US embassy cable - 05NEWDELHI909

S E C R E T SECTION 01 OF 07 NEW DELHI 000909 
 
SIPDIS 
 
E.O. 12958: DECL: 02/03/2015 
TAGS: PREL, PGOV, ECON, ETRD, EAID, MARR, MOPS, KPKO, XD, IN, External Political Relations 
SUBJECT: INDIA: CHALLENGES AND OPPORTUNITIES IN 2005 
 
Classified By: Ambassador David C. Mulford, Reason 1.5 (B,D) 
 
1.  (S) Summary: With political momentum in its favor, the 
United Progressive Alliance (UPA) expects to solidify its 
hold on power in 2005.  The Congress-led coalition's pursuit 
of closer US-India ties will continue unabated, but the 
exigencies of coalition government will slow progress on 
issues of importance to the US.  While committed to economic 
reform, the GOI and the UPA leadership will not move too 
quickly, so as not to lose support of the Left, which backs 
the UPA from the outside and opposes most forms of economic 
liberalization.  Although there have been no dramatic 
Composite Dialogue breakthroughs, we will encourage Manmohan 
Singh to inject new momentum into Indo-Pak relations as 
former PM Vajpayee did on several occasions.  The recent 
tsunami tragedy resulted in an unprecedented degree of 
 
SIPDIS 
civilian and military coordination between the USG and India 
to deliver immediate relief to Sri Lanka and Indonesia.  We 
hope the successful outcome of the January 30 elections in 
Iraq will afford us a new chance to push India to expand its 
thus far disappointing engagement in Iraq. 
Institutionalizing GOI progress on Trafficking in Persons and 
encouraging sustained, concrete high level action and funding 
on HIV/AIDS also will be major Mission priorities. End 
Summary. 
 
Internal Politics 
----------------- 
 
2.  (C) In the eight months since his unexpected victory in 
the May parliamentary elections, former Finance Minister 
Manmohan Singh steadily consolidated his position as the 
"accidental PM."  The BJP and its allies have been stuck in a 
tailspin following a series of electoral defeats, 
characterized by public spats between BJP leaders, as well as 
between party moderates and Hindu nationalists. 
 
3.  (C) Domestic politics returned to the fore after the 
disastrous tsunami that hit India at the end of 2004 
momentarily diverted attention away from political affairs. 
India's response to the tsunami was to deter outside direct 
assistance and material to demonstrate that it could deal 
with its own internal tragedy while at the same time making a 
strong statement of regional leadership by providing 
assistance to Sri Lanka, the Maldives and Indonesia.  In 
early February, India will hold elections in Haryana, 
Jharkhand, and Bihar, the only state polls scheduled for 
2005.  These will be major contests for the BJP and its 
National Democratic Alliance (NDA), which must halt if not 
reverse their string of election defeats to remain viable. 
We expect the UPA will retain control in Bihar, while likely 
unseating the BJP in Jharkhand and a regional party in 
Haryana.  That outcome could exacerbate the rift between the 
BJP's centrist coalition builders and hard line Hindu 
nationalists.  The budget session of parliament, which is set 
to begin on February 25, will demonstrate whether Congress 
can overcome opposition from its Leftist allies to implement 
economic reforms, while fulfilling the populist promises of 
the Common Minimum Program (CMP).   On January 3, India's 
National Security Advisor JN Dixit died suddenly, and was 
succeeded by Senior Advisor NK Narayanan.  The process raised 
questions about the role and relevance of the office of the 
NSA, which has played a major positive role in the growing 
US-India relationship. 
 
