VZCZCXRO8423
PP RUEHAST RUEHCI RUEHDBU RUEHLH RUEHNEH RUEHPW
DE RUEHBI #0444/01 3291214
ZNR UUUUU ZZH
P 251214Z NOV 09
FM AMCONSUL MUMBAI
TO RUEHC/SECSTATE WASHDC PRIORITY 7573
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHBI/AMCONSUL MUMBAI PRIORITY 2805
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 8787
RUEHCG/AMCONSUL CHENNAI PRIORITY 2160
RUEHCI/AMCONSUL KOLKATA PRIORITY 1948
RUEAIIA/CIA WASHDC
RHEHAAA/NSC WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 04 MUMBAI 000444 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND EINV ELAB ENRG ETRD IN
SUBJECT: GOLDEN" MAHARASHTRA'S ECONOMY IS STILL INDIA'S BIGGEST, BUT 
CHALLENGES AHEAD 
 
MUMBAI 00000444  001.2 OF 004 
 
 
¶1. (U) Summary:  The state of Maharashtra has historically been 
the seat of economic and financial power in India.  State 
government officials, members of the business community, and 
investors told Congenoffs that Maharashtra's historical status 
as the top investment destination is also driven by 
business-friendly policies, and good investment facilitation 
agencies.  However, due to the lack of infrastructure 
development and disinterested political leadership in 
Maharashtra, pro-active state leaders in Gujarat, Tamil Nadu and 
Andhra Pradesh have used good policies to attract increasing 
numbers of investors.  Nevertheless, with foreign investment of 
USD 30 billion -- 40 percent of India's total foreign investment 
-- flowing into the Maharashtra during the past two and a half 
years, Maharashtra's reign as India's economic and commercial 
powerhouse remains undisputed.  For these reasons, interlocutors 
noted that Maharashtra is simply too important to be ignored and 
engaging with the local government is the best way to address 
business obstacles and make the state -- and by extension most 
of Corporate India -- more investor-friendly.  Moreover, in most 
cases, the state-level experience plays a much bigger role in 
the outcome of an investment, making engagement with state 
leaders an essential effort.  End Summary. 
 
 
 
Maharashtra: India's Epicenter of Commerce & Industry 
 
--------------------------------------------- -------- 
 
 
 
¶2.  (U) Maharashtra, the second most populous state in India and 
the nation's largest employment provider, accounts for 13 
percent of national income, one-fifth of the total industrial 
output, and a quarter of the total exports of the country. 
Maharashtra averaged 9 percent growth rate from 2004 to 2008. 
(Growth declined to 6.7 percent in 2008-09 largely due to the 
economic slowdown and global financial crisis.)  The average per 
capita income in the state is USD 1000, compared to the national 
average of USD 750 per year.  Mumbai, in the center of coastal 
Maharashtra, is India's commercial and financial capital.  It 
houses the country's leading business conglomerates and is the 
seat of economic and financial power in the country.  The state 
leads in total project investment with USD 107 billion worth of 
projects planned or under execution according to Projects Today, 
a leading Indian research organization.  The state is also the 
number one destination for foreign direct investment (FDI,) with 
inflows of USD 35 billion, or over one-third of total FDI since 
2000, according to Reserve Bank of India (RBI) data. 
 
 
 
¶3.  (U) Relative to other Indian states, Maharashtra has 
historically had a reputation for having well-educated public 
servants, a high standard of policing, progressive business 
policies, a vibrant civil society, and an extremely dynamic -- 
and philanthropic -- business community.  In post-independence 
India, Maharashtra led in implementing pro-development and 
pro-growth policies, developing irrigation and agriculture, 
promoting industrial parks, permitting private education, and 
building infrastructure.  Mumbai itself claimed some of the most 
modern road and rail systems, the best urban public transport 
system, and some of India's finest universities and hospitals. 
For much of India's independent history, Maharashtra and Mumbai 
led India's growth, development, and modernization. 
 
 
 
Historical Legacy, Pro-Business Policies and Good Investment 
Facilitating Agencies Seen as Investment Enablers 
 
--------------------------------------------- -------------- 
-------------- 
 
 
 
¶4.  (SBU) A. M. Khan, the Principal Secretary for Industries for 
the Government of Maharashtra, noted that the state's 
geographical location, abundant manpower and natural resources, 
and the presence of Mumbai as India's commercial and financial 
hub has traditionally drawn investors to the state.  According 
to RBI data, Maharashtra attracted USD 30 billion of FDI in the 
past two and a half years.  In contrast, the other emerging 
 
MUMBAI 00000444  002.2 OF 004 
 
 
pro-business and investor-friendly states of Gujarat, Karnataka, 
Andhra Pradesh, and Tamil Nadu collectively secured FDI of USD 
17 billion during the same period.  Moreover, Khan claimed that 
successive state governments, irrespective of their political 
affiliation, have been consistent and clear in adopting and 
implementing business-friendly policies to ensure that investors 
remained committed to the state.  Khan noted that after an 
investment receives central government approval, if necessary, 
most of the key decisions about the investment, as well as its 
outcome and implementation, are made at the state level. 
 
