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vinu_scorpion
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Joined: 19 Jun 2001
Posts: 274

PostPosted: Tue Dec 16, 2008 8:17 am Reply with quoteBack to top

The Belvedere is an exclusive club at Mumbai's Oberoi hotel. Along with its equivalent at the Taj Mahal -- The Chambers -- it is a popular watering hole for India's business barons and CEOs. According to an estimate by business magazine Business Today, the members of the Belvedere alone account for more than 80% of the market capitalization of India's publicly listed companies. In late November, both clubs were savagely mauled in the terror attacks that rocked the city and shocked people around the world. During a 60-hour siege at the two hotels and other locations, terrorists took hostages and ran riot with grenades, assault rifles and bags of RDX, a powerful explosive. Ashok Kapur, chairman of Yes Bank, was among the 170 people killed in the attacks. The terrorists did so much damage that the two hotels could be closed for six months to a year.


The Oberoi and the Taj are not just places to strike deals. Events held here routinely host the rich and famous. The presentation ceremony of The Economic Times Awards for Corporate Excellence was to be held at the Trident -- the companion hotel to the Oberoi which was also attacked by the terrorists -- on November 29. Prime Minister Manmohan Singh was to preside over the event. Practically every CEO of India's leading companies would have been there. Perhaps presciently, The Economic Times reported on November 11: "Given the high profile nature of the event, the security agencies have already begun scouting the location for D-Day." The three-day terror attack, which is now known as 26/11, put an end to the celebrations.


The ripples have not been felt in India alone. "There will hardly be a Fortune 500 chief executive who has not lately stayed in the Oberoi or the Taj Mahal, and the impact of this attack will be felt in boardrooms around the world," wrote The Economic Times.


Political Fallout

On the political front, the siege of South Mumbai has already taken its toll. Union home minister Shivraj Patil -- responsible for the nation's security -- has resigned. Former finance minister P. Chidambaram has taken over that job. Prime Minister Singh has taken charge of the finance portfolio. But the finance ministry, in today's global crisis and domestic slowdown, is a fulltime job. Some observers believe that Singh may not be able to do justice to it, given his other responsibilities.


In the state of Maharashtra, too, of which Mumbai is the capital, heads have rolled. Chief minister Vilasrao Deshmukh has been forced to resign. The last straw was his going to visit the ruined Taj with a filmmaker who specializes in disaster movies in tow. The press dubbed it "terror tourism" and the Congress leadership in Delhi sacked Deshmukh. The state deputy chief minister and home minister R.R. Patil, who belongs to Nationalist Congress Party, a partner of the Congress party, told a press conference that "small incidents like this [the Mumbai terror attacks] do happen in big cities". He, too, had to step down after a public outcry.


What will happen in the medium term is debatable. General elections are due by the middle of next year, and it is possible that the opposition Bharatiya Janata Party (BJP) may cash in on the widespread public anger. "This has undoubtedly given a shot in the arm to the BJP," says Rajesh Chakrabarti, a professor of finance at the Hyderabad-based Indian School of Business (ISB). "It is an anti-incumbent advantage. Any opposition party would have benefited, but the BJP benefits because it has been trying to project itself as being tough and has been blaming the government for being soft on terrorists. How well it will be able to hold on to this until election time and translate it into votes and seats remains to be seen."


Global Implications

Political implications are also apparent at the international level. One of the terrorists' targets was Nariman House, a Jewish center, and as a consequence, India and Israel are moving closer. India has also moved closer to the U.S., which sent Secretary of State Condoleezza Rice to visit the subcontinent. After visiting both India and Pakistan in an effort to avert armed confrontation -- which many in India called for, especially since the media labeled the terrorist attacks as "India's 9/11" -- Rice urged Pakistan to cooperate with India in nabbing the terrorists. (The terrorists are alleged to have been recruited in Pakistan.)