4.  (C) By the end of 2005 it will become apparent whether 
Congress and its UPA allies have solidified their hold on 
power.  If the BJP/NDA does badly in the three state contests 
in February, Congress could convince some secular parties to 
leave the NDA alliance and cross over to the UPA.   This 
could also increase factionalism within the BJP, fueling 
speculation of a split within the Sangh Parivar.   If the BJP 
does not resolve its leadership issues and end infighting 
within its middle-tier leadership, its decline could deepen. 
As Congress grows more confident, it could demand a greater 
role within the UPA and in states where it rules in coalition 
with regional parties -- we have already seen this trend in 
Maharashtra, where Congress successfully held out for the 
Chief Ministership.  Congress will continue to build strength 
in the crucial state of Uttar Pradesh (UP) and could use 
growing law and order problems to invoke governor's rule and 
bring on a new election in an attempt to unseat the regional 
party in power there.  Although some Congress leaders would 
like to call new parliamentary elections to gain an absolute 
UPA majority and end its dependence on the troublesome Left 
parties, this is not likely to happen in 2005.  Local 
elections in J&K will mark the first time in 27 years that 
Kashmir residents will choose their neighborhood leaders.  We 
will continue pressure for New Delhi-Srinagar dialogue; an 
outcome that may become more likely after Congress takes 
control of the Chief Ministership in the fall. 
 
Indo-Pak 
-------- 
 
5.  (S/NF) when viewed in comparison to 2002/2003, India's 
relations with Islamabad have improved significantly.  The 
LOC cease-fire, which reached its first anniversary on 
November 26, 2004, has qualitatively improved the lives of 
Kashmiris.  The Home and Defense Ministries reported drops in 
infiltration rates and violence from Kashmir-oriented 
terrorist groups, attributing this progress to the fencing of 
major sections of the LOC, and the cease-fire that permitted 
fence construction to proceed.  The two rounds of the 
Composite Dialogue took place without rancor and 
recrimination, and there was incremental progress on counter 
terrorism, nuclear CBMs and counternarcotics cooperation.  On 
the margins of the UNGA, the PM told Musharraf his views on 
Kashmir:  India will discuss it, but will not agree to a 
second partition based on religion or a redrawing of the 
Indo-Pak boundaries.  We will quietly encourage PM Singh to 
follow the example of former PM Vajpayee and intervene to 
propose fresh initiatives when talks between the two 
bureaucracies bog down, particularly since the politics of 
Indo-Pak relations have swung in favor of greater 
rapprochement here. 
 
6.  (C) New Delhi appears content with the current pace of 
engagement with Islamabad, and is clearly interested in 
trying to erase the "trust deficit" by increasing bilateral 
trade and people-to-people contacts.  It is unclear how long 
talks will continue absent deliverables, and observers are 
divided over how much to credit "process in the absence of 
progress."  If terrorist violence in Kashmir and infiltration 
across the LOC continues, even at lower levels, a major 
attack during the year could compel an Indian response. 
Growing Indo-Pak goodwill generated over the past year has 
raised the threshold for military action, but GOI tolerance 
is not infinite, and the first three weeks of 2005 already 
saw two suicide attacks on government officers in Srinagar. 
The GOI has taken a low-key approach to Islamabad's decision 
to bring the Baglihar dispute to third-party arbitration, 
believing that the facts and the treaty are on its side. 
While Baglihar is unlikely to disrupt the bilateral dialog on 
other issues, it looms over the February 6-7 SAARC summit and 
FM Natwar Singh's mid-February visit to Islamabad and could 
sour otherwise cordial Indo-Pak atmospherics.  Musharraf's 
January 15 statement that the GOP would not move forward on 
CBMs until differences over the proposed 
Srinagar-Muzaffarabad bus have been overcome further 
complicated Kashmir dialog.  The Pakistan cricket team is 
scheduled to play a series of test matches in India from 
February through March, which should result in some of the 
same goodwill seen in the 2004 test series in Pakistan. 
 
