Terror Tuesday's Economic Toll

Although the tragedy highlights concerns about India's investment potential, the overall financial outlook remains bright

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The scenes were as grisly as they were tragic. In the space of just 11 minutes during the evening rush hour, seven bombs exploded in first-class carriages of commuter trains in Bombay, India's bustling financial capital. Charred bodies lay where they had been thrown on twisted railway tracks and in mangled train carriages. As police investigated the attacks, medics carried away survivors on stretchers. All told, the bombs killed about 183 people and injured more than 700.

The attacks came after markets were closed in Bombay. But several Indian companies listed in the U.S. dipped as the news crossed the wires Tuesday morning in New York. Tata Motors Co. fell $0.48, to $16.50. Satyam Computer Services dropped by $0.44, to $32.86. And Infosys fell by $2.67, to a low of $74.31, but recovered by the close of the day to $78.01. After early losses, when the Bombay Stock Exchange first opened for trading on July 12, the benchmark Sensex index recovered and finished up nearly 3% as investors assessed the economic impact of the terrorist acts throughout the trading day.

For all the carnage of Terror Tuesday—as the Indian media have christened the day—the bomb blasts are unlikely to have much effect on the country's economy. "It will make the companies that were cautious about India hold off, defer any investment," says Stephen Cohen, a South Asia expert at the Brookings Institution, a Washington think tank. "Everybody will want to see what the sources of this were, and what the government response will be. But I don't think it'll have a fundamentally significant impact."


  What it will highlight are recent concerns about the investment potential of India and other developing countries. Since May, the Sensex is off by almost 16% as investors have fretted over higher rates and an economic slowdown in the U.S. taking the wind out of India's growth. "There has been some sell-off in emerging markets in the past two months," says Bear Stearns analyst Ritu Kochhar. "And whenever there are incidents that bring to the fore the political vulnerabilities of a country, it makes people more risk-averse."

Investors in India have a history of shrugging off similar incidents. The Sensex tumbled after a bomb struck the Bombay Stock Exchange in August, 1993, Kochhar says, but was back to normal the following day. And after terrorists bombed buses in Delhi on a Saturday in 2003, the Sensex barely hiccuped when the markets opened the following Monday. This time, she predicts, the outcome will be similar. "The government seems to be in control of the situation," she says. "This incident by itself does not change the economic outlook of the country and fundamentals of the companies."

Despite the ongoing threat of terrorism, India's outlook still looks rosy. The country saw its GDP grow by 9% year-on-year in the first quarter, and the services sector may approach 10% growth this year.

That's because multinationals investing in India are unlikely to be deterred from building up their presence in what they consider one of the world's most promising markets. IBM, for instance, recently announced plans to triple its size in India with a $6 billion investment, and said it has no plans to slow down. "I don't think foreign investors in a large country like India will be enormously swayed, even by a series of bomb blasts," says John Williamson, an India expert at the Institute for International Economics in Washington.

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