VZCZCXRO8200
OO RUEHAST RUEHBI RUEHCI RUEHDBU RUEHLH RUEHNEH RUEHPW
DE RUEHNE #1766/01 2331350
ZNR UUUUU ZZH
O 211350Z AUG 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 7778
INFO RHEHAAA/WHITE HOUSE WASHDC IMMEDIATE
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RHEHNSC/NSC WASHDC
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
RUEHGV/USMISSION GENEVA 8511
RUEHBJ/AMEMBASSY BEIJING 7893

UNCLAS SECTION 01 OF 05 NEW DELHI 001766 
 
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 MDELANEY/CLILIENFELD/AADLER 
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 FSAEED, KDUNNE, AGIBBS 
DEPT PASS TO USTDA HSTEINGASS/JFLEWELLING 
 
E.O. 12958: N/A 
TAGS: ECON EAID ECIN ECPS EINT EAGR EFIN EINV ENRG EPET
ETRD, BEXP, PINR, KFPC, IN 
 
SUBJECT: New Delhi Weekly Econ Office Highlights for the Week of 
August 17-21, 2009 
 
REFTEL: 
 
¶1. (U) Below is a compilation of economic highlights from Embassy 
New Delhi for the week of August 17-21, 2009, including the 
following: 
 
-- Prime Minister's Economic Advisory Council Reconstituted 
-- Dr. Subir Gokran Likely to be Next RBI Deputy Governor 
-- Ministry of Finance Releases Direct Tax Code 
-- New Economic Data Points to Economic Recovery 
-- India Signs FTA with ASEAN 
-- India National Gas Grid Technical Assistance Project Finally 
Underway 
-- India's Answer to Google Earth Launched to Mixed Reviews 
-- Beleaguered American Company Running Low on Options 
 
Prime Minister's Economic Advisory Council 
Reconstituted 
------------------------------------------ 
 
¶2. (U) The Prime Minister has reconstituted the Economic Advisory 
Council (EAC) with Dr. C. Rangarajan as its Chairman. The EAC 
provides advice to the Prime Minister on policy matters and also 
prepares a monthly report on economic developments at home and 
abroad. It monitors economic trends on a regular basis and suggests 
suitable policy responses to the Prime Minister. 
 
¶3. (U) Dr. Rangariajan is a close confidant to Prime Minister Singh 
and was the chairman of the EAC in 2008 before resigning when he was 
nominated for the upper house of Parliament.  Other members of the 
EAC include: Dr. Saumitra Chaudhuri, a Planning Commission member 
and Economic Adviser at India's leading Investment Information and 
Credit Rating Agency; Dr. M. Govinda Rao, Director at the National 
Institute of Public Finance and Policy; Dr. Vijay Shankar Vyas, 
President of the Asian Society of Agricultural Economists; Dr. Suman 
Bery, Director General of the National Council of Applied Economic 
Research.  Members of the Council will have the rank of Minister of 
State, which makes them just below Cabinet-level Ministers.  All are 
well-known, pro-reform economists with distinguished records and 
backgrounds. 
 
Dr. Subir Gokran Likely to be Next 
RBI Deputy Governor 
----------------------------------- 
 
¶4. (U) Reliable sources have confirmed media reports that Dr. Subir 
Gokran, Chief Economist at Standard and Poor's (S&P) Asia Pacific, 
is the leading contender to be the next Deputy Governor of the 
Reserve Bank of India (RBI).  Dr. Gokran is a well-known and 
influential macroeconomist who has good relations with the Finance 
Ministry.  At 49, he will be one of the youngest RBI Deputy 
Governors. 
 
¶5. (U) Dr. Gokran is considered pro-reform and has been vocal in his 
support for further economic liberalization.  He will be responsible 
for monetary policy, a major challenge given the need to maintain 
liquidity to enable large government borrowings, coupled with the 
need to contain inflation. 
 
¶6. (U) Since 2007, Dr. Gokran has been responsible for shaping S&P's 
macroeconomic policies in the Asia-Pacific region, after being chief 
economist of Crisil Ltd., an S&P company.  He was also chief 
economist at the National Council of Applied Economic Research, and 
associate professor at the Indira Gandhi Institute of Development 
Research at Mumbai.  Dr. Gokran received his PhD in economics from 
Case Western Reserve University in Cleveland, Ohio. 
 
Ministry of Finance Releases Direct Tax Code 
 
NEW DELHI 00001766  002 OF 005 
 
 
-------------------------------------------- 
 
¶7. (U) Minister Pranab Mukherjee introduced a new draft Direct Tax 
Code (DTC) to replace the existing Income Tax Act of 1961. The DTC, 
if implemented, would improve the efficiency of India's tax system, 
eliminate tax distortions, and expand the tax base. It would also 
lower personal income tax rates at all levels of income while 
reintroducing the wealth tax on all assets. 
 
