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O 041254Z DEC 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8816
INFO RHEHAAA/WHITE HOUSE WASHDC IMMEDIATE
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RHEHNSC/NSC WASHDC
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RUEATRS/DEPT OF TREASURY WASHDC
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RHMCSUU/FAA NATIONAL HQ WASHINGTON DC
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UNCLAS SECTION 01 OF 05 NEW DELHI 002445 
 
SENSITIVE 
SIPDIS 
 
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 
TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
USDA PASS FAS/OCRA/RADLER/BEAN/FERUS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EAID ECIN EIND ELTN ETRD IN
SUBJECT: New Delhi Weekly Econ Office Highlights for the Week of 
November 30 to December 4, 2009 
 
¶1. Below is a compilation of economic highlights from Embassy New 
Delhi for the week of November 30 to December 4, 2009, including the 
following: 
 
-- Trade Contraction Moderating 
-- World Bank Commits Increased Funding for India 
-- Competition Commission Focuses on the 'Common Man' 
-- GOI Has No Plans to Curb Capital Inflows 
-- Moody's Maintains Negative Outlook for Indian Banks 
-- Reaction to Anti-dumping Measures Mixed in South India 
-- India Initiates Mandatory Standards for Tires 
-- Tax Disputes of Foreign Companies To be Settled Expeditiously 
 
 
 
Trade Contraction Moderating 
---------------------------- 
 
¶2. (U) According to the latest data released by the Ministry of 
Commerce and Industry, India's exports dropped 6.6 percent during 
October 2009 to $13.2 billion.  Cumulative exports for the first 
seven months of Indian fiscal year 2009-10 (i.e., April- October 
2009) slumped 26 percent to $91 billion, compared with $123 billion 
last year.  India's imports during October 2009 also fell to $22 
billion -- a 15 percent decline over last year.  April-October 2009 
Imports plunged 30 percent to $148.4 billion. 
 
¶3. (U) India's exports and imports have been declining since the 
onset of the global economic crisis as demand softened in both 
overseas and domestic markets.  However, the dip in exports has been 
shrinking since April 2009, possibly due to the GOI stimulus 
packages and slowly recovering overseas orders.  Initial Commerce 
Ministry estimates show that exports of petroleum products, 
plastics, marine products, spices, pharmaceuticals, and iron ore are 
growing and the export of cotton yarn, basic chemicals, electronic 
goods, leather products, and gems and jewelry have started showing a 
lower rate of contraction in recent months.  The Commerce Ministry 
is reportedly reviewing the performance of the export sector, and 
will soon be releasing an additional set of incentives for 
labor-intensive sectors. 
 
World Bank Commits Increased 
Funding for India 
---------------------------- 
 
¶4. (U) The World Bank plans to increase its lending to India to $8 
billion annually over the next three years beginning FY 2010-11 
versus $7 billion committed for FY 2009-10. The average annual 
commitment over the previous four years has been approximately $2.3 
billion.  During his visit to India in early December, World Bank 
President Robert Zoellick indicated that the International 
Development Association would provide about $5-6 billion in 
concessional loans and the International Bank for Reconstruction and 
Development would give $16 billion in at-cost loans, spaced over the 
next three years. The International Finance Corporation, the World 
Bank's private sector investment arm, would also invest about $3.5 
billion in private businesses during this period.  The current World 
Bank portfolio in India consists of 68 projects with a total 
commitment of $19.6 billion. [Note: "Commitments" are not the same 
as disbursements, so the money need not get spent in the same time 
frame.] 
 
¶5. (U) India's Road, Transport and Highway Ministry is requesting a 
$2.9-billion loan from the World Bank for upgrading its 6,376-km 
national highways.  The Ministry is also seeking advice from the 
World Bank on technical, financial and legal inputs for the 
identified mega highway projects of the National Highway Authority 
of India and the proposed expressways.  The World Bank is willing to 
look at funding the viability gap as well as 'build- 
operate-transfer' annuity road projects.  Key considerations include 
India's ability to meet World Bank social, environmental and 
corporate governance standards. A World Bank team reportedly plans 
to visit India in January 2010 to identify the highway projects in a 
more detailed manner. 
 
