Indian Markets Resilient in the Face of Terror

You couldn't strike a blow closer to the heart of Indian finance. Mumbai's downtown waterfront—the setting of last week's terror attacks—has been the nation's 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 besieged the city and killed 155 people last week had done grave damage to one of the world's fastest-growing major economies. But that assumption would 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 Economy.com 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 last Friday, when Mumbai's main stock exchange—open even as Indian commandos 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. Of course, it may fall further as the full impact of these terror attacks—the worst 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—become clear. 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."

Last week's 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."

The one industry unlikely to escape a major shock is tourism. "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 5 million by 2010. It may even move backward, as did Bali's tourism trade after the 2002 nightclub bombings, losing more than a third of its traffic overnight. Besides, Indian tourism is anything but incredible in a numerical sense; all the specter of terrorism can do is erode its small base. By comparison, Bali alone will garner 2 million foreign visitors this year, and China is expected to improve upon the 132 million it attracted in 2007. With India's GDP approaching $1.2 trillion and tourism contributing just more than $10 billion of that, the impact of even a major slowdown would be minor.

Experts are now focused on two real risks that could have longer-term economic impacts. One is that India's counterterrorism preparedness won't improve. The challenge is to remake a tiny national police force composed 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 those who paralyzed Mumbai will incite sectarian unrest between India's Hindu majority and its 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 factions 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 if additional terror attacks create the impression that India's security situation is deteriorating, the gloss could start to come off India's as yet untarnished economic story.