Terrorism has long-lasting impact on Indian economy: Moody's

Says negative impact of terrorism continues for years after the attack, taking up to five years for the effects to peter out

With India facing fourth largest number of terror attacks across the world in 2013, such incidents have a significant and long-lasting negative impact on the economy, according to Moody's Investors Service.

"More than 60% of all (terror) incidents in 2013 were concentrated in just four countries: Iraq (24% of terrorist incidents), Pakistan (19%), Afghanistan (12%) and India (5.8%)," it said in a report today.

India in 2013 faced 690 terror attacks. Topping the list was Iraq with 2,852 incidents, followed by Pakistan (2,212 attacks) and Afghanistan (1,443 incidents).

In 20 years (from 1994 to 2013), India faced 6,024 attacks, a little less than tenth of 68,962 incidents worldwide.

"Even normalised by the size of the country, Iraq and Afghanistan are at the top of the list with 82 and 47 incidents per million people, respectively, in 2013. This compares with a global average of 2.4 incidents per million people in 2013," it said.

Terrorist attacks, it said, are diverse in terms of the personal and property damage inflicted.

Moody's said its study shows that terrorist attacks significantly weaken economic activity, with long-lasting effects on the economy.

The study measures the impact of terrorism on a country's economic growth, investment growth, government expenditure and government cost of borrowing.

"For example, in 2013 the 10 countries most affected by terrorism took an immediate and significant hit to growth, dampening GDP between 0.5 and 0.8 percentage points," says Moody's Merxe Tudela. "Even worse is that the negative impact continues for years after the attack, taking up to five years for the effects to peter out."

Investment growth takes an even greater immediate hit, with Moody's estimating for the same episodes that investment growth declines between 1.3 and 2.1 percentage points.

"Terrorist events of the type and frequency seen in the top ten most terrorism-inflicted countries just in 2013 immediately weaken GDP growth between 0.51 percentage points (pps) and 0.80 pps; they further deteriorate growth between 0.37 pps and 0.59 pps after one year, and by 0.05 pps and 0.07 pps after three years," it said.

Terrorist attacks reduce investment growth (and hence impair potential growth) on the year of the terrorism event, by between 1.31 pps and 2.07 pps, for the top ten most affected countries.

Terrorist events lift the government cost of borrowing. In the most terrorist-inflicted countries, the cost of borrowing jumps between 41 and 65 basis points within one year and by 51-81 bps after one year of the event.