Mumbai: Terrorist attacks on Mumbai, the country’s financial capital, will have a short-term impact on India’s economy, said economists and analysts, although a senior executive at the country’s largest industry lobby admitted that business confidence, which has seen a decline over the past few months in the wake of the global credit crisis, could fall sharply.
“It’s a shaken reaction at this point of time; things have never been so uncertain. (But) over a period...(the attacks) will not be a big factor,” said Charanjit Banerjee, director general of the Confederation of Indian Industry (CII).
Mumbai, home to Asia’s oldest stock exchange, the country’s central bank and capital markets regulator, and India’s largest corporate houses—the Reliance, Tata and Birla groups—accounts for 5% of the country’s $1 trillion (Rs49.9 trillion) economy and contributes one-third of its direct taxes. The city has seen eight major terrorist attacks in the past 15 years and while the attacks will affect its and the country’s economy, a deeper cut will come from the global economic slowdown, economists said.
“I don’t think the impact (on business) should be big,” said V. Anantha Nageswaran, chief investment officer for Asia-Pacific at Bank Julius Baer in Singapore and a Mint columnist. “Things have already become difficult anyway before this from a macro perspective. That is what will dominate more than this as an issue.”
“I don’t think business confidence or any investment outlook will be hit much,” said Akhil Gupta, chairman, Blackstone India.
Still, the attacks forced regulators to shutter the equity market, which has dropped some 56% this year. Money, currency and commodity markets were also closed on Thursday.
Affecting business confidence
Earlier this month, CII ’s half-yearly survey of Indian business leaders showed that business sentiments had declined.
“Business confidence has been hit by the financial and economic crisis. The terrorist attacks will be another burden on the Indian economy,” said Soumitra Chowdhury, chief economist at rating agency Icra Ltd and a member of the Prime Minister’s economic advisory council. According to him, Indians are already find it difficult to borrow from abroad and the terrorist attacks “will make it even more difficult.”
Deepak Parekh, chairman of Housing Development Finance Corp. Ltd, India’s oldest mortgage player, said the attack has not been on Mumbai but on India to “destabilize and slowdown economic growth.” “This is the last thing one would have wanted in a year which is witnessing a global liquidity crisis. The travel, tourism, hospitality will be severely hurt in the peak season which starts in December.”
India’s economy had expanded by around 9% in each of the the past two years. But record inflation and the global credit crunch have forced economists and analysts to trim their forecasts for this year to 7%, a rate that still makes India, the second fastest growing major economy in the world after China.
“Over the next few days, the direct impact of the attacks is that people will be cautious,” said R. Ravimohan, managing director and regional head, South and South-East Asia, at credit rating agency Standard and Poor’s (S&P).
Ravimohan added that the terror attacks are unlikely to hurt India’s sovereign rating. On Wednesday, S&P projected a 7-7.5% gross domestic product growth in 2008 for India and 6.5-7% for 2009.
Still, the risk premium for the country’s top lender State Bank of India rose. The state-owned bank is a proxy in the debt market for the government, which has no sovereign bonds outstanding. Indian stock index futures fell 4% in Singapore, pointing to a likely steep fall in domestic shares when trading opens on Friday.
Currency analysts expect the rupee will weaken when it opens for trading on Friday, but they also suspect any weakness will be knee-jerk and fleeting and that the central bank will jump to its defence as it always has in volatile spells. “In the short term, it will be rupee negative. But if there is no repetition of such incidents, ultimately the market dynamics will take precedence,” said Joydeep Sen, vice-president, advisory desk of BNP Paribas.
The rupee fell to an all-time low of 50.60 against the dollar last week, down more than 20% this year owing to capital outflows and a withdrawal of foreign credit lines from risky markets. “This means that capital outflows will have a greater impact than they did in the past, though history suggests that any reaction to terrorist attacks in Mumbai will only be temporary,” Nikhilesh Bhattacharya, an economist with Moody’s Economy, said in a note.
One immediate casualty of the attacks could be the luxury retail business. The Taj and the Trident are home to around a dozen luxury retailers including Gucci, Ferragamo, Jimmy Choo, Estee Lauder, Louis Vuitton and Fendi.
Kalyani Chawla, the vice- president of marketing and communications for Christian Dior in India said business would be affected not just because of space but also sales “because we do have a lot of sales from in-house guests.” Most luxury brands prefer to operate out of five-star hotels because India doesn’t have enough high quality luxury retail space.
Mint’s Rasul Bailay, Asit Ranjan Mishra and Sanjiv Shankaran in New Delhi, and Reuters contributed to this story.