufacturing orders, consumer demand 
remains strong, and there is strong liquidity in the banking 
sector with deposit growth outpacing credit growth.  Exports are 
still contracting, though the pace has slowed. 
 
 
 
¶3.   (SBU)  Tushar Poddar, Chief Economist for Goldman Sachs, 
believes that the Indian economy turned the corner in mid-May, 
when key indicators - specifically credit growth, industrial 
production, money supply, consumer spending, and housing loans - 
 either stopped declining or turned modestly positive. 
Corporate earnings for Q1 2010 have been surprisingly good, 
indicating that many companies have weathered the worst of the 
crisis, cleaned up or restructured some of their debt now that 
conditions are more favorable, and benefitted from continued 
rural spending.  Investors have returned to India, he observed, 
because it is one of the few growth stories at the moment. 
Poddar predicts 6 percent growth for India in 2009, making it 
one of the world's fastest-growing economies. 
 
 
 
¶4.   (SBU)  Similarly, Sidharth Punshi, Managing Director and 
Country Head of investment bank Jeffries, also attributed 
increased foreign institutional investor inflow to unexpectedly 
strong first quarter corporate results, as well choice 
indicators, such as a 12 percent increase in car sales.  He 
highlighted the fact that large companies such as Tata Steel, 
Tata Power, Suzlon, and Sterlite, among others, have raised 
almost $8 billion since March 2009, $7 billion of that from 
FIIs.  The recent Adani Power IPO was oversubscribed by 20 
times, demonstrating that there is now demand for new equity in 
the market after almost a year of inactivity.  He also pointed 
to major real estate and infrastructure companies, such as 
housing giant DLF, who have retired some of their debt, sold 
assets and land, and largely avoided the major defaults that 
 
MUMBAI 00000327  002.2 OF 003 
 
 
many expected would be the "next shoe to drop" in the financial 
crisis' impact on India.  He expects this investment trend to 
continue, with Indian companies raising approximately $20 
billion by year's end. 
 
 
 
¶5. (SBU) Bharat Doshi, the Chief Financial Officer of Mahindra & 
Mahindra, agreed, noting that now is an excellent time to raise 
funds in India, either through capital markets or other 
investment avenues.  In June, Mahindra raised almost $100 
million for Mahindra Holidays, a travel and resort company. 
Doshi said that because international borrowings were still 
expensive compared to domestic borrowing rates, and the banking 
system is flush with funds, Indian corporates would likely 
increase their domestic funding operations.  Some small and 
medium-sized companies would still have problems getting credit 
due to continued risk aversion, but top-line corporations would 
be able to borrow at affordable rates.  For Mahindra, the large 
increase in rural spending over the past year has contributed to 
a 40 percent growth in tractor sales, year-on-year.  He feels 
that sales will continue to be high at least through October, 
when the impact of decreased government spending and the 
disappointing monsoon will be felt. 
 
 
 
¶6.   (SBU)  India Capital Research Service's Managing Director, 
Dan Tennebaum, also reports a rise in foreign institutional 
investment citing net $6.5 billion FII investment since the 
Indian elections in May 2009 (versus net $13 billion of outflows 
in 2008).  However, Tennebaum does not link increased investment 
to market fundamentals or recovery of the Indian economy. 
Rather, he thinks that developed markets present such a grim 
picture to investors that the Indian market--soft earnings and 
government inaction on economic reforms aside--appears 
attractive by comparison.  He also cited increased FII appetite 
for risk as developed economies tended toward stabilization. 
Gopal Jain, managing partner of private equity firm Gaja 
Capital, affirmed that FII inflows were returning to 2006-07 
levels.  However, he believed that the source of the inflows was 
a dollar-carry trade, as investors borrowed cheaply in the U.S. 
and reinvested in high-yielding emerging markets like India. 
While this benefits investment in the short-term, he worried 
that these investments could unwind suddenly if more financial 
problems develop in the U.S. 
 
