The impact of 26/11 on Indian economy

Before analyzing the impact of the Mumbai terror attacks on India’s economy, we must understand how 26/11 was different from any other terror attack on the country.

· There is no denying that the attacks were the most audacious of its kind ever in India. But this assessment of the tragedy is based more on the way it was executed, than on the actual number of victims it claimed.

· If you jog your memory back to the serial bomb blasts in Mumbai, 1993, where about 250 people were killed, you will realize that the city has witnessed tragedies of this magnitude before.

· However, the attacks were unique, in a rather dubious way, as it was perhaps the first instance where a small group of highly motivated terrorists held an entire nation and its defence forces to ransom for over three days.

· Coming at a time when the world was experiencing economic turbulence, it triggered fears that the Indian economy would be adversely affected.

The last point is of particular significance in these difficult times. Should an atrocity like 26/11 essentially have a negative impact on the economy? As it turns out, this is not the case.

The impact could have been termed negative, had the following cases been true:

· First Case: There was heavy foreign investment in India in the months before the attacks.

· Second Case: Foreign investment showed a dramatic decline following the tragedy.

Let us examine the first case:

· The first case is certainly not true. In the wake of the global economic crisis, foreign institutional investors (FIIs) were tripping over each other in their hurry to pull money out from the Indian markets in the months before the terrorist attacks.

· In the process, they pulled the rug from under the feet of the sensex, sending it crashing nearly 12,000 points in eleven months.

Let us now examine the second case:

· Even as the attacks were unfolding in Mumbai, the markets were witnessing something totally unexpected. Instead of a massive outflow of funds from the Indian markets, money was actually flowing in. So, the second case is also not true.

As you can see, the impact was actually favourable. But how did this miracle happen? As S.A.Aiyar points out in his column in the Times of India, the answer is fairly simple. The FIIs saw a big opportunity to buy shares and invest in equities when the market was low. When the markets reopened a couple of days later, the sensex actually registered a gain. It has kept up this trend ever since.

The events worked in India’s favour in other ways too. US intervention has forced Pakistan to crack down on terror outfits operating out of its territory. With the possibility of a confrontation between India and Pakistan waning, this can only have a positive effect on the Indian economy.

Anyone who hoped to shake the foundations of the Indian economy with this act of terror must be feeling very foolish indeed.

However, it would be wrong to say that the attacks had no impact whatsoever on the Indian economy.

· It affected tourism and hotels, with many tourists cancelling bookings.

· The global economic crisis had already hit tourism and 26/11 only made things worse.

But tourism contributes a very small part of the GDP. It is not something that will seriously impair the progress of the economy.