Despite Mumbai Attacks, India Is Confident

You couldn't strike a blow closer to the heart of Indian finance. Mumbai's downtown waterfront—the setting of the terror attacks—has been the national economic gateway since the days of the British Raj; its stock exchange sits between the two hotels besieged by gunmen, and the country's largest business groups are all headquartered nearby. So one might imagine that the gunmen who killed at least 155 people had done grave damage to one of the world's fastest growing major economies—and they'd be wrong. "There are far more important things going on in the global economy at the moment than terrorism in India," says Daniel Melser, senior economist with Moody's in Sidney. As horrific as the attacks were, he adds, "the economic impact will be secondary."

In the coming days and weeks, India's resilience will be on full display. The show of confidence actually began Friday, when Mumbai's main stock exchange—open even as Indian commandoes were still clearing the area of terrorists—rose slightly on the day, in contrast to the NYSE post 9/11, or London markets after the 2005 bombings, which fell sharply. It may well fall further as the full impact of the worst terror attacks to hit Mumbai since a coordinated bombing campaign destroyed the stock exchange, targeted the main railway station and killed some 250 people in a single day back in 1993, but most experts agree that the jitters will eventually subside. "In the short term I'd expect that the effect will be completely negative," said Saumitra Chaudhuri, a member of the prime minister's economic advisory council. "People who do business with India will think twice about visiting, and they'll also think twice about taking any Indian exposure. But all this will pass in a month or two, [and] I don't think in the medium to longer term there will be any lasting damage."

The attacks, in short, haven't changed the India "story" that investors find so alluring. The country remains a standout among emerging markets for its large middle class, thriving service sector and low export dependency. Unlike much of the rest of Asia, its economy is driven mainly by household consumption, which makes it uniquely resilient in today's global downturn. And with growth centers in a variety of industries and geographic locations across the country, the economy isn't vulnerable to a knockout strike of the sort any terror group could deliver. All of which should keep domestic growth relatively robust and prevent foreign investors from growing too skittish—provided Indian authorities quickly reestablish order. The latest attacks "obviously escalated things … so threat perceptions [will] go up dramatically," says Subir Gokarn, chief economist at Crisil, the India arm of Standard & Poor's. "One could take New York, which despite 9/11 got back on its feet, as an example. I think Mumbai will do the same, provided the system responds strongly. That's where the uncertainty is now."

India's tourism industry is unlikely to escape a major shock. "Incredible India"—the government's flashy tourism promotion campaign—is now virtually certain to fall short of its goal of doubling arrivals from last year's five million by 2010. It may even move backwards, as did Bali's tourism trade after the 2002 nightclub bombings, losing more than a third of its traffic overnight. Yet in truth, Indian tourism is anything but incredible in a numerical sense, so all the specter of terrorism can do is erode its already small base. By comparison, Bali alone will garner 2 million foreign visitors this year, and China is expected to improve upon the 137 million it attracted in 2007. With India's GDP at about $1 trillion and tourism contributing just more than $10 billion of that, the impact of even a major slowdown would be minor.

Experts are focused on two real risks. One is that India's counterterrorism preparedness won't improve. The challenge is to remake a tiny national police force comprised mainly of high-school graduates trained to do little but wield sticks to keep unruly crowds in order. The second risk is that terrorists like the ones who paralyzed Mumbai will incite sectarian unrest between India's Hindu majority and their Muslim neighbors, who make up just 14 percent of the country's 1 billion people. Indeed, with national elections due next year, the incentive is there for leaders of political parties divided along religious and geographic lines to ramp up the extremist rhetoric to rally their core supporters—regardless of what it does to India's business climate.

So far most politicians seem to be taking the high road. L.K. Advani, leader of the opposition Bharatiya Janata Party has toned down his oft-vitriolic Hindu nationalism and called for a unified response to the terror attacks from all political parties. Gokarn says the accommodating tone is "very encouraging" but adds that, to be effective, bipartisanship must beget "an institutional framework that the next government can very quickly act on, regardless of who is in office." If not, and additional terror attacks create the impression that India's security situation is deteriorating, the gloss that its economy emits could start to come off the India story.