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  According to Economists, the already damaged Indian economy due to the global financial crisis will be further affected by the recent terrorist attacks in the city of Mumbai, however, the impact of the attacks on the economy is expected to be short lived.

According to Economists, the already damaged Indian economy due to the global financial crisis will be further affected by the recent terrorist attacks in the city of Mumbai, however, the impact of the attacks on the economy is expected to be short lived.


Even though Mumbai suffers from a considerable poor population sectarianism, it has managed to transform itself from a city known for textiles and kitschy, to a powerful financial capital that serves as a gateway for India to the rest of the world. Mumbai’s economy, which contributes as much as 5% of India’s $1 trillion GDP and nearly a third of its direct taxes, stands as a beacon of India’s success in integrating itself in the global economy. In the recent past, this has made the city a more attractive target for terrorists that desire to shed India’s success. In 2003,  60 people were killed by car bombs, and in 1992 and 1993, Hindu-Muslim riots claimed another 1,000. In July 2006, 187 people were killed as coordinated bombs ripped through commuter trains in the crowded city.


Throughout all the obstacles that Mumbai has faced, it has still managed to become a prominent capital of Asian finance that rivals Hong Kong and Tokyo. Its stock exchange is among the world’s busiest, its banking community is the envy of South Asia, and its restaurants and nightlife are comparable to those of any global cultural capital.


As a result of the global financial meltdown, India’s economy had already started to contract prior to the November 29th attacks. GDP growth rates had already fallen from 7.9% in the first quarter of the current financial year to 7.6% in the second quarter. Moreover, the overall growth rate for the first half of the current year showed regressing figures (7.8%) when compared to the previous year (9.3%) . Fear had already spread in the city of Mumbai; fears of losing one’s job or home. Thus, the terrorists attacks of Mumbai arrived at a time when fear was already an epidemic in the city.


As a result of the economic crisis, the mood of business in India has turned highly pessimistic. Citibank estimates that GDP growth will be 6.8% in 2008-2009 and 5.5% in the next fiscal year. Goldman Sachs and Merrill Lynch expect 2009-2010 growth to be 5.8%, Nomura believes it will be 5.3% and First Global puts it at an alarmingly low of 3.5%.


In October, exports fell down by 12.1%. It is highly unlikely<!—likely or unlikely? just making sure—> that the $200 billion target for 2008-2009 will be missed. 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, indicating that manufacturers are bearish.


Taking one specific sector as an example; vehicle sales ware estimated to slide by 25.5% in the last three months of the calendar year and by more than 34% in January-March 2009.  Moreover, the Real estate market is also suffering, and the Bombay Stock Exchange (BSE) Sensex has been hovering around 9,000, a far cry from the 21,000 it had crossed in January.


Looking on the brighter side of things, Inflation, fell to 8.40% for the week ending on November 22, from almost 13% in August. This allowed the Reserve Bank of India (RBI) the benefit of focusing on boosting growth rather than fighting inflation. RBI governor D. Subbarao, announced a 1% cut in the lending rate, effective December 8, where the rate at which the RBI lends money to banks now stands at 6.5% The government has, meanwhile, cut the controlled price of petrol and other petro-products due to the fall in inflation. Furthermore, the Indian central government has also been announcing ingredients of a stimulus package to help boost the economy.


On that Friday, when terrorists still held hostages just a few blocks away, the Bombay Stock Exchange resumed its activity. The markets flared up in patriotic defiance, with the benchmark Sensex index closing up 66 points on a day when most expected it to drop. However, with GDP growth slowing to 7.6% and foreign institutional investors withdrawing more than $13 billion from its equity markets, India’s economy has already yielded defeat, leaving its Sensex at less than half where it stood a year ago.


With all this loss that India incurred, it will take a while for things to go back to the way they used to.  For three days after the incident, trains have run empty, schools and offices have remained closed, and Bombay’s residents, heeding a call from the government, have stayed indoors. On the next Friday afternoon, when some of the fear started to fade away and considerable public activity was witnessed, a false alarm about more armed gunmen at train stations sent back the city’s residents into quivering fear. Despite all these happenings, it is highly unlikely that the world is going to miss participating in an economy growing between 7 to 8% annualy.


The immediate impact of terrorism is ; destruction of property, loss of life, and loss of money, but the greatest loss of them all is uncertainty and fear, which impacts economic activity. Hospitality and transportation tourism sectors are amongst the first areas to feel the pain. Gross earnings from foreign tourists are currently around 1% of GDP. Hence, an affected tourism sector will impact the overall economy. Furthermore, holiday destinations such as Goa, are feeling the pinch even more because of intelligence reports suggesting that they could be future targets for terrorists. Hotel occupancy has gone down 25% and rates plunged in western India. Civil aviation is another sector in the dumps. But it was already troubled prior to the attacks.


Overall damage to India’s economy is indeed significant. Analysts have already started giving initial estimates that suggest the loss in business due to the attacks to 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. Furthermore, the foreign exchange front got hit by $20 billion. Even though the terrorist attacks were devastating to the city and its people, it is just a matter of time before the situation worsens, as harsher consequences are expected on the long run. While the short-term impact is easy to predict, what happens down the line remains impossible to assess.



Source: www.AsiaEcon.org
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Source: www.asiaecon.org |

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