Shankar, 23, a street hawker who sells balloons in Mumbai near the Taj Mahal Palace, one of the two luxury hotels stormed by terrorists in the city last week, was adamant: the attacks were bad for business.

“I sell to tourists - I don't think they will want to come to Mumbai now,” he told The Times last week.

Behind him, inside the Taj, the last terrorist had been killed only hours earlier and Indian troops were still searching for booby traps. Grenades had been left in the mouths of some of the bodies, a passing policeman said.

“Soldiers, policemen and terrorists don't buy balloons,” Shankar said ruefully. “This attack will make Indians poorer.”

Analysts broadly agree with the hawker's bearish assessment. Economists believe that the terror strike will have an impact on India's economy - albeit one that is short-lived, focused on vulnerable sectors, such as tourism, and slight compared with the damage caused by the global credit crisis.

They add, however, that India must tackle terrorism urgently to safeguard its economic advance.

It seems certain that the gunmen who raided Mumbai had India's business elite in their sights. Last week's attacks struck two of the city's outstanding citadels of commerce - its finest five-star hotels.

These are where the commercial capital's movers and shakers met to socialise, pitch for cash and thrash out deals. Affluent corporate nomads made a beeline for the legendary comforts that each establishment afforded.

When Goldman Sachs held a presentation, it would invariably be at the Taj. Merrill Lynch's John Thain preferred the Oberoi. When the two hotels were attacked, scores of high-flying executives - from companies including HSBC, Unilever and Warner Brothers - were trapped inside.

Those who lost their lives included Ashok Kapur, the chairman of India's Yes Bank, one of his industry's best-known figures. The sole Briton to be killed was Andreas Liveras, 73, a yacht tycoon. He was in town for a trade fair.

Few doubted that the two hotels represented a high-value soft target for a terrorist faction bent on garnering publicity and hurting India's global image.

Indeed, in the aftermath of the strike, Ratan Tata, the head of Tata, the Indian conglomerate that owns the Taj, said that he had been warned of a possible attack. However, he claimed that no security arrangement could have prevented the highly trained and organised militants who descended on Mumbai.

To judge by the anger among the Indian public, such excuses will no longer do. In the first few hours of last week's attack ten heavily armed terrorists outgunned and overwhelmed Mumbai's police force. The police are, for the most part, a ragtag group of potbellied constables, armed with bolt-action rifles, many of which had not been fired in years.

Experts say that India - second only to Iraq in the number of people killed by terrorism last year - has failed to learn the lessons of past strikes and that its economy is in danger if urgent action is not taken.

Ajay Sahni, of the Institute of Conflict Management, said: “The idea of 8 or 9 per cent economic growth, of India shining, of the nation becoming an economic superpower - you can forget it until the security system is entirely overhauled.”

Others suggest that India's business community had been as guilty of inaction as the nation's authorities. Suman K. Bery, the director- general of India's National Council for Applied Economic Research, said: “It was remarkable that the markets had discounted the threats [of terrorism] for as long as they had. It had long been known that we lived in a dangerous neighbourhood.”

Mr Bery believes that the Mumbai attack will increase costs for businesses in India, which will now hire private security firms, and may dissuade some foreign groups from outsourcing work to the subcontinent.

However, among the British business community, there is a determination not to be cowed. “If London can put up with 20 years of the IRA, then Mumbai can damn well weather this,” Alan Rosling, a Briton who is an executive director of Tata and chairman of the British Business Group in Mumbai, said.

Indeed, few, if any, companies have spoken of leaving India after the attacks and economists say that the country's long-term prospects remain compelling. Sherman Chan, of Moody's economy.com, said: “Investors will still be attracted to this emerging market with massive growth potential.”

Mr Bery also believes that Mumbai, a city accustomed to terrorist atrocities, will weather the storm - like New York and London before it. “The link between violence and economic performance is not an immediate or particularly powerful one,” he said.

The Taj's owner seems to think likewise. It has already pledged to rebuild its iconic hotel “inch by inch”.

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