 
 
¶5.  (U) Khan highlighted several favorable investment-enabling 
industrial policies passed by the Maharashtra government.  Since 
the Biotechnology Policy of 2001, the state has garnered a 33 
percent share of all investments in biotechnology.  Similarly, 
the IT and ITES policy of 2003 has led to an eight-fold increase 
in IT exports and the wine policy of 2001 has resulted in the 
state garnering a 90 percent share in wine production in India. 
Business interlocutors pointed to the mega project policy of 
2005 which they claimed made the state more investor friendly. 
This policy assured fast-track approvals, single window 
clearance, and infrastructural facilities for projects over USD 
25 million, USD 65 million or USD 130 million or employing over 
250, 500, or 1,000 persons depending on the location.  Khan said 
that 159 mega projects with proposed investment of USD 291 
million and an employment potential of 200,000 new jobs have 
been approved since the policy was announced.  41 of these 
projects have been implemented, with 19 located in 
underdeveloped areas of the state. 
 
 
 
¶6.  (U) In a series of discussions with the business and 
investment community in Maharashtra, interlocutors acknowledged 
the state's long-standing attractiveness to businesses and 
investors.  Maharashtra's business community largely agreed that 
politically stable policies were crucial, and pointed to other 
states where government-dictated business policies can change 
with every new government, and where business can depend on 
competing political patrons for success.  Businesses also 
praised the role of state government agencies, especially the 
Maharashtra Investment Development Corporation's (MIDC), in 
creating a business-friendly investment environment.  MIDC was 
formed to develop infrastructure and create investment 
opportunities in Maharashtra's less developed areas.  In MIDC's 
230 industrial parks, an investor is assured of sound 
infrastructure facilities, clear land ownership and established 
connectivity with other states and to the ports, they noted. 
MIDC's initiatives in creating industrial parks in Pune helped 
transform the region from Mumbai's poor neighbor to a business 
and investment competitor.  The City Industrial Development 
Corporation (CIDCO) and the Maharashtra Airport Development 
Corporation (MADC) have played similar roles in transforming 
Navi Mumbai and Nagpur. 
 
 
 
¶7.  (U) Business interlocutors noted that Maharashtra has 
historically attracted investment dating back to the British 
rule.  Longstanding investors are reluctant to shift from the 
state as inertia and comfort with the status quo sets in, said 
Pradeep Bhargava, the MD of Cummins Generator Technologies.  As 
linkages with the customer and supplier base are especially 
important for the manufacturing industry, Maharashtra is the 
natural choice for many businesses whose customers or suppliers 
are already present in the state, he added.  In contrast, 
process industries like chemicals and petroleum which do not 
require close proximity to customers or suppliers can flourish 
in states like Gujarat, which many claim is more 
business-friendly.  There are exceptions to this argument; 
Hyundai and Ford chose to establish manufacturing facilities in 
Tamil Nadu away from Maharashtra's "auto alley" devoted to the 
production of automotive components, largely due to investment 
incentives. 
 
 
 
The Decline of Mumbai 
 
--------------------- 
 
 
MUMBAI 00000444  003.2 OF 004 
 
 
 
 
¶8. (SBU) Maharashtra's flourishing business climate 
notwithstanding, almost all interlocutors agreed that its 
capital, Mumbai, is no longer the center of growth and 
innovation it once was.  First, Mumbai's infrastructure has 
eroded, with too few projects in the pipeline, after long 
delays.  Second, it has no discernable urban leadership, and 
state leaders, most of whom come from rural provinces, show 
little interest in Mumbai's future.  Instead, the continued 
demand for land and urban development has spurred a boom in real 
estate and land speculation.  The most dynamic businesses in the 
city are now property and land developers who, in league with 
local politicians, conspire to manipulate and control the 
allocation of land and construction permits, instead of focusing 
on innovation.  According to one investor, "Mumbai has now 
become an extraction economy; there might as well be oil under 
the ground, given all the fights over land."  Given this focus, 
most factories and industries have long ago relocated in 
industrial belts far from Mumbai. 
 
 
 
¶9.  (SBU) On the other hand, other cities, such as Hyderabad, 
Bangalore, and the New Delhi region, have become centers of 
excellence for IT, entrepreneurism, and innovation, and have 
greatly improved in livability and sophistication.  With cheaper 
living and working conditions, more modern infrastructure, 
easier accessibility to high-quality schools, and space to 
expand, these cities offer more for the young entrepreneur and 
the business.  Representatives of several private equity firms 
told Congenoff that almost all their prospective investments now 
come from these cities; almost none come from Mumbai.  In a 
business survey conducted five years ago, 80 percent of 
respondents interviewed said that they were downsizing their 
operations in the city. 
 
