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Businesses Concerned India-Pakistan Tensions Hurting Economies - 2002-06-07

Worries about a possible war between India and Pakistan are beginning to have an economic impact in the region. And, in India, there is particular concern in the software industry. The information technology sector is the nation's fastest growing industry, creating hundreds-of-thousands of jobs.

India's booming software technology companies are mostly based in the southern cities of Bangalore and Hyderabad, more than 2,000 kilometers from the disputed Kashmir region, where Indian and Pakistani troops face off across the Himalayan mountains.

Nevertheless, the tensions are beginning to be felt in the $7.5 billion software sector. Two-thirds of its customers are in the United States. Worries within the industry have intensified, after the United States, Britain and several other countries cut diplomatic staff, urged their nationals to leave India, and advised citizens against visiting the region due to "serious tensions."

Kiran Karnik is president of the National Association of Software and Service Companies, the software sector's main lobby group. He said the industry is worried about the impact these travel restrictions could have on business. "If the issue and the problems go on for more than a month, then prospective customers coming here for the first time will begin to wonder that, 'if I cannot travel to India for a month, should I be looking at business there at all?'" he said.

Visits by foreign customers are a key part of software business. But in the last week, industry officials have said, most business trips have been canceled. Software groups said orders have not been scrapped, but new ones are not coming in, either. Deals that were in the final stages of negotiation have been put on hold.

Indian companies are assuring customers that contingency measures are in place to continue functioning in the event of a war. These include copying data and programs to operate from alternate locations, and having parallel communication systems.

Mr. Karnik said Indian software groups have always had strong backup systems. "We continue to have incidents of one kind or another. Therefore, business operations here have built around that. It may be a power failure; it may be a strike; it may be a terrorist attack. All our systems are built around, and quite used to be able to withstand that. Systems in other countries, which have never experienced any of these are far more fragile," Mr. Karnik said.

But business leaders acknowledge that India suddenly looks like a risky investment proposition, although most Indians do not share Western concerns that escalating conflict could lead to the use of nuclear weapons.

Indian Foreign Ministry spokeswoman Nirupama Rao said the decision by several countries to begin evacuating their nationals is an overreaction. "We are disappointed that people should choose to leave the country. The life here is perfectly safe. It is perfectly secure. A needless hysteria has been created," Ms. Rao said.

Economists say India is bound to be hurt even by prolonged talk of a war. They say travel- and export-oriented industries such as tourism, hotels and the garment industry will also suffer.

Anwar Hoda is an economist at the Indian Council for Research on International Economic Relations. He has said the situation will only improve if the crisis is short-lived, and travel restrictions are relaxed. "If this blows over in a short time, as I expect it to blow over, then it is possible that whatever adverse effects have been there will be overcome, and, maybe, fully overcome," Mr. Hoda said.

Business leaders hope that sheer value for money will keep orders coming in. In the software sector, for example, Indian experts estimate that Western companies save up to 40 percent of back office costs by outsourcing to India.