India juggles terrorism with financial meltdown

Written by William Pesek | William Pesek | Updated: Nov 30 2008, 07:29am hrs
The lobby of the Taj Mahal Palace in Mumbai is as good as people-watching gets anywhere.

The last time I stayed at the hotel, I was sitting steps away from actress Michelle Yeoh, who was with Jean Todt, who masterminded Ferrari SpAs return to the pinnacle of Formula One. Bollywood superstar Preity Zinta strolled by. Moments later, so did Ratan Tata, the Tata Group chairman, and an entourage of well-known Indian businessmen. The cast of film stars and magnates was augmented by dozens of hotel guests hailing from New York, Frankfurt, Tokyo, you name it. This isnt an exercise in name-dropping. Its a bit of perspective on what might be happening at the Taj on any given evening and why terrorists might target the place. They did just that on November 26, killing more than 100 people at the Taj and Oberoi Trident complex.

Headline-grabbing bombings in Indias business capital are sadly commonplace. Yet, this weeks attack was something different: It was aimed at key tourist hotels and restaurants. It greatly raised the stakes for Asias third-biggest economy. While China, Japan and the rest of Asia are grappling with the fallout from a global credit meltdown, India now has a second crisis on its hands: domestic terrorism. Having your people blown up randomly is tragic enough. Dealing with attacks aimed at thwarting the very prosperity a government is trying to create to soothe social tensions is quite another. Just as the Bali bombers in 2002 did huge damage to Indonesias economy -- costs that continue to be counted -- Indias militants are aiming higher, so to speak.

Markets halted

In the age of globalisation, few greater weapons exist than spooking the investment and tourism dollars an economy needs. Protesters in Thailand blockading Bangkoks main airport understand that. So do the militants armed with grenades and rifles who wreaked havoc in Mumbai this week. India halted stocks, bonds and rupee trading on Thursday for the first time in more than three years. No government takes such decisions lightly, especially with the economy slowing. Stocks were already down 56% this year and the global credit crisis is increasingly flowing Indias way.

This weeks attacks will scare away investment India needs to expand its economy and markets. It will sidetrack government officials who should be focused on shielding households from a global slowdown. It will sap momentum away from reducing poverty in the nation of 1.2 billion. Its also a blow to Asia, which is in dire need of growth engines.

Onus on Singh

The onus is on Prime Minister Manmohan Singh and other national leaders. As an increasing number of multiple attacks rocked Indias cities with bombs planted in markets, theaters and near mosques this year, the two main national parties reacted unsteadily. Neither came forth with fresh thinking or plausible ways to deal with Indias terror threat.

There is not a second to waste. We live in a world in which risk aversion is the investment strategy of choice. Investors, who last week were enamored by Indias rapid growth, swelling middle class and young population, are this week wondering how to cut their losses. Its not a given that a critical mass of foreigners will flee India. While Indias $1.2 trillion economy is slowing from the 9% pace of the past 12 months, government officials still expect growth of 7.5% in the months ahead. Even if growth slows a bit more, India will outperform developed nations.

Not enough

Yet thats not enough. Before this weeks attacks, the benchmark Bombay Stock Exchange Sensitive Index, or Sensex, was set for its worst-ever performance amid record investor outflows. Once markets reopen, deeper losses are likely. Business people who planned trips to Mumbai may think twice after hearing that the Indian units of Merrill Lynch & Co, Morgan Stanley and HSBC Holdings Plc shut their Mumbai offices. They wont soon forget that one of Barack Obamas first condemnations of global terrorism as US president-elect involved India.

This is also a time when investors will have little patience for Indias bureaucracy. Bold, clear and forward-looking policies to reduce terrorism and stabilise markets are needed. So are policies aimed at keeping Indias growth at a respectable level. India isnt as dependent on exports as China or Japan, leaving it less susceptible to a global slowdown. Yet India is vulnerable in two ways: Its economy is reliant on capital inflows, and the nation lacks the fiscal latitude of its neighbours to spend its way to growth. Developing economies in Asia will have their hands full as markets gyrate and the US, Japan and much of Europe fall into recession. A few days ago, Indias big worry was a global blowup in markets. Now it needs to grapple with an equally uncertain domestic blowup: terrorism. Investors will be watching as this juggling act plays out, and with limited patience.