"At such times of crisis, the positive aspect is that not only do we see all the political forces internally standing up as a single force to face the situation, but internationally as well there is solidarity in the fight against terrorism," says Bundeep Singh Rangar, chairman of the Delhi-based IndusView, a research and advisory firm. Chakrabarti of ISB adds: "I don't see a serious international fallout. There will be some diplomatic efforts at trying to pinpoint Pakistan and some pressure will build up on Pakistan. There has been talk in Washington about reacting to the Mumbai event as a multi-country initiative rather than treating it as just an India-Pakistan affair. But the problem, ironically, is that Pakistan now has an elected government and they can't come out looking like they are giving in to India's demands even if they believe that India's demands are right. For decades, public opinion in Pakistan towards India has been negative. The perception of public approval of terrorist activities targeted at India must change before politicians can change. The Mumbai incident by itself will have only a temporary impact. But if the talk of a military solution between India and Pakistan aggravates then that can have a worse effect on capital flows than the terror attack."

When it comes to economic issues, Mumbai -- the country's financial capital -- is likely to feel the impact of the terrorist attacks, much as New York City did after September 11, 2001. "Mumbai brings in 40% of foreign trade, 60% of customs duty collections, 40% of income tax collections, 20% of central excise collections and $10 billion in corporate taxes," says Rangar of IndusView. Chakrabarti notes: "The Mumbai terror attack has been the most dramatic in a long series of terror events in India. It involved foreign hostages and places where business leaders, executives and foreigners frequented. It has therefore been a much more potent media drama than any of the previous terror events. This grabbed worldwide attention and there is certainly a negative impact on India's risk and security perception. It will dent foreign investors' views of India. This will lead to a drop in investments, but I expect it to be marginal."


Gloom and Doom

The attacks came at a time when India's economy had already begun to slow as a result of the global recession. The widespread fear and anxiety have added to the gloom. According to recent data, in the second quarter (July-September) of the current financial year, GDP growth has fallen to 7.6% compared to 7.9% in the previous quarter. The growth rate in the first half of the year was 7.8%, compared to 9.3% for the corresponding period of the previous year.

The mood of business has turned highly bearish. Citibank estimates that GDP growth will be 6.8% in 2008-09 and 5.5% in the next fiscal year. Goldman Sachs and Merrill Lynch expect 2009-10 growth to be 5.8%, Nomura believes it will be 5.3% and First Global puts it at a bottom-of-the-barrel 3.5%.

Exports are down. In October, they fell 12.1%. The $200 billion target for 2008-09 will most likely be missed. Manufacturers are pessimistic. The ABN AMRO Purchasing Managers' Index, an early indicator of the mood of manufacturing, is at its lowest since it was set up in April 2005. To take one specific sector, the Society for Indian Automobile Manufacturers estimates that vehicle sales could slide 25.5% in the last three months of the calendar year and more than 34% in January-March 2009. Real estate is also in the dumps. The Bombay Stock Exchange (BSE) Sensex has meanwhile been hovering around 9,000, a far cry from the 21,000 it had crossed in January.


These clouds do have a silver lining: Inflation, which was almost at 13% in August, fell to a seven-month low of 8.40% for the week ended November 22. This gives the Reserve Bank of India (RBI) the leeway to focus on boosting growth rather than fighting inflation. Indeed, on December 6, RBI governor D. Subbarao announced a 1% cut in the lending rate, effective December 8. The repo rate, the rate at which the RBI lends money to banks, now stands at 6.5%. Subbarao told a news conference later that growth would moderate "more than anticipated". On the flip side, inflation, too, would decline to below the estimated 7%. The government has meanwhile cut the administered price of petrol and other petro-products. The central government has also been announcing components of a stimulus package to boost the economy.


Still, many believe the terrorist attacks will hurt the economy at a time when it is weakening. The Indian Council for Research on International Economic Relations (ICRIER) has an estimate of the contribution of "external shocks" such as the financial crisis and the terror attacks. The New Delhi-based think-tank recently completed a study on the effect of external shocks on the country's GDP growth rate. According to Rajiv Kumar, director & chief executive of ICRIER, "ICRIER has been forecasting India's GDP growth rate with the use of leading indicators. These are variables that are considered to have significant influence on the future level of economic activity in the country." The 10 indicators that ICRIER uses include production of machinery and equipment; sales of heavy commercial vehicles; non-food credit; railway freight traffic; cement sales; sales of the corporate sector; fuel and metal prices; real rate of interest; the Sensex; and the GDP growth rates of the U.S. and Europe.


