Security tops India Inc.'s concerns after attacks

Attack in country's financial center puts business executives on edge


MUMBAI, India -- Mumbai is largely back open for business, but if the government doesn't improve the nation's security India Inc. may sink, corporate leaders say.

While few say the recent terror attacks will derail India's economy, there are concerns that foreign investment will decline as companies re-evaluate the risk of doing business in India. Mumbai's high-profile businesses - finance and film - will likely continue to grow, but business executives acknowledge concern about long-term damage to the country's reputation.

"You will reach a tipping point someday," said Kris Gopalakrishnan, the chief executive of Infosys Technologies Ltd., one of India's largest outsourcing companies. "Let's say no fundamental changes happen. Let's say terror attacks continue. At some point you may say, 'Enough is enough. I'm not going to bother with doing business in India.'"

The Indian government is facing widespread accusations of security and intelligence failures in the attacks that left 172 people dead and 239 injured. The country's top law enforcement official has resigned amid growing criticism that the attackers that immobilized Mumbai for 60 hours appeared better trained, better coordinated and better armed than police.

"All of this I think could've been minimized," Tata Group Chairman Ratan Tata told reporters the day after alleged Muslim militants stormed the historic Taj Mahal Palace & Tower hotel, which is owned by a subsidiary of the Tata Group. "Well, it's easy to say, everyone's doing their best, but it's not coming together fast enough."

Infosys' Gopalakrishnan said his company is in talks with federal and local authorities to discuss ways to consolidate and strengthen the nation's security agencies and police.

Prime Minister Manmohan Singh has promised to strengthen maritime and air security and look into creating a new federal investigative agency.

U.S. consumer products maker Procter & Gamble Co. banned its executives from traveling to India the week of the attacks but has since scaled that back.

Automaker General Motors Corp. advised employees not to fly through Mumbai - but said their business plans for India would remain unchanged. With sales sagging at home, GM is looking to emerging markets like India for future growth.

"Going forward, we consider this one as a temporary aberration. It is not going to impact our operation in any manner," said P. Balendran, vice president of GM India.

Mumbai, India's financial and entertainment capital, has a history of terrorist attacks, and has managed to bounce back each time. Within a month of the twin blasts that rocked Mumbai in August 2005, the benchmark Sensex rose 10.7 percent; a month after the July 2006 train blasts that killed some 200 people, it gained 5 percent, according to Religare Securities Ltd., a Mumbai brokerage.

Commerce Minister Kamal Nath said the latest attacks will be no different. "I believe people will understand this is an exception and not a rule," he said by phone.

But others worry that the spectacle of the city's top luxury hotels under siege played out in real-time on television around the world will leave a lasting, negative impression.

Also, this time India's economy is already under pressure from the global financial crisis. Economic growth is slowing, liquidity is tight and the stock market is sinking as foreign investors withdraw funds. Since the attacks, the Sensex has fallen 3.2 percent.

Investors will likely start demanding greater compensation for the risk of doing business in India, pushing up the cost of already scarce capital, says Amitabh Chakraborty, president of equities at Religare. That could come in the form of higher bond yields and loan rates.

"One cannot say it's nothing and Mumbai goes on," he said. "Long term, there will be real collateral damage."

Religare says credit default swap spreads - the cost of protection against default - for the State Bank of India and ICICI Bank rose in the wake of the attacks, an indication that investors believe the risk of the two banks defaulting has increased.

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