NSSP 
---- 
 
7.  (S) In completing Phase One of the Next Steps in 
Strategic Partnership (NSSP) in September, the UPA succeeded 
in doing what the previous NDA government would not, and 
provided assurances regarding non-diversion of technology to 
the US that it later reaffirmed on the floor of parliament. 
Phase Two of the NSSP requires intensive efforts by the GOI 
to introduce national legislation governing technology 
transfer, and commit to adhere to MTCR and NSG guidelines. 
The GOI is especially keen to see some flexibility on the 
parameters for cooperation on civil nuclear safety issues, 
warning that without progress on that front, the scientific 
establishment will hold back advancements on other NSSP. 
Officials in India's nuclear agencies have become outspokenly 
opposed to strengthening export controls, in the belief that 
the NSSP will not benefit them.  The GOI remains supportive 
of US goals on international non-proliferation, and is 
frustrated that we have not seen fit either to bring India 
into the core group of the Proliferation Security Initiative 
(PSI), or disband the Core Group altogether.  The GOI has 
also signaled its intention to join the Container Security 
Initiative and plans to send a team to Washington in late 
February to agree on a way forward. 
 
Military Relations 
------------------ 
 
8.  (C) The Indian military has embarked on an ambitious 
modernization program starting with revising its Army 
doctrine, procuring cutting-edge equipment and technology to 
enhance its capabilities, and conducting joint and combined 
exercises with an expanding number of partners.   The Army 
also considered changing its counterinsurgency methods, 
converting more battalions to Special Forces units, and 
increasing use of precision munitions and information 
warfare.  An ambitious schedule of US-India joint military 
exercises, including the largest such event to date off the 
Indian coast in October, enhanced US-India mil-mil ties and 
paved the way for better relations in other areas.  These 
efforts laid the groundwork for unprecedented cooperation 
between the US and India in tsunami relief.  A US decision to 
move ahead with an F-16 sale to Pakistan, and the subsequent 
political fallout, however, would endanger US hopes for a 
breakthrough arms sale to India in the near future. 
 
9.  (C) The Indian Air Force has extended the deadline for 
the US to submit a bid on 126 multi-role fighter aircraft to 
replace India's aging MiG fleet.  This represents the best 
opportunity we have had in years to cap three years of 
successful exercises and other military engagement with a 
decision to seriously compete in India's annual $14 billion 
defense market and demonstrate our confidence in the 21st 
century partnership that the President's NSSP initiative 
embodies.  (Note:  The USG has not yet responded to the 
Indian offer).  Whether the US participates in this tender or 
not, it will have a competitive presence at India's annual 
air show (Aero-India) in mid-February.  Later in February, 
the GOI is expected to receive a classified briefing on the 
PAC-2 missile defense system, followed by an initial 
exploratory meeting for a future missile defense and command 
post exercise. 
 
Economic Outlook 
---------------- 
 
10.  (SBU) During his first seven months as PM Manmohan Singh 
signaled his intention to keep market-oriented reforms moving 
forward.  He assembled several like-minded reformers around 
him, including Finance Minister Chidambaram and Deputy 
Chairman of the Planning Commission Montek Singh Ahluwalia. 
Collectively, they charted the course on future economic 
policy and were able and knowledgeable interlocutors in our 
bilateral Economic Dialogue.  This capable team faced 
significant political obstacles from the Left in its attempts 
to advance economic reforms outlined in the "Common Minimum 
Program (CMP)." 
 
11.  (C) Finance Minister Chidambaram submitted a Mid-Year 
Review to Parliament on December 13 concerning the state of 
the economy after the first six months of the fiscal year 
(April 1 - September 30).  The document lowers the prediction 
for GDP growth to "6 percent-plus" for the full fiscal year, 
indicating that the budget deficit target may slip, and 
flagged higher inflation.  However, the Review addressed 
several economic reforms that correspond closely with our own 
mid-term economic and commercial strategy and our ongoing 
engagement with the GOI.  It envisions the roll out on April 
1 of the value-added tax (VAT), calls for reducing federal 
subsidies, highlights infrastructure development, and urges 
liberalizing FDI.  The document also hints at opening up the 
now-closed retail sector to FDI as a means of creating an 
"integrated common market" for agricultural products.  It is 
not certain, however, that the PM and his team can sell these 
reforms to Parliament, and especially to the Left. 
 
