Effects of Terrorism in Indian Industries

Impact on Industries

That's the macro picture. A sectoral analysis sheds more light on the possible damage to different industries. "Terrorism's economic impact has normally been short lived," says a report titled, Economic Impact of Terrorism, by securities firm Anand Rathi Financial Services. "The immediate impact of terrorism is the loss of life, destruction of property and loss of man-days. Terrorist acts also cause uncertainty, which impacts economic activity. Tourism is one of the first areas to be hit, with hospitality and transportation feeling the pain the most. Gross earnings from foreign tourists are currently around 1% of GDP. A marked slowdown in tourism activity will have a perceptible impact on not only the hospitality and transportation sectors, but also on the overall economy.
"The impact on the earnings side (through lower room occupancy, depressed room rental, lower passenger traffic or lower air fares) may eventually reverse once the situation normalizes. On the expenditure side, though, the impact of higher costs from increased preventive arrangements and higher insurance premiums is likely to be more permanent." An important subset of tourism -- medical tourism -- is also likely to slow in the short term.
"Hospitality and tourism are two sectors that will certainly take a direct hit," says Chakrabarti of ISB. "This will be a gut reaction to the event and, if nothing else happens, then things will soon get back to normal." According to Rangar, "Estimates suggest that nationally hotels have seen about 60% booking cancellations." Holiday destinations such as Goa are feeling the pinch even more because of intelligence reports that they could be future targets for terrorists. Hotel occupancy in western India is down some 25% and rates have plunged. Civil aviation is another sector in the dumps. But it was already troubled before the attacks.
Rangar believes the overall damage to India's economy could be significant. "Analysts have already started giving initial estimates that suggest the loss in business due to the attacks would 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," he notes. "There is also a hit of $20 billion on the foreign exchange front. But though the numbers are alarming, it is just a matter of time before the city and its people rise to face the situation."
Exports, already down, could be further hit as foreign buyers put off visits. "International clients prefer to stay at five star hotels such as the Taj and the Oberoi," says Ganesh Kumar Singh, president of the Federation of Indian Export Organizations. They now see a risk staying at any five star hotel. The U.S. commercial nuclear mission has put off its India trip as have delegations from several other countries.
The perception of increased risk in India could also impact the IT industry, which depends on client visits to seal deals. But the larger firms in the IT industry have already spread their risk; they have back-up operations in other countries such as China. The effect there will be only temporary. Some analysts, however, believe that the business process outsourcing (BPO) industry may not be so lucky. "Oil & gas and other large operations are vulnerable to attack," says the Anand Rathi report. Beefing up security will add to their costs. But these are strategic industrial assets for the country as a whole, and part of the expenditure is likely to be borne by the government.
Does anybody gain? Certain lines of IT, particularly those related to security, will get some benefit. "Companies catering to defense, security and surveillance needs are likely to see a boost in demand," says the Anand Rathi report.
Rangar ends on a note of confidence. "Despite the slowdown -- and the recent incidents -- global companies are expected to continue to exhibit their confidence in India," he says. Adds Chakrabarti: "The confidence crisis is far worse in other parts of the world compared to India. Foreign investors need to put their money somewhere and India still looks very attractive. At worst we will grow at 6%. Most countries would die to grow at this rate at this point in time."