Sunday, November 30, 2008

Terror x Foreign Direct Investment= Indian Economic Slowdown?

It is not new to India, not even for the Indian people. India is facing terror attacks since 1993. The recent attacks on Taj heritage, Oberoi hotels and Nariman house which claimed more than 170 people including citizens of the USA, the UK and Australia. This incident has raised questions over the security measures by government. The UPA government has failed to curtail terrorism in its 5-year tenure.

India is blessed with a very good Prime Minister and Finance Minister. Overall performance of UPA has not up to notch. I am of the opinion that India in current situation will attract lesser foreign investments for short-term period. Following are some reasons, which will have negative effect on FDI’s:

Political uncertainty: Year 2009 is election-year for India. Looking at political scenario, Congress government has failed to curtail terrorism; BJP cannot handle power for five continuous years while other political parties have no calibre to handle the government. Even local political parties have total domination over national projects. For example, Trinumool Congress, which had its disputes with TATA Nano project resulted into transfer of Nano plant to Gujarat.

Global economic slowdown: The world is facing worse recession since The Great Depression. Year 2008 has proved a black year for world economy. Finance, Infrastructure, Information Technology sectors are the most affected. The most important factor a businessperson will look before investment is Capital Surplus. It is simple, if a business has no money to expand or invest in new horizons even though it is profitable, he has to borrow money or abandon the plan. We are in scenario where banks are bankrupt and require bailout or the borrowing norms are tight.

Terror attacks: To make situation worse, India is facing terror attacks all around the country. India witnessed eight major terror attacks in year 2008. One can argue that New York has witnessed WTC attacks and London has witnessed bomb blast. However, the interesting fact is that they haven’t faced any terror attacks after that. While in India, there is no strict law pertaining to terrorism. The UK, the USA and Australian government has advised their citizens against visiting India.

Effect of the current environment on Indian economy:

The recent terror attacks will have short-term effect on Indian economy. The foreign delegations, investors will be weary to visit India to carry on any further business. Foreign companies believe that their real assets are their employees, will be cautious sending their representatives. Even tourism and hospitality industry, which is major contributor towards country’s GDP, will have negative effect. The November-March season is considered cash making season will be lull. Even Airline sector will have effect on their business, as there will be sizable reduction in foreigners travelling both for business and vacation purpose.

The terror attack will have short-term effect, as India is one of the biggest emerging markets with abundant resources available in cheap. The volumes of business and profits earned from India will be too good to attract FDI’s in to country. Looking into past record of terror attacks in country, India has never failed to attract FDI’s just for the reason of terror attacks. Government has provided various benefits in term of land, tax and infrastructure, while cheap availability of labour as well as huge market to sell their products that is enough to attract FDI’s for medium and long term prospective.

A company with unique and very good product will fetch huge profits in current scenario. A smart investor will look current situation as an opportunity to invest rather than shying away. Investing is full of risk. There is no profit without taking risk. If FDI’s need to earn huge profits, they have to take this risk. India has always been great place to invest and will be always great place to earn profits.

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