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NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF APRIL 21-25, 2008

     
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Reference ID: 08NEWDELHI1209    
Created: 2008-05-02 12:04    
Released: 2011-08-30 01:44    
Classification: UNCLASSIFIED//FOR OFFICIAL USE ONLY       
Origin:  Embassy New Delhi
              

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FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 1567
INFO RUEHCG/AMCONSUL CHENNAI 2835
RUEHCI/AMCONSUL KOLKATA 2133
RUEHLH/AMCONSUL LAHORE 4405
RUEHBI/AMCONSUL MUMBAI 1946
RUEHPW/AMCONSUL PESHAWAR 4844
RUEHIL/AMEMBASSY ISLAMABAD 4836
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHMFIUU/FAA NATIONAL HQ WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE

UNCLAS SECTION 01 OF 05 NEW DELHI 001209
 
SIPDIS
 
SIPDIS
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USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD
DEPT OF ENERGY FOR A/S KHARBERT, TCUTLER, CZAMUDA, RLUHAR
DEPT PASS TO USTR CLILIENFELD/AADLER
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA ABAUKOL
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN
STATE FOR SCA/INS AND EB/TRA JEFFREY HORWITZ AND TOM ENGLE
USDA PASS FAS/OCRA/RADLER/BEAN/CARVER/RIKER
 
E.O. 12958: N/A
TAGS: EAGR EFIN EINV EPET ETRD SENV IN
SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF
APRIL 21-25, 2008
 
 
NEW DELHI 00001209  001.2 OF 005
 
 
¶1.  (U) Below is a compilation of Economic highlights from Embassy
New Delhi for the week of April 28 - May 2, 2008, including the
following items:
 
-- A SEPARATE DEPARTMENT OF PHARMACEUTICALS?
-- ADDITIONAL GOI 'ANTI-INFLATION' MEASURES INCLUDE EXPORT
-- KV KAMATH IS NEW PRESIDENT OF CII FOR 2008-09
-- U.S. SLOWDOWN IMPACTING INDIAN TEXTILES INDUSTRY
-- SEZ POLICY UNDER ATTACK
-- CABINET APPROVALS PROPOSAL FOR DEVELOPMENT OF PRIVATE
   AIRPORTS
-- PARLIAMENT PASSES UNION BUDGET 2008-09
-- INDIA LAUNCHES 10 SATELLITES WITH ONE ROCKET
-- MOTOROLA INAUGURATES NEW MANUFACTURING FACILITY
   NEAR CHENNAI
 
A SEPARATE DEPARTMENT OF
PHARMACEUTICALS?
------------------
 
¶2.  (U) The GOI is reportedly planning to establish a new department
of pharmaceuticals within the Ministry of Chemicals and Fertilizers
(MCF).  Press reports describe a "hectic debate" regarding price
regulation of pharmaceuticals, with the MCF engaged in finalizing a
new drug pricing policy.  At present the drug price regulator is the
National Pharmaceutical Pricing Authority (NPPA), but a GOI
committee of secretaries will decide whether NPPA will be a part of
the new department or whether it will continue as an autonomous
body.  If the new department proposal is approved, it could bring
together the functions of various GOI agencies dealing with
different aspects of the pharmaceutical industry, such as the
Ministry of Health (quality of medicines), Ministry of Chemicals and
Fertilizers (pricing and regulation), Ministry of Environment and
Forests (clinical trials) and the Ministry of Science and Technology
(drug research projects).
 
¶3.  (U) Comment.  The GOI's impetus for creating a stand alone
department of pharmaceuticals is its recognition of the sector's
importance as a sunrise industry.  However, we are skeptical that
such an extensive reengineering of the GOI bureaucracy, even when
clearly in the interest of a booming sector, will take place anytime
soon.  End comment.
 
ADDITIONAL GOI 'ANTI-INFLATION' MEASURES
INCLUDE EXPORT DUTIES AND CUTS IN IMPORT
----------------------
 
¶4.  (U) After inter-ministerial consultations, the GOI on April 28
imposed export duties on various steel products ranging from 5 to 15
percent in a bid to contain a domestic demand-supply imbalance and
rising prices of steel.  The GOI also reduced the customs duty to
nil for basic steel inputs like metallurgical coke, ferro-alloys,
and zinc, while abolishing the countervailing duty on imported steel
products used in construction.  Various steel products like pig
iron, mild steel products, hot-rolled coil, cold-rolled coil, bars,
rods and angles have been exempted from the basic custom duty.
 
