Economic Fallout of Terror Attacks

I had hoped that this time it is going to be different, and so it has been. The public outcry against terror is much more visible this time as compared to the past. While the country gets ready to fight terror on the political front (people are demanding a safe environment to live, heads have started to roll, irresponsible politicians are scurrying for cover, international community is being mobilised), it is the economic threat that looms large on the Indian economy.

India's external deficit has been mounting, with a slowdown in export growth. India's current account deficit was being financed through Foreign direct investment and NRI remittances. But the global financial turmoil has lead to flight of capital from India, it is estimated that about $12 billion worth foreign investment in Indian markets has been taken out since the beginning of 2008. This has lead to a lot of pressure on the Rupee. The impact of declining commodity prices including crude, which is a positive for Indian economy, has largely been offset by the declining Rupee.

Investors operating in international markets deploy capital in overseas markets based on their perception about the ability of the respective Governments to safeguard their citizens against terror attacks. Indian Government's ability to protect its citizens has suffered a severe jolt. The Indian market is not only facing flight of capital but the ability of Indian firm's to raise funds through ECB and Bonds is also drying up. The recent terror attacks are likely to accentuate the situation further. This may lead to a severe economic crises with the pressure on Indian rupee mounting.

India is a deficit ridden economy, which needs huge overseas capital infusion at this juncture. The Govt. needs to give positive signals to the world that it means business in tackling the menace of terrorism, but it has to rise above the vote bank politics. Luckily the Govt. has the tacit support of the masses to take some harsh political/economic measures in the long term interest of the Nation.