Cablegate: New Delhi Weekly Econ Office Highlights for the Period

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E.O. 12958: N/A
TAGS: ECON EFIN EAGR ELTN ELAB EIND EINV ECIN SOCI IN
SUBJECT: New Delhi Weekly Econ Office Highlights for the Period
February 15 to February 26, 2010

1. (U) Below is a compilation of economic highlights from Embassy
New Delhi for the period of February 15 to February 26, 2010,
including the following:

-- PMEAC Report Paints a Bright Macroeconomic Outlook
-- GOI Releases Task Force Report on MGNREGA
-- 3G Auction: For Real or Deja vu All Over Again?
-- Social Responsibility Trumps Commercial Viability in India's
Railway Budget

PMEAC Report Paints a Bright Macroeconomic Outlook
--------------------------------------------- ------

2. (U) In its economic review released on February 19, the Prime
Minister's Economic Advisory Council (PMEAC) painted an upbeat
picture for the country's economy for the next two fiscal years.
Real GDP is forecasted at a robust 8.2 percent for FY 2010-11 and
nine percent for FY 2011-12. The council expects the agricultural
sector to bounce back in the next two fiscal years, while the
combined output of industry and services should increase 8.8 percent
and 9.8 percent in fiscal years 2010-11 and 2011-12, respectively.

3. (U) The PMEAC reported that the two principle constraints on
future growth are low agriculture productivity and inadequate
physical infrastructure. On the former, the PMEAC called for a
clear policy on genetically modified crops, higher spending for
public agriculture research, better coordination between
agri-research institutions, greater research on high-yielding
varieties of seeds, and adequate risk mitigation strategies for
farmers. For infrastructure, the PMEAC stressed the importance of
accelerating power generation capacity and improving the
distribution network, as the cost of electricity and large power
shortages reduces India's competitiveness, leads to production
losses, and adversely impacts economic growth. Stressing the need
to tap nuclear energy, the Council asked for necessary regulatory
changes so that investment, including from established companies
interested in the nuclear energy business, can begin to flow.

4. The PMEAC also warned that the high fiscal deficits of the past
two years (over 10 percent of GDP when including state government
deficits) are unsustainable. It recommended that the Indian
government concentrate on cutting spending except for capital
expenditures, particularly infrastructure spending. Despite its
warning, the PMEAC did not think it would be difficult to reduce the
spending by one percent of GDP, noting that spending in the past two
years such as the farm loan waiver program and payments for back pay
to government workers would not recur in the coming years. On the
revenue side, the PMEAC recommended expanding the service tax base
as it did not think the expected Goods and Service Tax would be
ready for implementation by April 1, 2010. An expanded services tax
base combined with revenue from disinvestment and the 3G spectrum
auction could reduce the fiscal deficit by almost one percent.

5. (U) The Council's biggest concern is food inflation, which in
January was close to 18 percent, and its possible affect on general
price levels. The PMEAC recommended that the government release
food grains from public stocks in sufficient quantities and at
prices slightly below prevailing market prices in order to cool
inflationary expectations. It also recommended developing state
government distribution channels to supplement for the current
public distribution system to enable faster distribution of food
when released from public stocks.

GOI Releases Task Force
Report on MGNREGA
------------------------

6. (U) Prime Minister (PM) Dr. Manmohan Singh launched the 5th year
of the popular National Rural Employment Guarantee Act, rechristened
as the Mahatma Gandhi National Rural Employment Guarantee Act
(MGNREGA), in New Delhi on February 2. The PM highlighted this
flagship program as breaking new ground with its pro-poor vision.
He said even in the wake of the economic slowdown, the Act helped
the rural poor to sail through the recent hardships and acted as an
important social safety net. Dr. Singh focused on the greater than
50 percent participation rate for Schedule Castes (SC) and Schedule

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Tribes (ST) and women. He also emphasized the need to integrate
MGNREGA with other grass root level programs to augment functional
capability of the workers. UPA Chairperson Sonia Gandhi said
MGNREGA is a reflection of the Government's commitment to the rural
poor. However, she cited delays in wage payments, less wage
payments, less coverage, bogus job cards, and lack of receipts of
acknowledgment as some of the challenges in the implementation of
the program.

