People have been debating about impact of last week's Mumbai attacks on the Indian economy. In the short run mostly the cinema and restaurant businesses will be impacted. However, in my view there will be no direct and immediate impact on the equity markets as there is no money left for the FIIs to pull out. In fact global investors such as Mark Mobius of Tempelton have reiterated in the last few days that India remains an investment destination despite the current turmoil.
The more major and indirect consequences are linked to the budget of 2009 in my view and here are my first thoughts:
1. If the defence budget was to increase to the detriment of infrastructure and education spend, then there will be a serious impact. These are the two most important sectors for economic growth and are screaming for cash. Not related to budget, the country needs to focus on investing in renewable energy from a long term and acquiring overseas carbon fuel sources for the short term, if we are to become an energy sufficient nation.
2. Any increase in taxes in the name of domestic security, will further reduce spending and hence cause a drain on the economy.
3. The biggest danger, however, would be an increase in the country's deficit due to increased or imbalanced defense budget. Then not only would the economy suffer directly but the sovereign credit rating would also be in jeopardy and that will cost India Inc as well.
1. If the defence budget was to increase to the detriment of infrastructure and education spend, then there will be a serious impact. These are the two most important sectors for economic growth and are screaming for cash. Not related to budget, the country needs to focus on investing in renewable energy from a long term and acquiring overseas carbon fuel sources for the short term, if we are to become an energy sufficient nation.
2. Any increase in taxes in the name of domestic security, will further reduce spending and hence cause a drain on the economy.
3. The biggest danger, however, would be an increase in the country's deficit due to increased or imbalanced defense budget. Then not only would the economy suffer directly but the sovereign credit rating would also be in jeopardy and that will cost India Inc as well.
2 comments:
Dear Tanushree,
Good to see you post after so long.
However, don't you think that from an economic perspective, investors would rather come into a "safe" environment - to my mind security and increased investment go hand in hand.
Note that in 4 of the last 6 terrorist attacks on Indian soil, the stock market has suffered significant losses.
While an unbalanced or a defence-heavy budget is not a solution, surely some work needs to be done in the area of security?
Sincerely,
Aditya
Hi Aditya,
Yes security and a safe environment do go hand in hand, however, investors globally also understand that India's position is different from that of many other nations facing terror strikes. We are in that sense not an "unstable" nation.
Next, India witnessed a lot of "hot" money flow into the country in the last five years. The era of hot money now is over - thanks to the credit crunch. Most money that had to flow out of India has already found its way out. Thus the impact on the stock market will be limited. In addition, domestic institutional investors in India are also cash rich and still need to deploy their money. So once again will these attacks cause the markets to tumble from their current levels - I do not think so.
You are also very right in saying that some work needs to be done. There are a number of things that can be and should be done. The challenge is that we are soon coming to elections, so any initiative started now needs to have a buy in of all parties for it to be continued unhindered.
How about the country building a global lobby to support us like the US did post 9/11? We need to strategise our diplomatic tactics. Next, we need to reasses the current allocation of security expenditure on VIPs of the nation and if required rechannelise those funds towards domectic security.
I will stop at this as what can be done is another discussion.
Tanushree
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