America's General
Pakistan takes its most crucial decision since the 1971 war — to side with the US against the Taliban. The clerics may protest, but Musharraf has few options.

ECONOMIC IMPACT
Where Are We Going?
Fear and uncertainty stalk the Indian economy as early damages begin to show.

Ready For Battle
Where will the US strike, with what and how? A report on the military options before the global coalition that the Americans are building against terrorism.

Shifting Stance
Indian foreign policy is in a flux following the terrorist strikes in the US, metamorphosing in tandem with the tectonic shift in the geopolitical landscape of the world.

Menace In The Mind
People like bin Laden are not so much politicising religion as religionising politics.

COVER STORY: ECONOMIC IMPACT

Already the travel and tourism industries have begun to suffer. In the week after September 11, business and tourist travel came to a virtual halt in India. About 50 per cent of the bookings for overseas travel was cancelled. Sita Travels, which handles about one lakh incoming tourists every year, has had 5 per cent cancellations in a week. The figure is expected to rise up to 20 per cent. "The season between October and December 2001 will be a loss-making one with tourist growth being negative," laments Arjun Sharma, COO, Sita Travels. Pradip Madhavji, chairman, Thomas Cook, fears a 10 per cent fall in the three lakh American tourists who visit India every year. For a few months now tourists around the world will be subjected to inconvenience. The heightened security will mean longer time checking in, visas will be introduced in many countries and on-arrival visas may become very rare. "The terrorist attack is a direct attack on tourism," proclaims Madhavji. If tourism suffers, the aviation and hotel industries will also be hurt (see box: Who is Affected).

Some manufacturing industries are also beginning to get edgy. A continued fall in the rupee value will make products with imported components costlier. That includes a flurry of new cars and bikes that have been launched in the past one year. Struggling with a demand slump for over 16 months, car manufacturers were hoping the markets would perk up in the coming festival season. Those hopes are a little deflated now. "If there is any further devaluation of the rupee, a price hike may be inevitable," predicts Jagdish Khattar, managing director of Maruti Udyog. Cost pressures will also show on a host of high-end consumer electronics and appliances like frost-free refrigerators, TVS with screens bigger than 21 inches and DVD players, all of which have imported parts. "In case of a war situation, companies can expect manufacturing costs to go up and profitability to be under pressure," admits S.S. Lee, managing director, Samsung India.

India's darling infotech industry too isn't sure whether it stands to gain or lose. The immediate impact is undoubtedly negative. Says Krishnakumar Natarajan, president of the Bangalore-based MindTree Consulting: "The speed of decision-making has slowed down. Two of our major clients from the US have postponed their scheduled visits." More than biggies like Infosys and Wipro, it is the small companies that will face the heat. "The September 11 attack will worsen the already bad situation for small companies like ours," admits John Azariah, chief technology officer of Cogno Infotech. At stake are $6.2 billion software exports, 62 per cent of which go to the US. But NASSCOM, an association of software companies, believes that Indian companies will find business opportunities when the US Government spends $40 billion to rebuild Manhattan and beef up its security.

Export-dependent businesses, already on a negative growth path this financial year due to the US slowdown, are most pessimistic. The US buys a fifth of India's exports and a drop in consumer spending there will hit key sectors like gems and jewellery and readymade garments. Diamond exports alone are likely to fall from $2.15 billion in 2000-1 to less than $2 billion this year. "This season is going to be dull, with only compulsive shopping taking place," says Nirmal Jhaveri, one of the owners of jewellery firm Tribhuvandas Bhimji Zaveri. But Sanjay Kothari, chairman of the Gem and Jewellery Export Promotion Council, is hoping for some glitter. His bet: the slowdown and the rising price of gold will trigger an interest in low-priced gems. India accounts for a substantial part of the small diamonds business.

For once, corporate India is looking up to US President George W. Bush more than Union Finance Minister Yashwant Sinha to know what lies ahead for the economy. But that does not mean the Atal Bihari Vajpayee Government needs to do nothing. For starters, it could take a lesson from the manner in which the US Government responded to the crisis-it raised government investment and cut interest rates. Since February this year, the US has hacked interest rate from 6.5 per cent to just 3 per cent, with the last cut of 0.50 points coming on September 17. Says Deepak Parekh, chairman, HDFC: "If you look around the global economy, it is very clear that interest rates in India have to come down." The US Government has also pledged to spend $40 billion (Rs 1,90,000 crore) to rebuild the damaged economy. The Vajpayee Government too has been dangling a promise of public investment worth Rs 75,000 crore this year.

Instead of acting on those promises, the Government's reactions have been knee jerk. Such as allowing banks to lend for buying shares. A positive step, but unlikely to make a difference when most banks are diluting their exposures to equity. Another measure is hiking the FII investment limit in a company from the present 49 per cent to 100 per cent. This is also a right step but of little consequence. Of the eight companies that have allowed more than a 30 per cent FII stake in their equity, the FII investment crossed 30 per cent only in three.

Much of what the Government should really be doing figures in the several agendas for action Vajpayee released between September 1 and 11. If most of them are fulfilled, India's relatively small and closed economy will emerge out of the global uncertainty with only a few bruises. Or else an already sick economy could will take a fatal knock.

—with Stephen David

Constant suspicion, poverty, ill-health and lack of work dog Afghan asylum seekers in India. INDIA TODAY's Principal Correspondent Anna M.M. Vetticad meets some of them.
Living On The Edge