 
NEW DELHI 00002445  002 OF 005 
 
 
¶6. (U) Zoellick also announced that the World Bank would support the 
government's national program to clean and conserve the Ganges River 
with an initial financing of $1 billion over the next four to five 
years, as well as with knowledge resources. The Ganges river basin 
is the most populous river basin in the world. 
 
Competition Commission 
Focuses on the 'Common Man' 
-------------------------- 
 
¶7. (U) At a November 16 conference on "Competition, Public Policy 
nd the Common Man" organized by the Competition Commission of India 
(CCI) in collaboration with the Confederation of Indian Industries, 
CCI Chairman Dhanendra Kumar underlined the benefit of competition 
to achieve the basic objectives of equity and inclusive growth.  The 
conference's main agenda was to bring together international and 
domestic experts to discuss how to improve competition in India's 
agricultural markets and the government's public procurement system 
and also to evaluate the role of competition for the welfare of the 
'common man.' 
 
¶8. (U) Keynote Speaker Finance Minister Pranab Mukherjee stated that 
the tangible benefits of competition have been observed in the 
telecom and civil aviation sectors.  However, the farm sector has 
yet to see the benefits of competition.  Farmers continue to receive 
much lower prices than market rates due to the presence of 
intermediaries.  Mukherjee suggested there should be greater focus 
on the agricultural sector in order to achieve healthy competition. 
 
 
¶9. (U) Minister for Corporate Affairs Salman Khurshid reaffirmed the 
government's objective to develop a stable, efficient and 
transparent competition regime for eradication of India's poverty. 
European Commissioner for Competition Neelie Kroes advocated for a 
strong enforcement policy to combat bid-rigging and other abusive 
conduct.  Cabinet Secretary K. M. Chandershekhar requested that CCI 
help the procurement agencies on issues including the reduction of 
procurement costs, increased transparency and increasing sales 
revenues.  Minister for Law and Justice Veerappa Moily gave 
concluding remarks, urging CCI to look into anti-competitive 
practices in mergers and acquisitions and to effectively implement 
competition laws. 
 
GOI Has No Plans to 
Curb Capital Inflows 
-------------------- 
 
¶10. (U) India's foreign investments have totaled $36.2 billion 
during the first six months (April-September) of the current fiscal 
year. Foreign exchange reserves continue to rise and are up $33 
billion since April 1, totaling $285 billion as of November 20. This 
is primarily due to portfolio inflows which have risen by $16.3 
billion this fiscal year versus outflows of $9.1 billion last year. 
At this rate, analysts forecast India's total capital inflows will 
be in the range of $57-$60 billion for FY 2009-10.  Nevertheless, 
the Reserve Bank of India (RBI) appears to be only smoothing 
exchange rate movements, not resisting. At the end of November, the 
rupee had risen by 12 percent from a record low in early March, 
driven by capital inflows. 
 
¶11. (SBU) D. Subbarao, Governor of the RBI has expressed concern 
about a sudden surge in capital flows resulting from the abundant 
liquidity in advanced economies as the surge may impose 
macro-economic costs.  According to local media sources, Dr. C. 
Rangarajan, Chairman of the Prime Minister's Economic Advisory 
Council, indicated that India has the capacity to absorb nearly $100 
billion of inflows and hence, at the moment he does not see a need 
for any strong punitive measures to control capital inflows. 
Finance Secretary Ashok Chawla also said, "As of now, inflows are 
not a cause for serious concern."  Dr. Rangarajan noted that capital 
inflows are emerging as an important source of financing investment 
for the emerging economies, but warned that if inflows cross $100 
billion, the government may restrict capital flows to curb 
volatility in the stock markets.  Any initial curbs would be on 
speculative funds in sectors such as real estate and reinstating 
 
NEW DELHI 00002445  003 OF 005 
 
 
previous limits on external commercial borrowing.  Dr. Rangarajan 
and Mr. Chawla's views are in line with Anand Bajaj, Director 
(External Markets) at the Ministry of Finance, who told Econoffs in 
November that the government does not plan to take any steps to 
control money flows to India. Citigroup expects the GOI to allow 
further rupee appreciation to offset inflationary pressures, but may 
also tighten external commercial borrowing norms.  The GOI could 
release pressure by encouraging capital outflows, such as by 
reducing interest rates on non-resident Indians deposits. 
 
