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.

26463 2/4/2005 11:55 05NEWDELHI909 Embassy New Delhi SECRET "This record is a partial extract of the original cable. The full text of the original cable is not available.

" "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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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