US embassy cable - 05NEWDELHI2511

UNCLAS SECTION 01 OF 05 NEW DELHI 002511 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR SA, EB/TRA 
SINGAPORE FOR FAA - NESBITT 
FAA FOR LAVIN, NOSKOVIAK 
USDOT FOR BHATIA, MODESITT 
 
E.O. 12958: N/A 
TAGS: EAIR, BEXP, ECON, IN, Indo-US 
SUBJECT:  Scenesetter for Transportation Secretary Mineta's 
India visit 
 
REF: A) New Delhi 986; B) New Delhi 751; C) New Delhi 7923 
and previous 
 
1.  (SBU) Mr. Secretary, I want to welcome you to India, a 
vibrant, diverse, multiethnic, multifaceted democracy that 
is emerging as an economic powerhouse and has growing global 
ambitions.  Your visit comes close on the heels of an 
extraordinarily successful visit of Secretary Rice, who 
unveiled a new U.S. policy for South Asia that explicitly 
seeks to strengthen India's role as a major world power in 
the 21st century.  A decade of economic reforms has raised 
GDP growth to the 7-8 percent range, improved income levels, 
reduced poverty, and instilled increasing confidence within 
the country about its present and future international role. 
The quite visible benefits accruing from these reforms have 
created growing public support for more deregulation, 
liberalization and openness.  Successive governments are 
moving these reforms forward, albeit within the political 
constraints imposed by India's vigorous and sometimes 
frustrating democratic system.  Analysts predict several 
decades of sustained robust economic growth, thanks in part 
to India's youthful population and its technical and 
scientific prowess, which will lift India into the top ranks 
of global economic and political powers.  One factor that 
may stymie India's growth and derail its ambitions would be 
if they fail to develop a world class transportation 
infrastructure.  For strategic and economic reasons, we want 
to help India achieve these aspirations.  The Indians 
realize we are critical to their goals, which gives us 
considerable leverage in shaping their regional and global 
actions. 
 
A Strategic Partnership 
----------------------- 
 
2.  (SBU) Your visit to India, the first ever by a U.S. 
Secretary of Transportation, is an important opportunity to 
 
SIPDIS 
advance the President's directive to add strategic focus to 
our bilateral relations, which have strengthened on 
virtually every front during the last four years.  Today we 
consult regularly at the highest levels on political, 
economic, security, and global issues.  Your visit is the 
third to India this year by a cabinet member.  It follows 
the visits of Secretary Rumsfeld in January and Secretary 
Rice in March.  There are several other cabinet visits 
scheduled for the balance of the year.  We expect the Prime 
Minister to visit this summer and the President to visit 
sometime late this year or early next year.  These high- 
level exchanges are evidence of our changed relationship. 
Our close coordination in responding to the December Tsunami 
and the ongoing Nepal crisis are other cases in point.  Even 
when we disagree, as we did over Iraq, we are generally able 
to deal constructively with our differences, and move on. 
 
3.  (SBU) The keystone for our recent progress with India 
was Secretary Rice's visit, in which she proposed to the 
Indian leadership: 
 
-- launching a Strategic Dialogue to discuss global security 
issues, India's defense requirements, defense co-production, 
and expanded high technology cooperation; 
 
-- creating a working group to strengthen space cooperation; 
 
-- revitalizing our Economic Dialogue; and 
 
-- establishing a high-level Energy Dialogue to include 
civil nuclear cooperation. 
 
4. (SBU) Your visit comes, therefore, at a time of 
unprecedented optimism about the US-India relationship.  It 
will get heavy press attention both in Delhi and Bangalore. 
It will be an opportunity for us to deliver the message to 
the Indian public and the government that we want a strong 
and prosperous India.  It will allow us to highlight to the 
Indian bureaucracy the economic benefits derived from a 
strategic partnership with the US.  While the focus of your 
visit will be the civil aviation sector and Open Skies, we 
should view it as an opportunity to advance our broader 
agenda of forging enduring institutional ties in surface 
transportation as well.  In Delhi, we have requested 
meetings for you with the Prime Minister, the Civil Aviation 
Minister, the Minister for Shipping and Road Transport and 
Highways, and the Prime Minister's chief economic advisor, 
the Deputy Chairman of the Planning Commission.  In 
Bangalore, you will get a flavor of the face of a new, 
emerging India, eager to integrate with the global economy 
and confident about its ability to compete because of its 
technical and scientific prowess. 
 