¶8. (U) Under the DTC, foreign and domestic corporations would be 
taxed equally at the same corporate income tax rate of 25 percent. 
However, foreign companies would also be subject to a "branch 
profits tax" of 15 percent, regardless of whether the corporation 
distributes dividends or not to its foreign parent.  Corporations 
would also be subject to a minimum alternative tax based on total 
assets, which could adversely affect start-up companies, 
infrastructure projects, and other businesses that typically suffer 
losses in early years or take several years to turn a profit. 
 
¶9. (U) The Finance Ministry will accept comments on the DTC through 
October.  Minister Mukherjee plans to introduce the bill in the 
winter session (November 2009) of Parliament with the goal of making 
the DTC effective for the fiscal year beginning on April 1, 2011. 
 
New Economic Data Points to Economic Recovery 
--------------------------------------------- - 
 
¶10. (U) Although still one of the world's fastest growing economies, 
India's real GDP growth did "slow" to 6.7 percent in the past year, 
down from an annual average of almost nine percent in the previous 
five years.  Recently released economic data indicates a possible 
return to better days: the index of industrial production (IIP) has 
risen more than expected, consumer demand has increased, and foreign 
investment is returning to India. 
 
¶11. (U) IIP rose 7.8 percent in June, up from 5.4 percent in June 
2008, the fastest pace in 16 months. The manufacturing and mining 
sectors showed robust growth as did the electricity sector, despite 
the negative effect of poor monsoon rains on the hydroelectricity 
sector.  Analysts expect industrial output growth to average around 
5.5 percent in Indian FY 2009-10 as compared to 2.6 percent in the 
previous year.  The improving external environment and recovery in 
industrial activity will help offset the impact of a possible fall 
in agricultural production. 
 
¶12. (U) Higher government employee salaries, due to pay raises and 
increased government spending, boosted consumer demand. Both 
consumer durables and capital goods sectors were higher by 15.5 
percent and 11.8 percent respectively.  The one negative indicator 
is the continuing poor performance of exports, which the Ministry of 
Commerce and Industry expects declined for the 10th month in a row 
in July. 
 
¶13. (U) The Reserve Bank of India (RBI) reported that foreign 
investment in the first quarter (April - June) was up 150 percent as 
compared to the same period last year.  Most of this growth was due 
to the return of portfolio investment, which dropped of at the onset 
of the global recession in fall of 2009. 
 
India Signs FTA with ASEAN 
--------------------------- 
 
¶14. (U) Indian Minister of Commerce & Industry Anand Sharma signed 
the Association of Southeast Asian Nations (ASEAN)-India Free Trade 
Agreement (FTA) in Goods on August 13 in Bangkok.  The FTA was 
concluded as part of a Comprehensive Economic Cooperation Agreement 
(CEPA) signed in October 2003.  The FTA will reduce or eliminate 80 
percent of India's tariff lines in phases starting January 1, 2010 
 
NEW DELHI 00001766  003 OF 005 
 
 
and running through 2016.  Negative lists contain sensitive products 
from both sides, with India's lists excluding 1079 items from tariff 
reduction or elimination mainly to protect farmers as well as auto 
and chemical manufacturers.  Although the FTA was finalized earlier 
this year after six years of negotiations, the signing suffered 
repeated setbacks from both the sides-the latest by Indian leftist 
parties due to concerns of potential harm to the plantation sector 
of the southern states, specifically in Kerala. 
 
¶15. (U) The Agreement provides bilateral safeguard mechanisms for 
the initial 7-15 years to guard against import surges.  The GOI 
reports that the 10-member ASEAN is India's fourth largest trading 
partner with about $40 billion in total trade in Indian fiscal year 
2008-09, behind the EU, U.S., and China.  Trade analysts at a 
government-sponsored economic research institute told Econstaff that 
India's machinery, steel, auto component, chemical, and textile 
industries are likely to benefit once the FTA is fully implemented. 
The ASEAN-India FTA will hopefully benefit the Indian manufacturing 
sector, which is just now starting to show signs of recovery after a 
dismal performance for the past 1.5 years, by allowing manufacturers 
to procure products at competitive prices from ASEAN countries. 
 
¶16. (U) Comment: India's signing of the ASEAN-India FTA as well as 
several other ongoing regional trade negotiations (Japan, EU, Chile, 
and recently concluded talks with South Korea) point to India's 
focus on bilateral trade liberalization.  In an August 13 meeting 
with a U.S. Senate Finance Committee Staffdel, Commerce Ministry 
officials confirmed that India and ASEAN are currently negotiating 
additional trade agreements on services and investment.  The 
officials also mentioned that an FTA with Japan may conclude soon. 
End Comment. 
 
 
India National Gas Grid Technical Assistance 
Project Finally Underway 
--------------------------------------------- - 
 
¶17. (SBU) The long-delayed USTDA supported National Gas Grid 
Technical Assistance project finally got underway on August 18, 
¶2009.  The project, which was initially requested by the Gas 
Authority of India Limited (a government-controlled gas distribution 
company) in 2005, was transferred to the Petroleum Planning & 
Analysis Cell (PPAC) within the Ministry of Petroleum and Natural 
Gas in 2006.  After much delay, PPAC selected ICF International and 
Jacobs Consultancy to perform the study, which aims to develop a 
conceptual framework for a national gas grid in anticipation of an 
integrated national natural gas market in India.  The study will 
prepare baseline forecasts of gas demand and supply including two 
sensitivity analyses; a plan for commercial operations; a market 
strategy to provide a sound commercial basis for lenders and 
investors; a conceptual framework for a gas system based on market 
forecasts; and recommendations for an operational philosophy. 
 
