The terrorist siege in southern Mumbai, not far from its financial district, is likely to threaten India’s already murky economic future and thwart plans to transform the city into a regional financial center, economists and investors said.
India’s economy had already been slowing significantly, because of the global credit crunch and the rupee’s decline. The country’s leading stock market index, the Sensex, has been cut in half since January as foreign investors redirected billions of dollars out of the country. Real estate markets around the country are cooling off.
Now foreign investors and business executives, who fueled much of India’s blistering growth over the past three years, are expected to be even more cautious about investing in India, at least in the short run, analysts said. Local companies and executives, who have already put the brakes on growth projections, could revise them further.
“Of course there will be some setbacks” related to the attacks, said Hitesh Kuvelkar, associate director at First Global, a financial research firm. Even before the attacks, First Global predicted that India’s economic growth could slow to about 6 percent in 2009 and less than 4 percent in 2010.
The attacks, which left more than 150 people dead by Friday evening, made targets of foreigners, witnesses said. The heavily armed terrorists were able to bypass security at two of India’s most expensive hotels, and it has taken India’s military several days to quell the violence, raising questions about safety in even the most exclusive locations.
It may be some time before the hotels, the Taj Mahal Palace and Tower and the Oberoi, once regular haunts for executives, become deal-making hubs again. “I would not feel comfortable either staying in or going to meetings at the Taj or the Oberoi, at least in the near future,” said Joel Perlman, the president of Copal Partners, a research company.
Officials from India’s Finance Ministry and its stock exchanges have long promoted Mumbai’s potential as a major international financial center, but outsiders have been skeptical of that ambition. New glass office towers in northern Mumbai house some of the world’s largest banks not far from impoverished neighborhoods; there is a shortage of housing for business executives; and basics like public transportation are either overcrowded or inconvenient.
The international financial crisis and growing fears of terrorism could delay plans for Mumbai’s continued growth for years.
Tourism, which employs 20 million people throughout India, is sure to slow down, at least temporarily. “Tourists tend to be fickle and nervous,” said Matthew Brooks, the head of industry analysis at Business Monitor International, a research firm that specializes in emerging markets.
Even as India has emerged as an economic, political and cultural power in recent years, it has endured a steady increase in terrorist attacks. Since January 2004, more people have been killed in India in terrorist attacks than in any other country except Iraq, according to Political and Economic Risk Consultancy, which is based in Hong Kong.
Kamal Nath, India’s minister of commerce and industry, said in a telephone interview that he did not expect the attacks to have any lasting effect on the Indian economy, because, he argued, international investors have accepted that there is some risk of terrorism almost anywhere.
Others are not so sure. “If you have a situation where terrorism becomes endemic, that’s a more serious problem,” Mr. Brooks said.
The government will no doubt try to convince software company executives, bankers and other businesspeople that India remains a safe and attractive place to do business. “We are going to reassure people that this is an absolute exception and not the rule,” Mr. Nath said. “It’s not something that’s taken lightly by the government.”
Many people compared the Mumbai attacks to the attacks on the World Trade Center in 2001. After all, Mr. Perlman, of Copal Partners, said, New York “still retained its position as the main financial center in North America and the world.”
Interest rates in India have to come down by another 2-3 percentage points in order to stimulate demand in the economy, ICICI Bank chief K.V. Kamath said on Tuesday.
The Reserve Bank of India has taken a string of measures over the past few weeks to improve liquidity and boost growth, cutting its key lending rate -- the repo -- by 150 basis points to 7.5 percent and lowering banks' reserve requirements.
Interest rates in India have to come down by another 2-3 percentage points in order to stimulate demand in the economy, ICICI Bank chief K.V. Kamath said on Tuesday.
The Reserve Bank of India has taken a string of measures over the past few weeks to improve liquidity and boost growth, cutting its key lending rate -- the repo -- by 150 basis points to 7.5 percent and lowering banks' reserve requirements.
The economic slowdown is now visible in numbers. India's gross domestic product (GDP) clocked a 7.6 per cent growth in the second quarter of the current fiscal year compared with the same quarter of 2007/08, largely buoyed by a strong performance of construction and services, but low growth in agriculture and manufacturing was a matter of concern.
The growth rate in the July-September period was slower than the previous quarter's 7.9 per cent, while the half-yearly growth stood at 7.8 per cent. The quarterly GDP growth was the lowest since the last quarter of 2004.
Finance Minister P Chidambaram described the growth rate as during the first half of 2008-09 as "healthy and satisfactory" in the worldwide context, where many economies are shrinking in a recession. "The first half growth rate at 7.8 per cent is a satisfactory and a healthy growth rate with regard to the global slowdown," he said, but admitted that the manufacturing sector was a problem area.
The government was also looking into the issues of certain sectors such as textiles, gems and jewellery, he added. Policy-makers are grappling with options to boost exports amid shrinking order-books resulting from the worst financial meltdown in the world in 80 years.
The country's exports are projected to decline by 15 per cent in October this fiscal, for the first time in any month in five years, and likely to miss the $200 billion target for 2008-09. According to the Apparel Export Promotion Council (AEPC) exports of readymade garments from India tumbled by 6.6 per cent in September over the same month last year.
The US accounted for about 13 per cent of India's exports totalling $158 billion in 2007/08. Indian companies, beset by low volumes and high borrowing costs, have sought fiscal and monetary policy measures to boost demand in the economy.
"The manufacturing sector has slowed down and this sector needs to be pepped up. The other area that requires immediate attention is construction where the slippage in growth has been the steepest," Federation of Indian Chambers of Commerce and Industry (Ficci) said in a statement.
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