Terror Strikes Mumbai - Economic Impact

By Guneet Singh Sahni - India Market Analyst

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• Battleground – Mumbai (five star hotels - Taj and Oberoi, Jewish Centre and Mumbai's busiest railway station)
• Target – Innocent global citizens
• Attackers- Small group of young and heavily armed terrorists with initial links being traced to Pakistan
• Defenders – 350 Indian security forces and 400 police officers
• Motive – Economic impact

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It wasn't a nightmare. Yes, in fact, India engaged in a war with a group of heavily armed terrorists who had besieged hundreds of hostages inside two landmark five star hotels frequented regularly by the city's elite and foreigners. A Jewish centre in the heart of India’s business district was also not spared. Gun shots, hotels burning, hostages pleading for help, explosions, and the bodies of the innocent being carried away ruled the streets of India's business hub for 60 hours. Mumbai besieged lead to the closure of stock exchanges and money market operations on Thursday.

The attacks clearly demonstrated that the terrorists wanted to target the global affluent class who stay at two of Mumbai's landmark upscale hotels – Taj Mahal Palace and Oberoi. Major business decisions by executives and fund managers commonly take place in these hotels. The 105 year old Taj Mahal Palace, a heritage site, has hosted the world's leaders and famous figures including Brad Pitt, Angelina Jolie and Liz Hurley.

President-Elect Barack Obama, outgoing President Bush and other world leaders came out strongly condemning the attacks, termed as "9/11 of India" by the Indian media. This was followed by the U.S. gesture to send its FBI team to India, signifying that the war against terror can only be solved by global coordinated effort.

Obama's statement, "The United States must stand with India and all nations and people who are committed to destroying terrorist networks, and defeating their hate-filled ideology," clearly pointed out that terrorism cannot be ignored in the midst of global economic crisis.

No Major Impact on Economy

Past attacks on India have not shown any significant impact on Indian markets except for a short-term knee jerk reaction. This time as well, the BSE Sensex defied the attacks by gaining 2%, supported by better than expected GDP data, lower inflation and positive global cues that included the Citigroup (NYSE: C) rescue and the lowering of China's interest rates.

However, the present attack, the biggest 'til now will impact the individual psyche the most. As a result, the tourism sector is bound to be affected in the medium term. Indian Hotels (BOM:500850), the owners of the Taj chain of hotels, which also owns The Pierre in New York and Ritz Carlton Hotel in Boston, declined 12% on Friday to touch a new low of Rs 40. The Indian hotel industry, already bearing the brunt of an economic slowdown, will be negatively impacted by lower tourist arrival affecting peak season earnings (October to March).

Capital flows are already under severe pressure in India, which is witnessing an outflow of $14 billion YTD. Hence, I believe that most of the damage on this front has already been seen and the attacks won't add to the pressure.

The Indian government, which faces elections next year, has promised to come out with strict measures to instill confidence back at home. This may involve the tightening of internal and external security after escalating tensions with Pakistan, which is also a nuclear armed country. I expect the Indian government to expedite its long pending arms purchases worth billions under its defense modernization plans.

India plans to import defense requirements worth $24 billion in the next five years, which includes the already floated tender for the purchase of 126-multi combat aircraft worth $10 billion. The companies which have submitted their bids for these orders include Lockheed Martin (NYSE: LMT), Boeing (NYSE: BA), EADS (EPA: EAD), Dassault (EPA: AM), SAAB (STO: SAAB B) and Russian Aircraft Corporation MiG.


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