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. “Each time we have seen a bounce-back and this time will be no exception.”

Finance Minister Palaniappan Chidambaram, who expects India’s growth to rebound to 9 percent from as low as 7 percent this year even as a global recession spreads, today said the economy will “overcome” the impact of shootings and blasts in the nation’s business capital. Asia’s third-largest economy expanded more than expected last quarter as consumer spending held up and investments increased, a report showed today.

“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.

Gross domestic product expanded 7.6 percent in the three months to Sept. 30 from a year earlier, faster than the 7.2 percent forecast by analysts, according to a statement by the statistics department in New Delhi today.

Domestic consumption in the country of 1.2 billion people, which averaged 59 percent of the economy in the past year, held up at 58 percent last quarter. Local consumption accounts for 37 percent of GDP in China. Savings make up 30 percent of India’s economy, compared with 1 percent of GDP in the U.S.

Rural Incomes

“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.”

Investments rose to 35.3 percent of India’s GDP last quarter from 32.3 percent in the previous quarter, according to today’s statement.

Record crop plantings by India’s 400 million farmers will also boost rural incomes in the year ahead and help spur growth, Chidambaram said Nov. 18.

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 124 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.

Slower Inflation

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.”

“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 and bond markets, which were shut yesterday, advanced today. The key Sensitive index erased declines, rising 0.7 percent to 9092.72 at close of trading on the Bombay Stock Exchange, while the 10-year government bond yield fell 3 basis points to 7.07 percent. The rupee fell 1.4 percent to 50.1050 per dollar.

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.