Mumbai terror attacks: Economy braces for short-term shocks

The terror attacks that rocked India's financial capital may depress stocks, slow new investment, but are unlikely to inflict long-term damage on the nation's economy.The Confederation of Indian Industry believes that the attacks in Mumbai will not have a long-term impact on Indian business and the Indian economy but as CII President K.V. Kamath, points out, the attack highlights the threat to the institutions of business that are an integral part of India's growth and its relationship with the world.Though the terrorist attacks are targeted at the commercial capital of the country with an objective of disrupting the economy as law and order is an important determinant in any investor's decision. The attacks are likely to register a small and extremely short term blip on the economic radar of the country. According to L.K. Malhotra, President, PHD Chamber, such isolated incidents do not adversely affect the sentiment except in the very short-term. The attacks will affect adversely the capital market sentiment, tourist inflows, etc. in the extremely short term and all these will bounce back within a few days and it will be business as usual.The Indian economy has been doing well in recent years and is one of the top performing economies in the world. No doubt, on account of the global financial crisis, the Indian economy is currently feeling a strain which may get accentuated in the coming months and needs to be dealt with urgently in the economic arena by the economic policy makers of the nation.

Capital market analysts feel that short-term postponement of people's investment plans and a rethink by people on relocating to Mumbai is a possibility. As foreign tourists were held captive in top hotels, there might be a downgrade on the big and reputed names in the hotel industry.The real fear dawning now is that the attacks would impact India's stature as an investment destination. As it is the corporates are finding it tough to raise money through external commercial borrowings. However, experts while admitting that people would be scared, rule out companies considering a hasty exit.A Merrill Lynch analyst points out that foreigners understand Indian economy and India is a good place to invest in during crisis.

However, there are other economic implications of the attack spinning out from bilateral trade ties between India and Pakistan. With Pakistan militants reportedly behind the attacks, a proposed movement on the removal of the ban on FDI from Pakistan to India and vice versa looks likely to be put on the backburner. At stake is also the lack of telecom connectivity between the two countries which is to be addressed by the optical fibre link becoming fully functional by 2009.Moreover, both India and Pakistan had allowed two banks from their countries to set up branches in either country. While the basic decisions in this regard have been taken, the implementation can only kick off once the banks send an application to their respective central bank for the go-ahead that may suffer.Onkar S Kanwar, Co-President, India-Pakistan Chamber of Commerce and Industry and Past President, FICCI, had underscored the need for liberalising the visa regime between the two countries by issuing of non-police reporting and long term multiple entry business visas. Few see that happening now.