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How European crisis could impact India? Understanding the linkages…..

By Amol Agrawal

Though this has taken longer than I wanted, but here it goes. The analysis is
still in a very crude form. Will try and refine it as it goes: (Warning: it is a
very very long post)

A crisis in an economy impacts other economies via three channels:

Trade Channel: When an economy falls into a recession, it impacts the

affected country’s trading partners too. Falling household and business
demand in the slump-hit economy hits the exports/imports of its trading

The share of exports to EU (excluding UK) and imports from EU has fallen
over the years. In 1987-88, exports to EU constituted about 18.6% of total
exports. This has declined to 17.5% by 2008-09. The decline of imports is
higher from 25% in 1987-88 to 12% in 2008-09. Hence, total trade between
India and EMU is about 29.5% and could be impacted due to the crisis.
(Source: RBI)

However, trade channel can impact Indian external sector indirectly as well.
When the recent crisis gripped the world 2008, most policymakers,
economists and experts put forth the view that India would be only
marginally affected. Two reasons were cited for th

• First, India was a virtual non-entity in global trade as its share was
less than 0.5%-0.7% of the total global trade volumes. Hence, it was
assumed that its economy was largely insulated from the turmoil.
• Second, share of developed economies in trade had declined. In 1987-
88 developed economies contributed 59% of exports and in 2008-09 their
share has declined to 37%. The share of developing economies has
increased from 14% in 1987-88 to 37% in 2008-09. In case of imports
developed economies share has again fallen from 60% in 1987-88 to 32%
in 2008-09 while developing economies has risen from17% to 32%.
(Source: RBI)
Because of this shift it was felt that impact of global crisis on Indian
economy would be limited. As crisis originated in US and developed
economies with developing economies still growing, it was felt Indian trade
will continue to grow. However once the crisis struck in September 2008,
Indian trade sector declined sharply and growth was negative for 13 straight
months from Oct-08 to Oct-09.

The above analysis looks at trade in goods. What about trade in services?
We do not have country-wise data of trade in services so we just analysed
the broad trend. Unlike trade in goods which declines immediately, we see a
decline in services trade with a lag. It declines visibly in Jan-Mar 2009
quarter when the global crisis started in September 2008. Software exports
decline marginally from USD 11.2 bn levels to 10.4 levels which is great
given the global nature of the crisis. Hence, impact of crisis was more on
goods and muted on services.

(in USD Billion) India Software

Services Receipts
Jan – Mar 2008 10.8 10.9
Apr – Jun 2008 11.6 11.3
Jul – Sep 2008 14.4 11.2
Oct-Dec 2008 13.9 10.7
Jan - Mar 2009 11.0 10.7
April-June 2009 9.7 10.6
Jul-Sep 2009 7.2 10.4
Oct-Dec 2009 7.7 12.7
Software exports are more than services
trade as we import more in case of other
services like travel, transport etcSource:

Moreover, World Trade volumes declined for the first time in 60 years.
IMF says the decline in world trade in 2009 was around 12.3%. The Indian
government had to intervene and provide stimulus to exporters. Trade
volumes declined as world economy is far more integrated than we assume
it to be. Demand in developing economies also declined leading to overall
slump in world trade.
So, the overall impact of European crisis on Indian trade could be much
more than direct linkage indicates.

Financial Channel: The current crisis has shown the power offinance
channel (though trade channel was also very strong as above analysis
points). The impact of turmoil in one economy’s financial markets is not
merely transmitted to other markets, the quantum and direction of the
movement is also more or less similar (decline in equity markets, rise in
corporate bond spreads and depreciation in currency). This is because cross
border financial linkages have increased substantially over the years.
Besides, the correlation between assets too has been rising across the world.
If you plot the BSE Sensex with other advanced economy stock indices, you
more or less see the same trend. So much so, one can determine the trend
in the Indian equity market by just looking at movements in other global

Apart from movement in financial markets, three kinds of financial flows

could impact Indian financial markets:

• Foreign Direct Investment: There are many European companies

which have investments in India. So, there could be a possibility of
slowdown in FDI in India. We looked at top 15 FDI investors in India which
constitute about 92% of total FDI (Source: DIPP). EU economies have
contributed about 12.8% of total FDI since April 2000. But again FDI
remained robust throughout this crisis. Given the severity of the crisis it
was felt there will be little FDI investment. However, in case of India, FDI
inflows remained positive throughout the crisis. The FDI inflows actually
helped keep maintain capital account when all other categories showed
sharp decline.
(in USD billion) Gross FDI Gross FDI Net FDI
inflows Outflows (Inflows
Jan – Mar 2008 13.7 -7.4 6.4
Apr – Jun 2008 11.9 -2.9 9.0
Jul – Sep 2008 8.8 -3.9 4.9
Oct-Dec 2008 6.3 -5.9 0.4
Jan - Mar 2009 8.0 -4.8 3.2
April-June 2009 8.7 -2.6 6.1
Jul-Sep 2009 10.7 -4.2 6.5
Oct-Dec 2009 7.1 -3.2 3.9
Source: RBI

• Foreign Institutional Investment: Unlike FDI, it is difficult to pinpoint

the origin of FII investment. However, the linkage here is pretty direct.
With a turmoil in global financial markets, FII inflows will decline. We have
a large number of global financial firms which operate across the world and
in case of a decline in one major market, there is a pull out from other
markets as well.
Jan – Mar 2008 -3.7
Apr – Jun 2008 -4.2
Jul – Sep 2008 -1.3
Oct-Dec 2008 -5.8
Jan - Mar 2009 -2.7
April-June 2009 8.3
Jul-Sep 2009 9.7
Oct-Dec 2009 5.7
• External Commercial Borrowings: External commercial borrowings
could also decline if the European crisis spreads to other economies. ECB’s
declined in the first stage of the crisis as well.
Jan – Mar 2008 4.8
Apr – Jun 2008 1.5
Jul – Sep 2008 1.7
Oct-Dec 2008 3.8
Jan - Mar 2009 1.1
April-June 2009 -0.5
Jul-Sep 2009 1.2
Oct-Dec 2009 1.5
• Remittances and NRI deposits: Another important flow is NRI deposits
and Remittances. Former shows whether NRI depositors withdrew funds in
wake of crisis and latter shows whether Indians living abroad stopped
sending funds to their homes again because of the crisis. We see an
interesting trend in the case of NRI deposits. The deposits increase in the
crisis periods Oct-Dec 2008 and Jan- Mar 2009 and decline thereafter. It
could be that NRI preferred to invest higher proceeds in India seeing crisis
in their own economies!In case of remittances, we see a decline in crisis
period Oct 08 – Mar 09 but see improvements as crisis eases. There were
huge concerns of remittances collapsing because of the crisis. In some
countries they did collapse worsening poverty status. In India, despite the
decline it manages to remain in positive. (see thisstudy on remittances)
(in USD NRI Remittances
billion) Deposits
Jan – Mar 2008 1.1 13.4
Apr – Jun 2008 0.8 11.6
Jul – Sep 2008 0.3 13.0
Oct-Dec 2008 1.0 10.0
Jan - Mar 2009 2.2 9.5
April-June 2009 1.8 12.9
Jul-Sep 2009 1.0 13.8
Oct-Dec 2009 0.6 12.8

Again like in the trade channel, the impact of financial markets could be
more via the indirect linkage. Financial markets are far more integrated than
the trade channel.

Even both trade and finance are interlinked. First, domestic banks can lend
to companies in other economies as well. A problem in latter could lead to
worsening of the conditions of domestic banks/financial firms as well (this
was seen in the case of Swedish banks).

Second, Banks are at the center of the international trade as they provide
trade finance and other financing facilities that facilitate trade. A problem in
financial markets will disrupt the international trade as well. In the initial
phase of post September 2008 crisis, WTO and World Bank chiefs raised
concerns over trade finance in numerous forums.

Confidence channel
This channel shows confidence declines in business and households seeing
the global uncertainty. So even if an economy’s macroeconomic conditions
and outlook look favorable, the decline in confidence can disrupt the
economic conditions. Decline in confidence is also one of the reasons for
decline in business investments which led to decline in overall Indian GDP
growth. Credit growth also declined because of decline in business
RBI Governor Mr Subbarao has stressed on this channel on numerous
occasions (see this speech in 2009).