 
 
Is Maharashtra Losing its Investment Allure? 
 
------------------------------------------- 
 
¶10.  (U)  While Mumbai suffers from the typical urban challenges 
that affect large cities, weakening infrastructure is one of 
Maharashtra's greatest liabilities.  The state faces a peak 
power demand deficit of 24 percent resulting in four to twelve 
hours of scheduled power outages in most parts of the state, 
excluding Mumbai.  Physical infrastructure -- rail, roads, 
sewerage and water -- is deteriorating or non-existent.  Project 
execution has been poor, and while a few new projects are moving 
forward, new infrastructure projects have suffered from delays, 
long even by Indian standards.  As a result, many emerging 
states with increasingly better infrastructure and pro-business 
and pro-development programs are catching up.  However, Ashutosh 
Parasanis, Managing Director of PTC Software, argued that the 
pressure on existing infrastructure is much higher in 
Maharashtra due to its high growth rate and increasing number of 
new businesses and migrant population. 
 
¶11.  (SBU) Moreover, contacts widely agreed that ten years of 
indifferent governance by the ruling Congress/Nationalist 
Congress Party coalition -- which was re-elected in October 2009 
- have further decreased investor confidence in the state. 
Businesses repeatedly claimed that political leaders devote most 
of their time to the politics of remaining in office instead of 
developing and implementing development and economic policies. 
Contacts acknowledge that corruption exists in almost every 
business transaction in the state, though no more or less than 
other states in India.  Businesses must bribe government 
officials to secure permits and permissions, payouts are made to 
politicians and labor leaders to ensure peace in factories, and 
commissions are a mandatory component of any government 
contracts or tender.  Maharashtra's inability to improve 
governance, implementation, and infrastructure development at 
the same rate as some other states has caused it to lose ground 
in relative comparisons.  For example, an India Today study 
ranked Maharashtra at no. 8 among all Indian states in the 
overall quality of life performance indicators in 2009, down two 
places from the sixth position it held from 2004-2008. 
 
 
 
 
MUMBAI 00000444  004.2 OF 004 
 
 
¶12.  (SBU) Businessmen and officials commented that 
Maharashtra's leaders have traditionally had a governing style 
that puts them at a disadvantage.  While Maharashtra government 
officials are reticent and modest by nature, and shy away from 
aggressive marketing and promotion efforts, other state leaders 
aggressively tout their strengths to attract investors. 
Business still applauds Gujarat Chief Minister Narendra Modi's 
personal and pro-active involvement in business, despite his 
role in the 2002 Gujarat carnage.  Former Andhra Pradesh Chief 
Minister Chandrababu Naidu single-handedly transformed his state 
to a leading global IT hub.  Dynamic leadership in other states 
coupled with tax incentives, concessions and a warm and 
welcoming environment could continue to lure business away from 
Maharashtra, businessmen noted. 
 
 
 
But Engagement with Local Government Could be the Key 
 
--------------------------------------------- -------- 
 
 
 
¶13.  (U) Members of the Mahratta Chamber of Commerce, Industry, 
and Agriculture (MCCIA) believe that business chambers of trade 
and commerce like their organization play a vital role in 
bridging the gap between government and industry.  For example, 
they said that their own chamber hosts bi-monthly meetings with 
the "guardian minister" of Pune and other government officials 
from different departments and its members where problems are 
discussed which the government commits to resolving.  In this 
way, through direct engagement and interaction with the 
government, business chambers can assist in removing investment 
roadblocks and addressing challenges to business.  Naser Munjee 
of the Development Credit Bank believes that civil activism will 
spur the government to action.  He, however, admitted that 
direct engagement with local government to solve problems is 
more difficult in a large state like Maharashtra, or a large 
city like Mumbai, due to the plethora of government agencies and 
multiple layers of bureaucracy.  Munjee pointed out that 
whichever mechanism businesses chooses to adopt, engaging with 
leadership at the state level is key to ensuring greater trade 
and investment relations with India.  The central government can 
only develop policies to facilitate investment into the country 
but the states are central in developing a favorable business 
climate, he maintained. 
 
 
 
Comment: State-Level Engagement Key to USG Efforts in India 
 
--------------------------------------------- -------------- 
 
 
 
¶14.  (U) Maharashtra's undisputed reign as the nation's prime 
investment destination is not without its share of problems and 
challenges that have to be addressed for the state to maintain a 
favorable business and investment environment.  Indeed, 
overcoming the state's political lethargy and meeting the 
state's infrastructure needs may be beyond the current crop of 
political leaders.  However, we recommend that USG agencies 
consider more engagement with state leaders, as the majority of 
decisions that impact the experience of an American company in 
India are within the purview of the state, and not the central, 
government.  The business community agrees that the state 
government is open to discussing, debating and even resolving 
problems and issues that plague business.  Increased interaction 
and direct engagement with local government officials may, 
therefore, be the best way to push concerns and demand remedial 
action.  End Comment. 
FOLMSBEE