12.  (SBU) Because of leftist opposition, labor law reform 
and the privatization of most state-owned companies appear to 
be off the table, although the GOI may proceed with limited 
asset sales that do not reduce government ownership below 50 
percent of equity.  The Left has historically opposed most 
forms of FDI; attacking GOI plans to raise FDI caps on 
telecom companies (74 percent from 49 percent), and insurance 
(49 percent from 26 percent).  Its posture has put it in 
conflict with PM Singh's ambitious goal of attracting $150 
billion in FDI for infrastructure development in the next 10 
years.  Singh has publicly acknowledged that the UPA must 
still win over the Left on FDI.  With this as a political 
backdrop, economic reform will likely move forward on an 
ad-hoc basis.  Issues that have popular support, like 
reducing bureaucratic red tape and simplifying the tax code, 
will move forward.   Nonetheless, some observers believe that 
a general compromise is slowly being forged behind the 
scenes, with the Left giving tacit assent for liberalizing 
FDI regulations and proceeding with a new patent law, in 
exchange for a strong government commitment to rural 
development and a rural jobs program.  Meanwhile, the GOI has 
agreed to sign with us its first ever Open Skies Agreement. 
Mission looks forward to Secretary Mineta's late March visit 
here to sign the Agreement. 
 
Iraq 
---- 
 
13.  (C) The GOI expressed high-level interest in providing 
training and other material assistance for Iraq's January 30 
elections.  However, it was hamstrung by its policy barring 
Indian citizens from going to Iraq and by strong Left party 
opposition against any involvement until a 
democratically-elected governments takes the reigns in 
Baghdad.  GOI support for the January polls was limited to 
the $10 million it had already committed to the UN Trust 
Fund.  Although frustrated by lack of access to 
decision-makers in Baghdad, poor information flow, and 
absence of response to its offers of assistance, New Delhi 
says it is committed to playing a larger role in subsequent 
Iraqi polls scheduled later in 2005.  A very positive GOI 
statement following the January 30 elections was drafted with 
Washington in mind, and we will encourage a GOI effort to get 
back into the game of Iraq reconstruction and political 
reform. 
 
Regional Engagement 
------------------- 
 
14.  (C) India's "Look East" policy and PM Singh's personal 
interest in pursuing close economic ties with Southeast Asia, 
as well as India's vision of itself as a balance to China, 
ensures that New Delhi will continue to pay close attention 
to ASEAN for economic as well as strategic reasons.  At the 
2004 ASEAN Plus One Summit, the PM committed India to free 
trade with parts of the organization by the distant deadline 
of 2011, with no indication of concrete steps towards that 
goal in 2005.   Initially opposed to an East Asia Summit on 
the grounds that there already exists an ASEAN Plus Three 
(ASEAN plus Japan, Korea, China), the MEA has recently 
indicated that if invited, India will participate. 
 
15.  (C) Progress on SAFTA (South Asia Free Trade Area) 
negotiations leading up to the planned January 2006 
implementation date will be a principal focus for SAARC in 
2005.  Although the MEA has outlined an ambitious plan for 
SAFTA negotiations, aimed at having an agreement for member 
ratification by July 2005, India has generally preferred 
bilateral tracks for liberalized trade.  Within South Asia 
India has an FTA with Sri Lanka, a de facto one with both 
Nepal and Bhutan, and is in the very early stages of 
discussion with Bangladesh, leaving out only Pakistan. 
Uncertainty about the PM's attendance at the February SAARC 
Summit in Dhaka reflected continued difficulty in the GOI-GOB 
relationship, and genuine Indian concerns about the security 
situation there. 
 