 
 
IT Sector Struggles to Find Good News 
 
 
 
--------------------------------------------- 
 
 
 
¶7.   (U)  Despite the overall economy's turn for the better, 
important sectors continue to suffer.  The Information 
Technology and Information Technology-Enabled Services (ITes) 
sector, a major driver of growth in the Indian economy, recorded 
13 percent growth in 2008-09, significantly lower than the 30 
percent growth recorded 2004-08.  While export revenues grew by 
16.3 percent during the year, almost all of the growth was 
witnessed before October 2008, when effects of the global 
slowdown first reached India.  Sangita Gupta, Research Associate 
with the National Association of Software & Service Companies 
(NASSCOM), reports export revenues either contracted or were 
flat after September 2008.  Since the U.S. market and global 
financial services sector comprise 60 percent and 40 percent of 
the sector's export revenues respectively, the double impact of 
the U.S. recession and the global financial crisis have hit the 
Indian IT sector hard.  NASSCOM estimates that growth during the 
first half of 2009-10 will be flat or negative and will only 
marginally pick up in the second half of the year, leading to an 
overall growth rate of 4-7 percent for the sector in 2009-10. 
Going forward, Gupta said that this industry had already matured 
significantly, and 30 percent growth levels are unlikely to be 
sustainable, in any case. 
 
MUMBAI 00000327  003.2 OF 003 
 
 
 
 
 
Weak Monsoon Has Potential to Erode Recent Economic Gains 
 
 
 
----------------------------------- 
 
 
 
¶8.   (U)  A weak monsoon is currently one of the clearest, if 
not biggest, threats to the Indian economy.  Rainfall levels in 
June were approximately 35 percent below average, leaving India 
teetering on the cusp of having an officially "deficient" 
monsoon (defined as rainfall more than 19 percent short of 
average).  Rainfall levels over the next few weeks will 
determine whether normal conditions or drought prevails; steady 
rains in August could elevate the monsoon into the "normal" 
range.  The lack of rain, however, has already led to an 8.5 
percent decrease in agricultural sowing - mainly affecting the 
rice crop in the crucial growing states of Andhra Pradesh, Uttar 
Pradesh, and Punjab - putting the effects of a weak monsoon 
already in motion. 
 
 
 
¶9.   (U)  The results of a poor harvest could have rippling 
effects throughout the Indian economy.  While agriculture only 
accounts for 16 percent of total Indian GDP, roughly 60 percent 
of Indians live and work in rural areas.  The last weak monsoon 
was in 2002-2003, where a 19 percent deficiency contributed to a 
2 percent drop in overall GDP growth.  A Citibank report 
estimates that negative agriculture growth will, at a minimum, 
decelerate GDP growth from 6.8 percent to 5.8 percent, despite 
governmental buffers such as the National Rural Employment 
Guarantee Scheme (NREGS), farm subsidies, and other fiscal 
interventions.  UBS researchers estimate that GDP growth could 
fall 1.2 percent from their current 7 percent estimate, if 
rainfall does not improve.  However, other economic forecasts 
suggest any decline will largely be compensated by other areas 
of the economy. 
 
 
 
¶10.   (SBU)  Many observers fear that a poor harvest will lead 
to food price inflation, as poor harvests drive up commodity 
prices and spur rural unemployment.  While the Wholesale Price 
Index (WPI), India's most data-reliable measure of inflation, is 
currently negative, the food portion of the basket, led by 
sugar, is positive.  The more inexact - but more representative 
- Consumer Price Index (CPI) is already above 10 percent, 
reflecting a rise in food prices generally.  Inflation, which 
Credit Suisse estimates will stand at 6 percent by early-2010, 
could have a strong dampening effect on the economy.  Mumbai has 
already seen public demonstrations in the past few weeks over 
the rising prices of food goods, especially vegetables. 
 
 
 
¶11.   (SBU) Comment:  A series of positive economic indicators 
has turned investor and market sentiment positive, at least in 
Mumbai.  Good corporate earnings and the rebounding of capital 
markets have excited financiers and investors, although 
economists and Indian officials remain anxious about the impact 
of the so-far weak monsoon.  While agriculture makes up an 
increasingly small part of overall GDP, a poor monsoon would 
have a disproportionate impact on the majority of India's mostly 
poor population, including a rise in basic food prices, more 
rural unemployment, and more defaults and impoverishment in the 
countryside.  The Indian government will likely hew to election 
promises and continue to boost rural stimulus spending to stave 
off the most dire results, placing other economic reforms on the 
back burner.  Nevertheless, this spending - much of it 
necessary, some of it wasteful - is already having an impact on 
the growing fiscal deficit, raising further long-term concerns 
about the economy.  End Comment. 
FOLMSBEE