¶5.  (U) Steel prices have reportedly risen over 60 percent in the
past year.  According to industry sources, price hikes have been
frequent in recent months.  In response to various GOI informal
appeals, Indian steel companies have recently agreed to a voluntary
freeze on prices.  Prior to the latest announcement of steel export
duties, the GOI has already taken many measures in recent months to
stabilize steel prices in the domestic market, such as reducing the
import duty on scrap metal inputs to zero from 5 percent and the
withdrawal of export incentives.
 
¶6.  (U) The GOI also announced some additional duty changes to rein
in food prices.  The measures include an export levy of Rs. 8,000
(approx $200) per ton on basmati rice and a 16.7 percent reduction
in the minimum export price of non-basmati rice to $1,000; reduction
 
NEW DELHI 00001209  002.2 OF 005
 
 
in custom duty on skimmed milk powder to 5 percent from 15 percent
for a tariff rate quota of 10,000 tons; and reduction in import
tariff for butter oil to 30 percent from 40 percent.
 
KV KAMATH IS NEW PRESIDENT
OF CII FOR 2008-09
-----------------------
 
¶7.  (U) Mr. KV Kamath, CEO of ICICI Bank, on May 1 became the
President of the Confederation of Indian Industry (CII - India's
largest industry chamber of commerce) for the year 2008-09.  He was
the Vice President of CII during 2007-08 and succeeds Sunil Bharti
Mittal of Bharti Airtel.  Kamath started his career in 1971 at ICICI
(originally a public sector unit - Industrial Credit and Investment
Corporation of India), but moved to the Asian Development Bank for
some time before returning to a privatized ICICI as its CEO in 1996.
 Under his leadership, ICICI has transformed itself into a modern
financial services group with ADRs listed on the NYSE.  Kamath did
his MBA from IIM-Ahmedabad.
 
U.S. SLOWDOWN IMPACTING INDIAN
TEXTILES INDUSTRY
--------------------
 
¶8.  (U)  The Indian garment and textiles industry is facing lower
demand from U.S. consumers, with retailers such as Wal-Mart, Gap,
Nike, and Target placing fewer orders for readymade garments and
fabrics from India.  Garment exporters are reporting both supply and
demand hurdles, attributing a deceleration in business activity both
to increased cotton prices and increased global competition, while
facing decreased U.S. demand.  An example is Gokaldas Exports, which
is India's largest garments exporter and 50.1 percent owned by the
U.S. private equity firm Blackstone.  The company earns about 96
percent of its revenues from exports and employs over 54,000
workers, but reports its products have become less competitive in
the international market.
 
¶9.  (U) According to the Apparel Export Promotion Council (AEPC),
orders are down about 20 percent from large US retailers,
compressing industry profits margins.  AEPC also notes the negative
impact of the rising rupee on garment exporters.  Indian garment
exporters are now looking at the European market as an alternative
destination for their products.  There is considerable demand for
Indian garments from European retailers, such as Tesco.  However,
AEPC is concerned that the US slowdown may indirectly hit demand
from European retailers.  The domestic market within India is also
booming and offers opportunities to garment manufacturers to offset
lost business.
 
SEZ POLICY UNDER ATTACK
-----------------
 
¶10.  (U) Alleged manipulations in land acquisition deals by some
Indian real estate companies from southern Indian states has
triggered the latest round of debates on the success of special
economic zones (SEZs) policy.  Earlier this week, both the
opposition party BJP and the Congress Party's Left Party allies in
the Parliament questioned hasty approvals of SEZs by the GOI over
the last two years.  Commerce and Industry Minister Kamal Nath
responded to these accusations on April 28 and emphatically stated
that the GOI is open to review the SEZ Act to address any problem
areas.  There has been considerable controversy over land
acquisition in India for SEZ development.  At a time when the ruling
coalition is in a weakened position ahead of national elections next
year, the recent criticism from the Left Parties could lead to
amendments in the SEZ Act as soon as the next Monsoon Parliament in
July.
 