16.  (C) Bangladesh:  Press reports indicate that PM Singh 
may not attend the SAARC summit in Dhaka, which was to be the 
site of the first bilateral meeting between PM Singh and 
Bangladeshi PM Khaleda Zia.  Should such a meeting take 
place, it would give a much-needed goodwill boost to 
India-Bangladesh relations early in the year.  However, one 
meeting is unlikely to resolve continuing New Delhi's 
frustration over what it sees as Dhaka's complicit support 
for Northeastern insurgent groups.  Economics may provide 
some positive impetus to the relationship.  In early January 
the petroleum and natural resources ministers of India, 
Bangladesh and Burma met in Rangoon and agreed to proceed 
with an oil and gas pipeline from Burma through Bangladesh. 
New Delhi's response to Dhaka's request for access through 
India for hydroelectricity and goods from Nepal and Bhutan 
will set the tone for progress on the pipeline.  In late 
2004, the MEA expressed to us some optimism regarding the 
Tata Corporation's proposed USD two billion investment in 
Bangladesh.  However, without Bangladeshi acknowledgment of 
Indian concerns about support for Northeastern militants, the 
relationship will likely remain uneasy.  Mission will 
continue to encourage real information sharing towards 
US-India CT cooperation on the India-Bangladesh border. 
 
17.  (C) China: India's engagement with China is likely to 
maintain its upward trajectory in 2005.  China will continue 
to figure prominently in New Delhi's foreign policy calculus, 
as India continues its ascent to regional and global power 
status, and seeks opportunities in rapidly expanding 
Sino-Indian trade.  Both countries conducted a first-ever 
strategic dialogue on January 24, further broadening the 
scope of India-China diplomatic interaction.  The 
discussions, led by Foreign Secretary Shyam Saran and Chinese 
Vice Foreign Minister Wu Dawei, included an exchange of views 
on terrorism, non-proliferation, energy security, UN reform, 
Iraq, Afghanistan, Iran, and North Korea.  Border talks are 
also likely to continue, although four rounds of discussions 
have yielded few concrete results, and the demise of NSA 
Dixit -- India's China negotiator -- reduces the prospects of 
diplomatic innovation.  Lingering suspicions and lack of 
trust will remain obstacles to the bilateral relationship on 
the Indian side, especially as New Delhi views with concern 
the PLA's military build-up on the Tibetan plateau and in 
Burma, and Beijing's strong relationship with Pakistan. 
 
18.  (C) Nepal: The February 1 dismissal of the government by 
King Gyanendra complicated the India-Nepal relationship. 
While the GOI described the incident as a "serious setback" 
to the cause of democracy and reaffirmed its support for 
Nepal's political parties, early indications are that it will 
take a cautious approach, so as to not to encourage Nepal's 
on-going Maoist insurgency.  The GOI remains committed to do 
"whatever is necessary" to help Nepal defeat the Maoists, and 
does not want the security situation there to deteriorate 
further.  The king's actions will further strain his already 
testy relationship with New Delhi.  Shared concerns about the 
political crisis and the Maoist insurgency will continue to 
provide opportunities for greater US-India dialogue and 
collaboration, taking advantage of New Delhi's influence and 
insight into political dynamics in Kathmandu. 
 
19.  (C) Afghanistan: India welcomed President Karzai's 
re-election and expressed a desire for successful Afghan 
Parliamentary elections.  With India's policy towards 
Afghanistan moving to the post-Bonn phase, the GOI is 
currently looking at the next phase of reconstruction 
projects, which represent India's largest aid program 
anywhere. 
 