7. (U) The Ministry of Rural Development (MRD) used the four-year
anniversary to release a report detailing the growth and results of
the Act. About 45 million households now participate and receive
some sort of employment under the program. As MGNREGA has expanded
from covering 200 districts to all 619 districts, wages paid has
more than tripled since 2006, and totaled $3.88 billion for the nine
month period ending December 31, 2009. Total expenditure including
administrative expenses for the same period was $5.6 billion. The
average wage paid per man-day has also increased, from 65 rupees
(approximately $1.40) to the current 89 rupees ($1.95). According
to the report, MGNREGA has also promoted financial inclusion as the
MRD has advised all States to ensure payment of wages through a bank
and post office account. About 88 million new bank accounts are
attributable to the MGNREGA.

8. (U) According to the report, a sizeable proportion of the
beneficiaries have come from minority groups such as SCs (30 percent
participation), STs (21 percent participation), and women (50
percent participation, up from 40 percent participation in 2006).
In some states such as Kerala and Tamil Nadu, over 80 percent of the
participants are women. Only in Uttar Pradesh and Jammu and Kashmir
is women's participation less than 20 percent of total
participation. In 2008-09, Rajasthan provided the highest number of
household employment with over six million households participating.
Rajasthan was followed by Andhra Pradesh, Madhya Pradesh, and Uttar
Pradesh with the most households participating. MGNREGA also
provided employment to thousands of skilled workers including work
for 22,387 technical assistants, 8,517 Data Entry Operators, and
6,755 Accountants.

9. (U) Since its inception in 2006, the number of employment
projects started per year has increased by more than 300 percent.
Water conservation projects are the most popular, accounting for 41
percent of the total projects. Other popular projects include rural
connectivity (16 percent) and land development (14 percent).

10. (U) The report also mentioned some of the challenges and
problems MGNREGA has had. Payment of wages through banks and post
offices improved financial inclusion and reduced corruption but it
has also led to some delays in wage payments since post offices lack
the staff and infrastructure to deal with such high influx.
Laborers are subjected to delay in long queues and often exploited
by touts. New initiatives such as helplines and ombudsmen are
expected to reduce these problems.

3G Auction: For Real or Deja Vu All Over Again?
--------------------------------------------- --

11. (U) Once again, media is abuzz with reports that the Department
of Telecom (DOT) is likely to go ahead with the long delayed 3G
spectrum auction. As per the new schedule, the Notice Inviting
Application (NIA) for bids will be issued by Friday, February 26.
The pre-qualification of bidders would begin on March 30 and mock
auctions to be held on April 5 and 6 followed by actual auction
beginning April 9. The 3G spectrum auction has been in a state of
perpetual postponement for the past two years due to issues over
vacation of spectrum by defense and setting bid prices. DOT appears
to be taking an action in direct response to Prime Minister's Office
approaching the Telecom Commission, the apex policy-making wing to
conclude the auction of 3G spectrum before the end of fiscal year.
Although the auction could not be held during this financial year,
the UPA government wanted the process to start ahead of the Union
Budget beginning on February 26.

12. (U) The government issued the notice inviting applications (NIA)
and the document has been posted on the Department of Telecom
website. The 3G auction would start on April 9, 2010, and Wimax

NEW DELHI 00000378 003 OF 004

bidding would begin two days after the close of the 3G auction. It
is believed that the highest authority in the government wants
Minister of Communications A. Raja to update the status of the 3G
auction every fortnight.

13. (U) The existing plan is to auction off three slots of 3G
spectrum in 17 circles and four slots in remaining 5 circles. The
broadband (BWA) auction will consist of two slots in 22 circles.
All successful bidders will be allowed to offer 3G services on a
commercial basis from September 1 onwards, although the full payment
will have to occur in 10 days. The winners will be obligated to
cover at least 50 percent of the service area using the 3G spectrum
within five years of the effective date. New and foreign entrants
will have to pay Rs 1,650 crore ($356 million) in addition to the
bid amount for acquiring a Unified Access Service license (UASL).
However, they will not get start up 2G spectrum bundled with it.