¶11.  (U) Defending the GOI stand on SEZs as engines of growth,
Minister Nath explained to Parliament that currently 80 SEZs are
operational in India, and the GOI plans to assess the overall
 
NEW DELHI 00001209  003.2 OF 005
 
 
success of its 2005 SEZ Act after having 100 SEZs in place (which is
expected later this year).  The GOI has approved 439 SEZs (which are
not yet operational) involving a total of 60,168 hectares of land.
Highlighting the success of SEZs for the Indian economy, Minister
Nath pointed out the huge investments of nearly $17 billion in
various SEZs, employment of 177,000 people, and a 13 percent
contribution to India's total exports of $126 billion.
 
CABINET APPROVALS PROPOSAL FOR
DEVELOPMENT OF PRIVATE AIRPORTS
-------------------------------
 
¶12.  (U) On April 24, the Indian Cabinet cleared the Ministry of
Civil Aviation's proposal to allow private airports, airstrips, and
helipads for private development and operation.  Both the Ministry
and the Directorate General of Civil Aviation (DGCA) have been
authorized to clear private airport proposals, subject to security
clearance from the Ministry of Home Affairs.  While these project
proposals do not require Cabinet approval, all private airports will
have to meet the DGCA's safety norms.
 
¶13.  (U) Between December 1997 and September 2007, the number of
private aircraft in India increased from 96 to 229 and the number of
aircraft for non-scheduled use (charters) from 46 to 196.  The
number of private planes for government and other miscellaneous use
has also increased from 247 to 373.  Despite the significant
increase in private aircraft across India, the number of operational
airports remains the same.  As such, the latest Cabinet decision is
expected to lead to an increase in new airport development to
provide better connectivity to distant and remote locations and
reduce burdens on current operational airports.  Civil Aviation
Minister Praful Patel noted that the Cabinet decision is a positive
step towards meeting the current requirement of 400 to 500 new
private and greenfield airports.
 
¶14.  (U) The Minister also noted, that, in a significant departure
from earlier policies, the Cabinet will allow development of a new
airport within 150km of an existing airport.  However, pending
proposals which have a bearing on the contractual obligations of an
existing airport developer, like those in Bangalore, Hyderabad, or
Delhi, will need Cabinet approval.  The DGCA will be empowered to
clear projects beyond 150km of an existing airport as well as those
which have neither a bearing on existing contractual obligations nor
seek exemption from any rule. The new policy will not have any
bearing on the "under consideration" status of the Uttar Pradesh
state government's proposal to build an airport in Greater Noida nor
growing demands by some to keep the old Bangalore and Hyderabad
airports operational for certain services.
 
¶15.  (U) Under the new simplified policy, the Ministry will provide
a single window to developers and a steering committee headed by
Civil Aviation Secretary Chawla to coordinate the appropriate
clearances from various agencies.  The Ministry's official statement
also clarifies that, "Proposals for airports to handle cargo and/or
nonscheduled flights as well as heliports need not be submitted to
the ministry for approval and these cases may be considered and
decided at the level of DGCA".
 
PARLIAMENT PASSES UNION
BUDGET 2008-09
------------------
 
¶16.  (U) India's budget (Finance bill) for FY 2008-09 was passed by
both houses of parliament this week and received President Pratibha
Patil's assent.  Prior to passing the budget in the lower house of
parliament, the Left parties staged a walkout protesting against
Finance Minister Chidambaram for not addressing their demands,
including a complete a ban on futures trading in essential
commodities.  Chidambaram added several amendments to the bill,
beginning with new fiscal measures to contain inflation. ThU tax
holiday for software companies located in parks run by Software
 
NEW DELHI 00001209  004.2 OF 005
 
 
Technology Parks of India was originally meant to expire in 2009 but
has now been extended for one more year until March 2010. This is
intended to benefit small and medium sized firms that are finding it
difficult to move into the special economic zones due to lack of
availability of space and high rental costs. Further, to provide
relief to public sector units, tax benefits of the seven year tax
holiday has been provided to three oil refineries being built by
public sector oil companies, namely, Indian Oil Corporation,
Hindustan Petroleum Corporation and Bharat Petroleum Corporation,
provided they begin refining not later than the March 31, 2012.
 
