Commentary by William Pesek
Nov. 28 (Bloomberg) -- 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 SpA’s 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 isn’t an exercise in name-dropping. It’s 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 Nov. 26, killing more than 100 people at the Taj and Oberoi Trident complex.
Headline-grabbing bombings in India’s business capital are sadly commonplace. Yet this week’s attack was something different: It was aimed at key tourist hotels and restaurants. It greatly raised the stakes for Asia’s 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 Indonesia’s economy -- costs that continue to be counted -- India’s militants are aiming higher, so to speak.
Markets Halted
In the age of globalization, few greater weapons exist than spooking the investment and tourism dollars an economy needs. Protesters in Thailand blockading Bangkok’s 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 yesterday 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 percent this year and the global credit crisis is increasingly flowing India’s way.
This week’s 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. It’s 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 India’s 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 India’s 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 India’s rapid growth, swelling middle class and young population are this week wondering how to cut their losses.
It’s not a given that a critical mass of foreigners will flee India. While India’s $1.2 trillion economy is slowing from the 9 percent pace of the past 12 months, government officials still expect growth of 7.5 percent in the months ahead. Even if growth slows a bit more, India will outperform developed nations.
Not Enough
Yet that’s not enough. Before this week’s 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 yesterday. They won’t soon forget that one of Barack Obama’s first condemnations of global terrorism as U.S. president-elect involved India.
This is also a time when investors will have little patience for India’s bureaucracy. Bold, clear and forward- looking policies to reduce terrorism and stabilize markets are needed. So are policies aimed at keeping India’s growth at a respectable level.
India isn’t 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 neighbors to spend its way to growth.
Developing economies in Asia will have their hands full as markets gyrate and the U.S., Japan and much of Europe fall into recession. A few days ago, India’s 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.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Kyoto, Japan at wpesek@bloomberg.net
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