India's Economy Will Likely Withstand Terror Attacks

By Cherian Thomas

Nov. 28 (Bloomberg) -- India's economy will probably withstand the effect of yesterday's terror attacks in Mumbai as rising incomes and record harvests boost consumer spending.

“Mumbai is no stranger” to terrorism, said Sarah Hewin, an economist at Standard Chartered Bank in London. “But each time we have seen a bounce-back and this time will be no exception.”

Finance Minister Palaniappan Chidambaram, who didn't comment yesterday on the shootings and blasts in India's business capital, expects growth to rebound to 9 percent next year from as low as 7 percent this year even as a global recession spreads. Still, the pace of expansion probably slowed last quarter after the central bank raised interest rates earlier this year to cool inflation.

“Things changed starting October, when monetary policy shifted to a softening stance that will continue until the middle of next year,” said Mridul Saggar, chief economist at Kotak Securities Ltd. in Mumbai. “The fundamentals of the economy are positive.”

Governor Duvvuri Subbarao has reduced the central bank's repurchase rate twice in the past five weeks, lowering it to 7.5 percent from a seven-year high of 9 percent. The Reserve Bank of India has been given room to cut borrowing costs as weaker commodity prices reduce risks from inflation, now at a six-month low of 8.84 percent.

'Bounce Back'

Chidambaram expects growth in India's $1.2 trillion economy to slow to between 7 percent and 8 percent in the year to March 31. He says it will “bounce back” on the strength of domestic consumption and investment. Chidambaram said even at 7 percent, India's growth is three times the rate of global expansion and is second only to China.

India's statistics office will release figures for gross domestic product growth in the three months to Sept. 30 at noon in New Delhi today. Economists surveyed by Bloomberg expect an increase in GDP of 7.2 percent, the weakest pace since 2004.

Record crop plantings by India's 400 million farmers will also boost rural incomes, Chidambaram said Nov. 18.

Domestic consumption in the country of 1.2 billion people makes up 55 percent of the economy, compared with 37 percent of GDP in China. Savings account for 30 percent of India's economy, compared with 1 percent of the economy in the U.S.

“There is a lot of money to be reinvested back into the economy,” said Jai Sinha, partner and co-head for India at Booz & Co., a global management consulting firm. “There is no doom and gloom over India.”

Foreigners Targeted

Indian and overseas companies said they aren't changing their business plans after terrorists attacked luxury hotels, a railway station and a hospital in Mumbai. The encounter, which targeted American and Britons, left as many as 125 120 dead.

Targeting foreign nationals at key tourist hotels and restaurants adds a new dimension to a wave of bombings in India this year that has killed more than 300 people.

“The events of the last 24 hours have not affected our longer term business plans in the country,” said Alice Hunt, director for corporate media at GlaxoSmithKline Plc, Europe's largest drugmaker, which is looking at India to boost sales.

Jan Lambregts, head of Asia research at Rabobank International, a subsidiary of the Dutch banking group, said India's “domestic demand component could show some resilience because inflation is coming off.” He forecast economic growth at about 7 percent in 2009, “which is quite decent given that it's a very tough year next year.”

Markets Closed

“In the short term there will be a shock, but in the medium term the investor confidence will come back,” said Venu Srinivasan, chairman of TVS Motor Co., India's third-largest motorcycle maker. “India's long-term growth story is intact.”

India will “go after” individuals and organizations behind the Mumbai terrorist attacks, which were “well-planned with external linkages,” Prime Minister Manmohan Singh said in a televised address to the nation.

India's stock index futures pared losses yesterday. futures for November delivery were trading 2.4 percent lower at 2,685 as of 6:04 p.m. in Singapore after earlier declining as much as 4.9 percent.

India's stock index futures pared losses. S&P CNX Nifty Index futures for November delivery, which expire today, closed yesterday in Singapore down 2.4 percent at 2,685 after earlier declining as much as 4.9 percent. Futures for December delivery traded at 2,652.

The stock, bond, currency and money markets in India were shut yesterday as the government ordered Mumbai residents to stay at home.

Any decline in Indian financial markets in response to the terror attacks may prove to be “temporary” as borne out by Mumbai's experience since 1993, Moody's Economy.com said.

The benchmark Sensitive index rose 3 percent the day after train bombings in Mumbai in July 2006 that killed 187 people and injured more than 800.

“This sort of incident is not new in India,” said Templeton Asset Management Ltd. Chairman Mark Mobius, who oversees more than $24 billion in emerging-market stocks. “Life does go on in India. It's a very vibrant economy.”

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net