5.  (U) During your visit, you are scheduled to sign several 
agreements, which together will signal a new era in 
bilateral transportation cooperation: 
 
-- Open Skies Agreement: The agreement was finalized in 
January after your meeting with the Indian Civil Aviation 
Minister.  It is the only full Open Skies agreement that 
India has signed with any air services partner.  It promises 
to benefit consumers and economies of both countries through 
cheaper flights, more choices, and faster services. 
 
-- FAA Memorandum of Agreement: This agreement will allow 
FAA to engage in technical cooperation with Indian civil 
aviation authorities, and help broaden the US-India aviation 
relationship in air traffic management and control, safety, 
and airport systems. 
 
-- Memorandum of Cooperation in Transportation Science and 
Technology: This MOC will signal the intention of both 
countries to undertake cooperation and collaboration in 
areas such as intermodal operations, transportation safety, 
intelligent transportation systems, rapid transit, and 
infrastructure financing. 
 
-- Memorandum of Cooperation in Maritime Science and 
Technology:  This MOC will signal the intention of both 
countries to undertake cooperation and collaboration in 
areas such as shipping and intermodal operations, port 
management, and maritime safety and security. 
 
-- Aviation Cooperation Program (ACP) Launch:  This is a 
unique public-private partnership designed to support 
cooperative activities in the area of training and technical 
assistance on aviation safety and efficiency. 
 
The Economic Dialogue 
--------------------- 
 
6.   (SBU) During its 10 months in power, the UPA government 
has moved on several economic issues of importance to us: it 
has finalized an Open Skies policy with us; it has 
strengthened its IPR regime; it has taken steps to resolve 
our bilateral irritants such as pressing state governments 
to settle disputes with American power producers, it has 
raised foreign direct investment limits in several sectors; 
and it has lowered tariff rates in sectors of importance to 
our industry.  Another highly symbolic FDI legacy issue, the 
Dabhol dispute, which was complicated by the Enron collapse, 
is moving closer to resolution.  We hope Boeing will soon be 
awarded a $8.5 billion contract for sale of commercial 
aircraft to Air India.  The principal tool we have used to 
strengthen the economic relationship is the US-India 
Economic Dialogue (ED).  Last October, following the Prime 
Minister's visit to New York, we agreed that the ED, which 
had yielded uneven results, needed to be revitalized.  The 
leadership of the ED has been elevated so that key issues 
can be lifted to the White House/Prime Minister's Office 
level.  The five existing tracks of the ED -- Finance, 
Environment, Trade, Energy, and Commerce -- will remain 
because they are useful.  Secretary Rice raised the profile 
of the Energy track, which may now be elevated to a stand- 
alone US-India Energy Dialogue.  A new CEO's forum will be 
added to advise policy makers on what is required to remove 
structural impediments to greater trade and investment ties. 
 
Economic Challenges 
-------------------------- 
 
7. (SBU) The UPA government has developed an economic reform 
strategy that promotes private and foreign investment while 
seeking to deliver a greater share of the benefits of reform 
to India's rural and urban poor through various 
infrastructure, agriculture, education, and employment 
initiatives.  It has pursued a line-of-least-resistance 
strategy with coalition partners, sacrificing to the leftist 
opposition overt privatization and labor market reform while 
moving rapidly forward with liberalization of the aviation, 
manufacturing, food processing, and IT sectors.  The 
economic challenges the GOI must address are daunting.  The 
chronic fiscal deficit headlines the macro-economic trouble 
spots.  The combined federal-state deficit this year is 
expected to be $54 billion, about 10 percent of GDP. It is 
among the highest in the world.  Interest payments on 
government debt consume nearly half the revenue received 
from taxes.  Despite India's importance as an emerging 
market and its formidable scientific and technological 
accomplishments, poverty and illiteracy remain high, and HIV 
poses a threat. 
 