¶12. (U) According to local media, Dr. Rangarajan's major concern was 
inflation, particularly in food prices, which are running at 
double-digit levels.  Food price inflation in India is largely 
supply-side driven, which would render price controls ineffective. 
However, given the 7.9% economic growth rate in the 3rd quarter of 
2009, the RBI in its January policy might go for monetary tightening 
measures and raise the cash reserve ratio or policy rates. 
 
Moody's Maintains Negative 
Outlook for Indian Banks 
-------------------------- 
 
¶13. (U) In its November Banking System Outlook report, Moody's 
indicates that the credit outlook for the Indian banking system 
remains negative due to deteriorating asset quality and the high 
volume of restructured loans.  The credit rating agency changed its 
outlook for India's banking system from 'stable' to 'negative' in 
January 2009. 
 
¶14. (U) The report is cautious in its discussion of the rising level 
of gross non-performing assets of Indian banks. The absolute level 
of gross non-performing loans (NPLs) of banks rose to 22.5 percent 
in FY 2008-09, compared to about 12 percent the year before. The 
rapid expansion of retail lending over the last few years, combined 
with the slowdown of the Indian economy, has led to increased 
delinquency rates especially for unsecured retail loans. 
 
¶15. (U) Profitability of banks has improved in recent years with 
core income benefiting from the high lending environment and rising 
net interest income. In its October monetary policy review, the RBI 
directed banks to improve their provision coverage ratio (PCR)for 
NPLs to 70 percent by September 2010 (Note: PCR is a measure of 
funds that banks have to set aside from their profits to protect 
against losses from some loans going bad. End note.)  However, 
Moody's opines that this RBI directive could reduce the 
profitability of some banks, as the banks would be required to set 
aside 210 billion INR for the PCR. 
 
¶16. (U) Moody's recommends that banks focus on increasing their 
fee-based income, as this would help improve the quality of their 
earnings and maintain future profitability.  Diversified earnings 
profiles would help public sector banks improve their financial 
strength ratings.  Public sector banks in India currently own 72 
percent of the total bank assets while the balance is held by 
private sector banks at 19.6 percent and foreign banks at 8.5 
percent. 
 
Reaction to Anti-dumping Measures 
Mixed in South India 
--------------------------------- 
 
¶17. (U) Initial press reports of local reaction to the U.S. Commerce 
Department's announcement of anti-dumping duties starting December 7 
on particular types of safety matches suggested that Tamil Nadu's 
match industry (which produces 90 percent of India's safety matches) 
would be strongly hit.  These reports included strong objections to 
the new measures from local match makers, clustered in the districts 
surrounding the town of Sivakasi, south of Madurai in central Tamil 
Nadu. 
 
¶18. (U) The basis for the objections, however, is more nuanced than 
media reports suggest.  Tamil Nadu's match producers primarily 
manufacture boxed matches, which do not appear to be affected by the 
anti-dumping duties and focus on 20-stick matchbooks.  However, R. 
Shenbagarajan, Secretary of the All India Chamber of Match Industry 
 
NEW DELHI 00002445  004 OF 005 
 
 
(one of the match industry's main trade associations), told 
Consulate Chennai that the fear among Sivakasi's producers is that 
competitors from Mumbai's book match sector, hampered from exporting 
to the United States by the new penalties, will bring unwanted 
competition to Tamil Nadu producers' lucrative markets in Africa and 
Latin America. 
 
