War fears affect Indian economy

Many foreigners have left India following warnings from home

By Sanjeev Srivastava BBC correspondent in Bombay

With a host of Western countries, including the US and the UK, issuing travel warnings to their citizens and also cutting down diplomatic staff in India and Pakistan, an impression is gradually gaining ground in Western capitals that it is no longer safe to do business in the region.

We may continue to think that war is a distant possibility but why should a western company take any risk?

Sunil Choksey
Rosy Blue Securities

But there is a perception among many Indians that the West may have pressed the panic button a trifle too soon and war fears - at least at this point in time - are exaggerated.

"It is an unnecessary over-reaction. The situation is not so grave and there is no immediate threat to life and property," said Amit Mitra, Secretary-General of the Federation of Indian Chambers of Commerce and Industry (FICCI).

But that is the Indian perception. Whether Indian business leaders like it or not, for now at least, the perception outside appears to be different.

And it is beginning to cast a pall of gloom over the Indian economy.

IT suffering

Worst affected by this war-like scenario is the Indian IT industry.

Business may start to feel the pinch

Over the last few years, Indian information technology and software services companies had earned a reputation for themselves and billions of dollars for the country as companies the world over began to rely on their quality and used them for outsourcing and back office operations.

"If Western businessmen become wary of coming to India, orders will also dry up soon," said Sushil Choksey of Rosy Blue Securities.

"Already there are reports of some companies losing orders because of the risk profile of the region going up,"

While ongoing contracts will be honoured, Mr Choksey believes, Indian companies may find future orders harder to find in the prevailing scenario.

"After all, why should anybody place an order with a company which may not be able to execute the same in case the situation changes for the worse?"

Tourism fears

Travel, trade and the hospitality industry are other sectors likely to suffer.

The tourism industry may not be hit immediately as it is summer time now and India never really gets many Western tourists at this time of the year.

No sign yet of a let-up in the military build-up

But if the situation does not change in the next few months then the tourist season beginning in September may turn out to be a disaster for the Indian travel and hotel industry.

Capital markets have also felt the tremors of war.

In the last few weeks, the Bombay stock index has fallen nearly 9%.

There are now fears that foreign investors may pull out money if the situation deteriorates any further.

For Brian Brown, head of Salomon Smith Barney brokerage's Indian operations, a major concern is that new money may not flow into India if war clouds persist.

But he also does not think there will be any flight of foreign capital as the present situation has more or less been built into current investment calculations.