Trafficking in Persons 
---------------------- 
 
20. (C) Initially placed on Tier II in the 2002 Trafficking 
in Persons (TIP) certification baseline survey, India slipped 
to the Tier II Special Watch List in 2004 for failing to 
demonstrate increased central government law enforcement 
response to its huge trafficking problem and inadequate local 
prosecutions in Mumbai and Calcutta.  The US subsequently 
presented the GOI with a list of suggested actions, 
including: A) creating and empowering a national anti-TIP 
coordinator; B) designating and empowering a national 
anti-trafficking law enforcement agency; C) encouraging state 
governments, particularly Maharashtra and West Bengal, to 
increase significantly the number of trafficking-related 
prosecutions and convictions; D) implementing the 1998 
National Plan of Action; E) strengthening national 
anti-trafficking law and F) increasing public awareness of 
trafficking.  Failure to demonstrate progress on this agenda 
could result in India slipping to Tier III in the 2005 TIP 
certification process, and the imposition of sanctions.  GOI, 
NGO and private sector contacts admit that India is deficient 
in TIP law enforcement, but argue that Tier III placement 
could be highly counterproductive to USG/GOI relations, 
particularly to anti-TIP cooperation. 
 
21.  (C) While the previous government virtually refused to 
discuss the TIP issue, the UPA administration has been open 
to exploring greater anti-TIP cooperation. The MEA Joint 
Secretary (Americas), and the Secretary of the Department of 
 
SIPDIS 
Women and Child Development (DWCD) have been very pro-active. 
 Strong Embassy efforts at the highest levels are bearing 
fruit.  The GOI has made significant movement on virtually 
every issue except designating and empowering a national 
anti-trafficking law enforcement agency.  The GOI argues that 
since India's constitution enshrines law enforcement as a 
state issue, it cannot directly enforce national laws 
(including anti-TIP laws) at the state level. 
 
22. (C) We understand that the DWDC Secretary will be 
appointed as the nodal interagency TIP coordinator and that 
she will chair an interagency meeting on February 4 to agree 
on a forward strategy that is expected to include acceptance 
of U.S. training to improve law enforcement, particularly in 
areas the U.S. has identified as weak, i.e., Goa and Mumbai. 
In any case, USG/GOI anti-TIP cooperation will continue to be 
a high Mission priority. 
 
Social Issues 
------------- 
 
23.  (U) HIV/AIDS in India is at a critical stage.  With at 
least 5.1 million people infected, the number of people 
living with the disease is second only to South Africa.  The 
epidemic initially surfaced in urban areas, but is showing 
clear signs of spreading to the countryside.  In response, 
the GOI has increased its HIV/AIDS activities, especially in 
advocacy and awareness creation.  Prime Minister Manmohan 
Singh will head the GOI's National Council on AIDS and play a 
critical role in expanding HIV/AIDS activities in India.  The 
GOI is also reviewing its HIV/AIDS program including current 
prevalence estimates.  These are encouraging signs but more 
needs to be done, especially to reduce the stigma associated 
with the disease.  In addition, the GOI needs to increase 
significantly its own committment of resources to make 
HIV/AIDS treatment more affordable.  Expanding USG assistance 
to India on HIV/AIDS and encouraging increased GOI financing 
will be major focuses of the Mission this coming year. 
 
Comment 
------- 
 
24.  (C) US-India relations are increasingly dynamic, firmly 
on track and further improvement is all but inevitable. 
There are few major impediments that could change or halt 
this trajectory, although a clash over Iran sanctions or a US 
decision to sell F-16's to Pakistan would inevitably detract 
from the pace.  As Congress solidifies its hold on power, it 
will come closer to its goal of forming the government 
without Left/Communist support, will grow more confident, and 
we could see more scope for progress on issues we care deeply 
about, such as economic reform, and possibly Iraq.  A 
perception of slackening US pressure on the issue of 
terrorist infiltration from Pakistan could diminish India's 
confidence in the US as a neutral observer in the Indo-Pak 
equation.  The GOI would like normal relations with Pakistan, 
so that New Delhi can better focus its attention outside the 
region and on economic growth, but we do not expect a 
dramatic improvement in ties with Islamabad in the coming 
year, or dramatic innovation in the Indian approach to 
Kashmir.  Although this process will likely continue into the 
future, regardless of who is in power in New Delhi, its speed 
and the scope of its development will be influenced by the 
political quality of our relationship. Minimize considered. 
MULFORD