14. (U) The limited number of slots in the most congested telecom
areas are likely to elevate the competition and fetch higher
revenues. According to some estimates the auction will bring at
least three times the reserve price of Rs. 3500 crore ($756
million), helping reduce the ballooning fiscal deficit currently at
a 16-year high. In order to keep the 3G market competitive, the DOT
has kept the Merger and Acquisition rules tight. If two 3G players
merge their business, then they will be allowed to keep only one
slot of 5 Mhz chunk and the other slot will have to be surrendered.

Social Responsibility Trumps Commercial
Viability in India's Railway Budget
---------------------------------------

15. (U) Stating that her main consideration was social
responsibility rather than commercial viability, in her second
railway budget speech presented to Parliament on February 24,
Railway Minister Mamata Banerjee announced a number of populist
measures, keeping an eye on the 2011 state elections in her home
state of West Bengal (WB). With many in parliament calling it a
"Second Railways Budget for Bengal," Banerjee's focus was clear and
it played well to her core constituency, the audience in West
Bengal, and less so for those around the rest of the country. She
left passenger fares and freight rates untouched for the seventh
year in a row, slightly lowered freight charges by 100 rupees
($2.20) per wagon for food grains and kerosene to combat rising food
prices, and lowered service charges on e-ticketing. How many of the
populist railways initiatives can be implemented, given the lack of
public financing and dependence on optimistic private sector
participation, remains to be seen.

16. (U) The railway budget announced the introduction of ten fast
trains (two for WB), 54 new train services (14 from WB), 28
passenger trains, extension of 21 trains and increased frequency of
trains. Some 94 stations (16 for WB) would be upgraded as Model
Stations and ten (two for WB) to World Class Stations, while 93
multi-functional complexes will be developed - all having
multi-level parking facilities. Other initiatives announced include
fare concessions and improved passenger amenities such as better
food, clean water, more ticket counters, and provision of attendant
service for aged passengers. A new scheme "House for All" would be
provided to all rail employees in the next ten years and health
insurance for the informal sector would also be made available.

17. (U) A Vision 2020 Plan for the Railways released in December
2009 includes increasing gross revenues of railways from 1.2 percent
of GDP to three percent, and adding 25,000 kilometers to the current
route length of 64,099 km. (Comment: This seems highly ambitious as
India was only able to add 10,000 kilometers in the past 10 years.
End comment.) Although the Railway budget will be the highest
amount ever at $9 billion (Rs 414 billion), this is only a three
percent increase from prior year spending. Minister Banerjee plans
to set up five rail wagon factories, a rail axle factory, a
refrigerated container factory, water bottling plants, all to be
part funded by the private sector. Two wagon factories would be set
up at Burdwan and Haldia in West Bengal. About 18,000 wagons would
be acquired this year which should interest foreign investors. The

NEW DELHI 00000378 004 OF 004

Railway Ministry hopes to achieve this through government funding
and public private partnerships (PPP). Private investment will be
needed for laying new lines, developing freight corridors,
modernizing railway infrastructure, and setting up auto and
ancillary hubs. To improve private sector participation, Minister
Banerjee announced a Special Task Force to close investment
proposals within 100 days. However, Minister Banerjee promised not
to privatize the Railways.

18. (U) The rail budget appears ambitious given the resource
constraints and overly optimistic based on the Minister's past
performance. The goal of laying 1,000 kilometers of new track per
year would be a five time increase over what the Ministry has been
able to achieve in the past. Operating expenses now account for
92.3 percent of revenue, up from 75.9 percent two years ago, leaving
little for capital improvements. Railways continue to lose business
to the trucking industry, now accounting for slightly less than 20
percent of the total shipping of goods, down one percent from the
previous year and five percent in the past seven years. Profits
have come down to $207 million (Rs 9.5 billion) in FY 2009-10
compared to $2.9 billion (Rs 134 billion) in FY 2007-08. After
missing her projected profit in FY2009-10 by 67 percent, the
Minister projected a 200 percent increase in profits to $690 million
(Rs 32 billion) for FY 2010-11 based despite a projected 7.75
percent projected increase in total receipts from an estimated
higher demand for cargo and passenger services.

19. (U) Visit New Delhi's Classified Website:
http://www.state.sgov/p/sa/newdelhi.

ROEMER

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