Are foreign investors fleeing India after the Islamic militant attack in Mumbai on Nov. 26-29? Not at all. They have adopted Nathan Rothschild's maxim that the best time to buy shares is when blood runs in the streets. On Nov. 28, in the middle of the Mumbai gunfight, they bought $151 million worth of Indian stocks and bonds. And then in the first 12 days of December, they injected another $524 million into India's equity and debt markets.
Gruesome though it may sound, foreigners are treating the bloody Mumbai attack as a buying opportunity, not a tragedy that dents global business confidence. They remember that the terrorist attack on the U.S. on 9/11 was horrific but that this very horror made it an excellent time to buy equities, and they are following the same principle in India today.
Before Mumbai, foreign institutional investors had been pulling out of India on a massive scale. From the start of 2008, they pulled $13.5 billion out of Indian markets, sending the Bombay Sensex crashing from a peak of 21,000 to barely 9,000 today. Pessimists feared that the Mumbai attack would lead to further outflows. Surprise, surprise, dollars have flowed in instead.
Veteran economic analysts say that the attack may have a short-term negative impact in some areas, notably tourism. But long-term flows of foreign direct and portfolio investment are unlikely to be affected. The long-term India story remains unchanged, since terrorism is part and parcel of that story, and the risks are familiar and well understood by foreign and Indian investors.
India has been subject to Islamic terrorist attacks for two decades, and major Indian cities witnessed a series of bomb blasts in 2008. The Mumbai attack was notable for providing reality television for 60 hours rather than for high casualties, and in showing that the business elite (including foreigners) were as vulnerable as ordinary folk. Only 174 were killed in Mumbai (including 26 foreigners), a small figure compared with over 50,000 killed in Kashmir over the last two decades. Indeed, 3,500 people die in Mumbai every year falling off over-crowded trains. Every death is a tragedy, but the Mumbai attack was not exceptionally tragic in numbers.
Nor is Islamic terror the only security issue India faces. Sundry Maoist groups have been waging insurrection in several states, and Maoist incidents have been reported from 157 of India's 600 districts. Many of these are in the central Indian jungle belt, which is rich in mineral ores. This has made it problematic to get some mining and steel projects off the ground.
Such risks are, however, already factored in to the calculus of foreign investors. Hong Kong-based Political & Economic Risk Consultancy had already assessed India as the riskiest of 14 Asian countries, not including Pakistan and Afghanistan. The Mumbai attack will worsen perceived risks only if it seems that tensions will escalate in South Asia and that India and Pakistan might go to war.
That, fortunately, is unlikely to be the case. India is focused on diplomacy and organizing international pressure against Pakistan. This effort has been successful. Pakistan has complied, though reluctantly, with the U.N. Security Council mandate to close down various militant outfits and stop their leaders from spreading the culture of terror. The security forces in Pakistan have used terrorists groups to inflict a thousand cuts on India, especially in Kashmir, and are reluctant to quash the very militants they have nurtured for so long. However, those militants are no longer under the control of Pakistan's authorities, as shown by the assassination of Benazir Bhutto.
Her husband, the current president, may be more serious about ending terrorism than his predecessors. Besides, after the Security Council's strictures, even Islamic elements in the Pakistani establishment will want to rein in the wildest groups, not out of love for India but simply to avoid further diplomatic embarrassment. So, we may see a diminution rather than escalation of Pakistan-inspired militancy in India, and that will be positive for the economy.
This does not mean, of course, that the Mumbai attack will have no adverse impact at all on the Indian economy. The most serious short-term consequence is a massive cancellation of tourist bookings. Hotel occupancy is down 20% to 25% in prime destinations, and hotels have slashed their room rates.
However, tourism is not among the top Indian industries. The global recession was already taking its toll before the Mumbai attack, and tourist cancellations will worsen the situation. But foreign exchange earnings from tourism, at around $10 billion per year, are barely 1% of India's GDP. They are less than a quarter of the $42 billion of remittances to India by overseas Indians. While tourist hot spots will suffer, the Indian economy as a whole will shrug this aside. Indian businessmen and economists are far more worried about the impact of the global recession than of the Mumbai attack. As the saying goes, when you are fighting the alligators in a swamp, you do not worry about the mosquitoes.