¶19. (SBU) In a candid conversation, Shenbagarajan said that exports 
to the United States account for only five percent of the matches 
Tamil Nadu sends abroad.  The only safety-match products South India 
supplies to the United States are large, barbecue matches and 
"family pack" boxed matches, he said.  Shenbagarajan also said that 
95 percent of South India exports go to Latin America and Africa, 
where the shorter, wax-stick matches produced in South India are 
preferred.  He did add, however, that he objected to the new U.S. 
anti-dumping measures, saying "we don't need the extra competition." 
 
 
India Initiates Mandatory 
Standards for Tires 
-------------------------- 
 
¶20. (U) India published in the official gazette on November 19 a 
Ministry of Commerce and Industry notification on "Pneumatic Tyres 
and Tubes for Automotive Vehicles (Quality Control) Order, 2009." 
Previous voluntary tire standards will now be mandatory beginning in 
mid May 2010 (180 days from the notification date) on all tires 
produced domestically or imported.  The production, import, storage 
and sale of all automotive vehicle tires and tubes will be subject 
to mandatory Bureau of Indian Standards (BIS) certification with 
prescribed standards indicated in four categories.  However, the 
certification requirement is not applicable to tires manufactured or 
imported for re-export or for research and development purposes; 
tires imported as part of completely built units are also exempt. 
Manufacturers must apply for a BIS license to obtain a "standard 
mark" for their product before January 3 (within 45 days from the 
notification date).  As of mid May, GOI agencies will be authorized 
to inspect vehicles for compliance with this order and may require 
the manufacturer or importer to furnish tire samples for testing "in 
the laboratory approved by the Bureau of Appropriate Authority." 
 
¶21. (SBU) Comment:  The GOI released this notification quietly and 
the notification is still not available on the Commerce Ministry 
website.  India's goal of improved vehicle safety is admirable, but 
implementation of this new standard poses challenges and many 
questions.  The only BIS approved lab at this stage is the Central 
Institute of Road Transport (CIRT).  U.S. industry has expressed 
concern that CIRT's limited capacity could lead to testing backlogs 
and disrupt trade in tires to India.  It is not clear from this 
notification what are the requirements to obtain a standard mark 
license or how widely the GOI will require tire samples to be sent 
for testing.  Post will continue to seek clarification on 
implementation of this standard and will advocate that India 
recognize additional test labs. 
 
Tax Disputes of Foreign Companies 
To be Settled Expeditiously 
---------------------------------- 
 
¶22. (U) The Central Board of Direct Taxes under the Finance Ministry 
issued a notification on November 24 on the rules to regulate the 
procedure of the Dispute Resolution Panel (DRP) constituted under 
the Income Tax Act, 1961.  Under the new rule, eight DRPs across the 
country (including Delhi, Mumbai, Chennai, Kolkata, Bangalore, Pune 
and Hyderabad) would be constituted for settling the tax disputes of 
domestic/foreign companies in a faster, more cost effective manner. 
The Dispute Resolution Panel will be a panel comprised of three 
Commissioners of Income Tax.  The rules would only be applicable for 
a domestic/foreign company if it has a dispute with tax authorities 
regarding transfer pricing (i.e., tax disputes pertaining to pricing 
of tangible and non-tangible assets transferred within an 
organization).  Transfer pricing rules were introduced in India in 
¶2001. 
 
¶23. (U) Tax analysts note that the new rules would ensure resolution 
 
NEW DELHI 00002445  005 OF 005 
 
 
of issues swiftly and also help to lower the litigation backlog 
related to transfer pricing.  Foreign taxpayers would be allowed to 
review the draft assessment order specifying their tax liability, 
unlike the present practice of handing out the order without 
providing taxpayers any opportunity to see the assessment order. 
Taxpayers would have 30 days to raise objections to the DRP and have 
the order amended.  If the order is passed by the panel, taxpayers 
would be given a chance to appeal the decision.  The decision would 
be binding on the assessing officer handling the case. 
 
¶24. Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi. 
 
 
ROEMER