Infrastructure 
-------------- 
 
8.  (SBU)  Your visit will be an opportunity to highlight 
one of India's biggest goals -- the development of a world 
class physical infrastructure -- and to demonstrate our 
support for the country's efforts.  Indian airports, road, 
railways, and ports are wholly inadequate to sustain the 
country's competitiveness in the global market place and 
threaten to thwart the country's aspirations of becoming a 
global economic and political power.  Business, both 
domestic and foreign, consistently rates deficient 
infrastructure as its greatest obstacle.  Successive 
governments have recognized this but failed due to 
inadequate political leadership.  Ambitious plans have been 
drawn up in the past, but they have languished due to 
failure to mobilize the resources, lack of clarity of 
purpose, and poor implementation.  Nor is the problem just 
one of lack of funds.  There is enough private sector 
liquidity and interest to fund many large projects that are 
needed.  The problem has been a culture that intrinsically 
believes that it is the responsibility of government to 
plan, build, and operate these projects.  Capital markets 
are not sophisticated enough to channel the liquidity to 
fund large projects.  India lacks a culture of private 
project finance.  Nor is there a regulatory structure to 
ensure private investors of transparent and fair 
competition. 
 
9.  (SBU) There are signs that the UPA government has 
learned the lessons of the past and will do things 
differently.  Prime Minster Manmohan Singh has made 
infrastructure one of his government's top priorities, and 
announced the goal of attracting $150 billion in foreign 
direct investment to the sector.  A government run by 
economists appears to understand the vital role of the 
private sector in infrastructure development but needs help 
in creating appropriate incentives.  Singh's government has 
signaled its intention to build public-private partnerships 
in developing these projects.  It is an open question 
whether India will be able to break from the habits of the 
past and address what everyone in the society believes is a 
pressing need.  Merrill Lynch estimated last year that the 
country has a good chance of spending $76 billion on 
infrastructure project under construction or in the pipeline 
within the next 3 years.  One stark characteristic of this 
spending is the almost complete absence of American 
involvement.  Your visit could induce American companies to 
take a second look at what may in the next decade be the 
sector of greatest commercial opportunity in India. 
 
Civil Aviation 
-------------- 
 
10.  (SBU) The civil aviation sector is experiencing a 
period of profound restructuring, reform, and 
liberalization.  The success of India's telecom sector has 
encouraged the GOI to identify civil aviation as the second 
sector of the economy to be opened up and deregulated. 
Civil aviation is a sector where reform and liberalization 
hold the least amount of political opposition and offer good 
prospects for meaningful benefits.  A focus on this sector 
fits seamlessly with the high priority that the GOI and the 
Prime Minister, in particular, have placed on infrastructure 
development.  In some ways radical reform of this sector was 
inevitable because the sector was close to collapse. In a 
stinging report, a government appointed aviation committee 
found the Indian civil aviation sector to be in crisis due 
to neglect, lack of investment and modernization, and growth 
in air traffic.  The UPA government has begun to use the 
committee report as a road map for the sector and begun 
implementing its recommendation.  It has within the last six 
months liberalized air services agreements, rolled out plans 
for privatization of airports, allowed private airlines to 
fly overseas, and is drawing up plans to establish an 
independent economic regulator. 
 