¶17.  (U) Press reports indicate that Ram Vilas Paswan, Minister for
Fertilizers and Chemicals, has requested higher fertilizer subsidies
this year due to spiraling global prices. He has demanded that the
subsidy be raised by more than 100% to $25 billion from $11.25
billion paid last year to fertilizer manufacturers, for the same
quantity of fertilizers.  Fertilizer prices around the world have
doubled since January 2007.  The government, however, is not in
favor of increasing fertilizer prices, as that would affect food
grain prices.  The GOI subsidizes domestic as well as imported
fertilizers on behalf of farmers to try to keep food prices
affordable. Comment: Many critics argue for targeting the subsidy
directly to the farmer, rather than to the fertilizer producer or
importer, who does not necessarily pass on the cost savings to the
farmer.  End comment.
 
¶18.  (U) The Fertilizer Association of India (FAI) also has given
indications that the government may have to spend an additional sum
of $6.3 billion during FY 2008-09 on di-ammonium phosphate (DAP)
subsidies. Due to severe shortage of phosphoric acid (the main input
for manufacturing DAP) in the global market, Indian fertilizer firms
have negotiated an import price of $1985/ton with international
suppliers for FY 2008-09 (an increase of 250% over the average price
of $566/ton of imported phosphoric acid during FY 2007-08). The cost
of importing DAP is $1275/ton, while government subsidies enable
farmers to purchase it at $233/ton. The existing subsidy rate for
DAP is therefore around $1000/ton.  A hike in the fertilizer subsidy
bill will impact the fiscal deficit, targeted at 2.5% of the GDP in
the current fiscal year.  In FY 2007-08, the government issued
fertilizer bonds worth $1.9 billion to 23 fertilizer companies. The
government is likely to issue similar bonds in the current year to
compensate the fertilizer subsidies.  Note:  One of the main drivers
for increased prices is more demand for natural gas for
non-fertilizer uses.  Natural gas is 90% of the raw material cost
for fertilizers such as ammonia.  Six new urea plants are being
constructed in Iran, Egypt, Nigeria, Oman and Russia, which should
increase the supply significantly and bring down prices, over time.
End note.
 
INDIA LAUNCHES 10 SATELLITES
WITH ONE ROCKET
----------------------------
 
¶19.  (SBU) India's space agency (ISRO) successfully launched its
workhorse Polar Satellite Launch Vehicle (PSLV) precisely on
schedule at 9:23 am on April 28.  Fourteen minutes after lift-off,
the PSLV began releasing its cargo, which consisted of 10
satellites:   a 900-kg mapping satellite (Cartosat 2A), an 83-kg
"mini" satellite, and eight "nano" satellites.  ISRO's Director of
International Cooperation told Consulate Chennai that the initial
signals indicate that all satellites are in their prescribed orbits.
 He added that this launch operationalized ISRO's Commercial Launch
Services Agreement with the European Space Agency (ESA), noting that
several of the nano satellites were of European origin.
 
MOTOROLA INAUGURATES NEW
MANUFACTURING FACILITY
NEAR CHENNAI
---------------
 
¶20.  (U) Motorola celebrated on April 26 the grand opening of its
 
NEW DELHI 00001209  005.2 OF 005
 
 
new production facility at Sriperumbudur, 50 km west of Chennai.
Henry Mohan, Motorola India's General Manager, told Consulate
Chennai that the new facility, focused on the Indian market and able
to produce one million mobile phones every month, was necessary to
meet the tremendous demand for the company's products.  He also
explained that the facility will produce 6000 base stations yearly
for Indian mobile service providers.  Indicating that he expects the
Motorola to continue to expand in India, he noted that the new
facility currently occupies only one-fifth of the 70 acres of land
in Sriperumbudur the company controls.  Motorola is only the latest
high-tech manufacturer to set up shop alongside the
Chennai-Bangalore highway, where the state of Tamil Nadu wants to
develop an industrial corridor; its immediate neighbors include
major production facilities for Dell, Nokia, Flextronics, Samsung,
Caparo, and Hyundai.
 
¶20.  (U) Visit New Delhi's Classified Website:
http://www.state.sgov/p/sa/newdelhi
 
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