"Leading indicators can predict future growth based on what has already happened in the past but cannot capture the impact of sudden external shocks which may have an immediate impact on the economy," says Kumar. "Examples of such shocks in the past are the IT boom going bust [after Y2K], the crop failure in 2002-03 and the recent U.S. financial meltdown. The leading economic indicator index, with a five-quarter lag, and the shock represented by a dummy variable (equal to 1 with shock and 0 without) have been used to forecast India's future GDP growth."


The conclusion? "India would have grown 7.5% this year -- a slowdown from 9% in 2007-08 -- had the global crisis not occurred," says Kumar. "The crisis is likely to bring India's growth rate to below 6% in 2008-09. With the first-half GDP growth rate already known, this implies a sharp slowdown in the next two quarters. In the first half of next year, the economy would have grown below 7% in the absence of the external crisis. The global crisis may reduce the Indian growth rate to less than 4% in 2009-10." Kumar adds that while the terrorist attack is "one of the components of external shocks, in our assumptions we do not go into the details of the nature of the external shock itself."


Impact on Industries

That's the macro picture. A sectoral analysis sheds more light on the possible damage to different industries. "Terrorism's economic impact has normally been short lived," says a report titled, Economic Impact of Terrorism, by securities firm Anand Rathi Financial Services. "The immediate impact of terrorism is the loss of life, destruction of property and loss of man-days. Terrorist acts also cause uncertainty, which impacts economic activity. Tourism is one of the first areas to be hit, with hospitality and transportation feeling the pain the most. Gross earnings from foreign tourists are currently around 1% of GDP. A marked slowdown in tourism activity will have a perceptible impact on not only the hospitality and transportation sectors, but also on the overall economy.


"The impact on the earnings side (through lower room occupancy, depressed room rental, lower passenger traffic or lower air fares) may eventually reverse once the situation normalizes. On the expenditure side, though, the impact of higher costs from increased preventive arrangements and higher insurance premiums is likely to be more permanent." An important subset of tourism -- medical tourism -- is also likely to slow in the short term.


"Hospitality and tourism are two sectors that will certainly take a direct hit," says Chakrabarti of ISB. "This will be a gut reaction to the event and, if nothing else happens, then things will soon get back to normal." According to Rangar, "Estimates suggest that nationally hotels have seen about 60% booking cancellations." Holiday destinations such as Goa are feeling the pinch even more because of intelligence reports that they could be future targets for terrorists. Hotel occupancy in western India is down some 25% and rates have plunged. Civil aviation is another sector in the dumps. But it was already troubled before the attacks.


Rangar believes the overall damage to India's economy could be significant. "Analysts have already started giving initial estimates that suggest the loss in business due to the attacks would be about $100 billion, arising from crucial institutions, such as the stock exchanges, commodities and money markets, and business and commercial establishments which remained closed," he notes. "There is also a hit of $20 billion on the foreign exchange front. But though the numbers are alarming, it is just a matter of time before the city and its people rise to face the situation."


Exports, already down, could be further hit as foreign buyers put off visits. "International clients prefer to stay at five star hotels such as the Taj and the Oberoi," says Ganesh Kumar Singh, president of the Federation of Indian Export Organizations. They now see a risk staying at any five star hotel. The U.S. commercial nuclear mission has put off its India trip as have delegations from several other countries.


The perception of increased risk in India could also impact the IT industry, which depends on client visits to seal deals. But the larger firms in the IT industry have already spread their risk; they have back-up operations in other countries such as China. The effect there will be only temporary. Some analysts, however, believe that the business process outsourcing (BPO) industry may not be so lucky. "Oil & gas and other large operations are vulnerable to attack," says the Anand Rathi report. Beefing up security will add to their costs. But these are strategic industrial assets for the country as a whole, and part of the expenditure is likely to be borne by the government.


Does anybody gain? Certain lines of IT, particularly those related to security, will get some benefit. "Companies catering to defense, security and surveillance needs are likely to see a boost in demand," says the Anand Rathi report.


Rangar ends on a note of confidence. "Despite the slowdown -- and the recent incidents -- global companies are expected to continue to exhibit their confidence in India," he says. Adds Chakrabarti: "The confidence crisis is far worse in other parts of the world compared to India. Foreign investors need to put their money somewhere and India still looks very attractive. At worst we will grow at 6%. Most countries would die to grow at this rate at this point in time."

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Regards,
Vinod.
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