¶18. (SBU) Comment: In late 2006, the Government of India established 
the Petroleum and Natural Gas Regulatory Board (PNGRB) to regulate 
the market.  Through a separate technical assistance grant agreement 
signed in 2008, USTDA is helping PNGRB to establish appropriate 
market regulatory systems and procedures.  PNGRB would have been the 
natural beneficiary for the Gas Grid project, but the Government 
delegated the project to PPAC.  Recently, PNGRB's new Chairman, 
Labyendu Mansingh (a well-known officer of the Indian Administrative 
Service who was offered the assignment post-retirement), has 
pressured the GOI to move the Gas Grid project over to PNGRB, likely 
goading PPAC to start the project.  Though delayed, the project's 
timing is fitting as the largest gas find in India (Reliance 
Industries KG D6 basin) is already embroiled in a pricing 
controversy.  As the gas grid study will be highly data dependent, 
procuring appropriate data and more importantly validating its 
 
NEW DELHI 00001766  004 OF 005 
 
 
authenticity will be a challenge for ICF and Jacobs.  The large 
number of government agencies in the Indian energy sector will 
likely further complicate matters.  End Comment. 
 
India's Answer to Google Earth 
Launched to Mixed Reviews 
--------------------------------- 
 
¶19. (U) The Indian Space Research Organization (ISRO) launched a 
preview ("beta") version of a satellite imagery website called 
"Bhuvan" on August 12.  Bhuvan (Sanskrit for "Earth") is positioned 
as a competitor for the popular Google Earth software package. 
According to the program's marketing blitz, Bhuvan offers higher 
resolution, closer zoom (10 meters vs. 200 meters for Google Earth), 
and more up-to-date images of India than Google Earth.  It also 
plans to provide images in a format optimized for slower bandwidths 
typically found on the subcontinent.  The website, using ISRO's 
satellite imagery, will also offer information on weather, natural 
resources, and population on a district-by-district basis. 
 
¶20. (SBU) Dr. Jacob Ninan, a former ISRO official currently working 
as a consultant for Antrix Corporation Limited (ISRO's marketing and 
commercialization arm), told Consulate General Chennai that the 
Bhuvan venture was an attempt at advertising ISRO's capabilities to 
potential customers of higher-grade imagery products for real 
estate, mining, and other applications.  Despite the fanfare, Bhuvan 
was not readily accessible in the days after its launch.  Access 
remains intermittent, and journalists and bloggers reported their 
inability to load the website and complained about its poor 
functionality and low quality images.  Bhuvan will supposedly be 
accessible at http://bhuvan.nrsc.gov.in/; however, potential viewers 
should note that using Bhuvan involves downloading code not approved 
for use on State Department computers. 
 
Beleaguered American Company 
Running Low on Options 
--------------------------------- 
 
¶21. (SBU) The machines of the 100,000 square foot Bailey Hydropower 
(BHPL) factory in Chennai once hummed.  Now they are mostly silent. 
Responding to troubling reports, Consulate General officers visited 
the American-owned hydraulic cylinder factory on August 14.  Since 
2005, the company has weathered an embezzlement scandal, a 
months-long strike, and various recriminations, both in and out of 
court.  BHPL's in-country managing director (an American with no 
prior India experience) now says the company faces 
retrenchment-laying off up to 60 percent of its current workforce-if 
it wishes to stay afloat. 
 
¶22. (SBU) BHPL's troubles began in 2005 when its then-manager, who 
had also been its partner in a Singapore-based venture, was found to 
be siphoning off large sums of money.  A year later, a labor union 
affiliated with the Communist Party of India - Marxists (CPIM) 
staged a strike over the distribution of uniforms. In the years that 
followed, labor disputes cost the company thousands of dollars in 
court on what turned out to be trumped-up wage charges.  Due to 
strikes and suspensions, BHPL was unable to meet production demands 
and lost several million-dollar accounts, then was hit hard by 
reduced orders from remaining customers due to the economic 
downturn.  The managing director has reluctantly subcontracted much 
of his factory's work to a Chinese firm and fears he will be forced 
to shut down operations in Chennai.  If the Tamil Nadu government 
does not approve his application to retrench (the law generally 
requires government approval for layoffs from companies that have 
more than 100 employees), he doubts his plant will remain viable in 
the current economic climate. 
 
¶23. (SBU) Comment: Consulate General Chennai has offered advice and 
 
NEW DELHI 00001766  005 OF 005 
 
 
stands ready to assist insofar as we can.  The case presents a 
useful cautionary tale illustrating that there are failures as well 
as successes among American firms engaged in manufacturing in India. 
 End Comment. 
 
¶24. (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi. 
 
 
ROEMER