Role of confidence channel in crisis has grown overtime. Bank of Japan

Governor Masaaki Shirakawa in a recent speech said confidence cycle plays
a crucial role in all crises:

Why do financial crises, and for that matter bubbles which precede them,
occur repeatedly? Many reasons are given — lax risk management,
excessive leverage, existence of financial institutions which are perceived to
be too-big-to-fail, failure of supervision, excessively accommodative
monetary policy and the list goes on. I generally agree with such
assessments, but we also need a holistic perspective which cannot be
captured just by focusing on individual causes. From this perspective, I
would like to emphasize that, what one could term as a “cycle of confidence”
which evolves over a very long time horizon, plays a decisive role. Success
breeds confidence which unfortunately turns into over-confidence or even
arrogance. Complacency also sets in. The collapse of the bubble based upon
this over-confidence leads now to under-confidence, which is followed by
rebuilding efforts. Then the cycle begins once again.

Increasing integration of India with global economy

Apart from these three channels, Indian economy has become more global
over the years. The business and trade cycle of India has started to follow
the cycles of advanced economies. RBI Executive Director Deepak Mohanty
in his speech explained the increasing correlation:

With increased global integration, the Indian economy now is subject to

greater influence of global business cycles. The correlation between the
cyclical component of the index of industrial production (IIP) of the
advanced economies and India has risen to 0.50 during the period 1991-
2009 from 0.20 in during the period 1971-1990

The traditional conduit of transmission of global shocks is through trade

cycles. The cyclical movement in India’s exports and world imports during
the earlier period 1970-91 was not significantly synchronised with a
relatively low correlation of 0.38. However, with rising exports alongwith a
transition from primary article exports to manufacturing exports, the
correlation between India’s exports and world imports has increased
significantly to 0.80 during the recent period 1992-200.

Concluding thoughts and possible scenarios

The above analysis looks at some preliminary evidence of the linkages of

Indian economy with European economies. Again, I must emphasize that we
need to look beyond the direct impact of European economy on India. As
this crisis has shown that world economy is far more global with many
complex interlinkages. Hence, if the European crisis continues to spread, it
could impact Indian economy via other indirect linkages as well.

Given this global uncertainty, it puts Indian policymakers in a peculiar

situation. If we look at Indian economy alone fundamentals look quite
strong. GDP growth is expected to be around 8.5% in 2010-11, IIP is
increasing in double digits, credit growth has increased to 17%, export
markets are picking up and capital inflows have been robust.

However, because of the global uncertainty all these calculations can easily
go wrong. Infact, sentiment has already reversed in some cases:

• The investments might not increase seeing the global uncertainty.

Investment was a key driver in Indian 9% growth period (2003-08). Again
it is expected to play the key. We have seen business confidence
evaporating in thin air quick time
• IIP could again decline as it did post September 2008 crisis
• Credit growth could decline both because of banks becoming uncertain
and business not demanding credit
• Foreign capital inflows could reverse to an outflow position. Infact this
has already started to happen with FII showing outflows worth USD 1.65
billion in May (from May 1 2010 to May 24 2010) from equity markets. Till
April 2010, we had nearly USD 6.65 billion of capital inflows.
• The decline in inflows along with global uncertainty has led to decline
in equity markets. The expectations of BSE Sensex reaching soon to 21,000
levels are being revised downwards.
• The volatility is again increasing. If we see the NSE VIX index. It had
increased from 20 level in Jan 2008 to 85 levels in Nov-08. It then declines
to go back to pre-crisis level of 17-18. It has again started increasing to
touch 34 levels now.
• Yields in bond markets have eased considerably to 7.35% levels
looking at the global crisis. This is quite a turnaround as most market
participants expected yields to touch 8-8.25% levels after April Monetary
Policy. The market participants were also expecting RBI to increase interest
rates even before its monetary policy in July 2010. This crisis has reversed
the sentiment and most now expect RBI to keep interest rates unchanged
in July policy.
• Export markets could also decline for reasons explained above.
• If the crisis situation worsens, Indian government might again have to
intervene to ease the crisis situation. Though the probability is remote, but
it is till there. There are expectations that fiscal deficit and government
borrowing program could be lower than budgeted amount. This is because
of the higher than expected proceeds from 3-G auctions. If crisis worsens,
the government borrowing and fiscal deficit could get worse.
• Oil and commodity prices have declined as well. This could be a
positive factor as inflation might just become lower.