11.  (U) As a result of these reforms, the Indian civil 
aviation sector is experiencing robust growth, both on 
internal and external routes.  Domestic traffic grew by 27 
percent last year, and is expected to grow at a similar clip 
in the years ahead.  The Civil Aviation Minister told us 
that he expects domestic traffic to double within in the 
next 3 years.  To underscore his point he noted, with 
perhaps only a hint of exaggeration, that on domestic routes 
"every seat of every flight of every carrier to every city 
at every time is fully booked for months."  The four 
existing domestic carriers are being joined by at least six 
other new entrants, many of them low cost carriers. 
International traffic is growing at a similar pace. 
Established regional and European carriers such as Singapore 
Airlines, Emirates, Gulf, Thai, British, Lufthansa are fast 
expanding their services to India, sometimes to new and 
unlikely destinations such as Amritsar and Trinuchapali. 
Low cost regional carriers such as Air Asia and Tiger 
Airways are initiating service from South East Asia. 
Meanwhile India carriers are increasing their international 
flights as fast they can acquire or lease aircraft.  Such 
growth is causing prices to tumble as choice and route 
selection increases.   The growth in air traffic is 
particularly strong in the south where economic resurgence 
is creating a burgeoning demand for international air travel 
-- particularly to US cities.  The US Consulate in Chennai 
issues enough visas each day to fill two or three 747s, and 
waitlists for flights to US destinations continue to grow. 
 
12.  (SBU)  This growth comes with many challenges. 
Observers estimate that Indian airlines will purchase $25 
billion worth of aircraft in the next 20 years.  Acquiring 
these aircraft is in some ways the easy part.  The challenge 
for Indian civil aviation officials is to develop the 
physical and software infrastructure to service this surge 
in traffic.  The Indian civil aviation infrastructure is 
unable to service even the existing traffic, let alone the 
projected growth.  Even today, there are not enough 
overnight parking places in the major metropolitan airports, 
and many airplanes have to overnight at smaller cities. 
Metro airports are chaotic during rush hour with frequent 
aircraft delays and long lines for ticketing, baggage check- 
in, baggage pick-up, security screening.  GOI officials have 
expressed strong concerns about the effect of such growth on 
safety and air traffic management.  There are ominous 
shortages of pilots and other trained staff.  The EU has in 
place a $32 million dollar program to help support the 
upgrade of India's civil aviation sector.  It has seconded 
experts to sit and work fulltime at the Indian civil 
aviation authority.  Civil aviation authorities have 
frequently drawn our attention to us about the absence of 
American involvement.  Your visit will and the agreements 
you sign -- the Open Skies agreement, the FAA Memorandum of 
Agreement and the Aviation Cooperation program -- will show 
our support for the sector and help neutralize some of the 
advantage that the EU has earned through many years of 
collaboration with the Indian civil aviation authority. 
 
Aircraft procurements 
--------------------- 
 
13.  (SBU) For the past several years, state-owned Air India 
and Indian Airlines have been in discussions with Boeing and 
Airbus for aircraft acquisitions which could total $12 
billion.  In competitively bid tenders, Airbus won a $2.1 
billion dollar order to provide single aisle aircraft to 
India Airlines while Boeing won a $1 billion order to supply 
18 B737-800 airplanes to Air India.  Air India is in the 
process of determining the winner of its $8.5 billion tender 
for procuring 50 double aisle long haul aircraft of the A- 
340/A-330/B-777/B-7E7 class.  Boeing has run an aggressive 
sales campaign which has positioned it well.  You should 
signal our strong support for Boeing for this sale.  The 
GOI's plan is to replenish the fleets of these two carriers 
to prevent this further slippage due to years of neglect and 
drift by the government.  It hopes fleet expansion will help 
restore the carriers' financial strength and raise their 
value on the markets.  The GOI then would likely float an 
IPO on the bourses before gradually privatizing them 
completely. 
 
Conclusion 
---------- 
 
14.  (U) In sum, you will come to India at a time when the 
President's goal of establishing a key strategic 
relationship is becoming reality.  The new initiatives you 
announce during this visit will move us forward in building 
new habits of collaboration with one of the world's rising 
giants.  My team looks forward to welcoming you to India and 
ensuring a successful visit.