The above is a worse-case scenario and all will depend on the nature of
European crisis. We still do not know where the crisis is headed.
Comparisons have been made on how the crisis is similar to earlier US crisis
but we have a far more complex problem here. In US you have one
government and here you have 16 governments who are trying to resolve
the issue.

The recent events show the situation is quite severe. There is little
coordination between European policymakers as daily edition
ofeurointelligence shows. Germany recently imposed ban on naked short
selling without taking other European governments in confidence. This
angered other European governments who said why Germany should make
standalone policies when we are all fighting this crisis together. And just
after saying this, European policymakers have again showed resolve to fight
this crisis. Germany was seen as the economy which could support falling
Eurozone but its government has been severely criticised for its dilly-dally
approach. So, overall it is all very chaotic and complex at the moment.
Finally a reminder for all those who forget/prefer to forget economic history
so quickly. I mean it is just amazing. Before the crisis in Sep-08 we kept
saying we will not be impacted because of the global crisis for all kinds of
reasons. This was especially the case for financial market players. And then
the crisis hit and hit them hard with equity markets declining from 21000
levels to 8000 levels. And again, it rose not because of some Indian
economy wonders but because global financial markets started picking up
(or stopped declining). Infact much of the gains in Indian economy did not
come from some economy wonders but government wonders. And as global
crisis eased, we preferred to call it a one time event etc.

As Europe started to decline, we again laughed off when asked whether we

could be impacted. And again it is the same set of people expressing
confidence over Indian economy etc. And now we are seeing some strains on
equity markets, capital inflows etc. We may not be impacted by the
European crisis as much as previous crisis, but forgetting history so quickly
is a crime. It drives you nuts really.

NEW DELHI: Global credit ratings agency Standard & Poor's has said that a prolonged
and widespread debt crisis in Europe could have a substantial negative impact on the
Indian economy.

"If the solution of the Greece crisis takes longer than anticipated or if the confidence
crisis in Europe becomes more widespread, there could be a more substantial negative
impact to India," S&P Director (Sovereign & International Public Finance Ratings)
Takahira Ogawa said.

However, Ogawa pointed out that the short-term impact of the crisis on the Indian
economy would likely be indirect and "limited to the impact of a generally weak global
stock market on India's markets".

The worsening Greek debt turmoil has raised concerns about the contagion spreading
to other European countries, especially Portugal and Spain, which are facing huge fiscal

Despite euro zone countries and the International Monetary Fund (IMF) pledging a 110
billion euro bailout package for Greece, world markets are still worried about the viability
of the proposed rescue effort.

According to Ogawa, if the debt crisis spreads to other nations in Europe and their
banking systems, European entities could start repatriating funds from Indian stock

"This would negatively impact the Indian stock market and lead to lower foreign
currency reserves. In the process, refinancing by Indian borrowers from international
markets would be adversely affected," Ogawa noted.

Pointing out that the Indian economy is getting more connected to global economies,
Ogawa said that in recent years, some Indian conglomerates initiated or increased their
stakes in European companies.

"As such, there could be an adverse impact on the Indian economy through a decline of
exports of goods and services to Europe and through the reduction of revenues or loss
incurred from European-related operations of these companies," he added.

Regarding the overall impact on India, Ogawa said the country could see more of a
severe macro-economic impact due to the turmoil.

"In our opinion, as we have seen when the global financial crisis hit the global economy
in 2008-2009, the macro-economic impact could have a more severe effect on the
Indian economy than the financial impact by repatriation of foreign funds," Ogawa

World markets continue to wobble on fears about the Greece debt crisis, which could
hamper the fragile global economic recovery.

Indian market reaction

Indian stock markets have corrected 10% from its recent peaks on the back of the jitters
from the Greece-led European crisis.In fact, the concerns about the stability in the
European region have once again resurfaced with the latest down grade of Spain by the
However, India has out-performed the global indices during this correction phase. India
has not corrected as much as have other global markets, during the phase of European
debt crisis.
The recent healthy correction in the stock markets is happening constantly trembling
under the fear of worsening of the European crisis and a possibility of a double dip
recession in the US.
Why is India an Out-performer?
Indian economy is far less dependent on exports to Europe. Indian IT companies have alower
exposure to European clients to the extent of roughly a quarter of their revenues.Add to that
India¶s exposure to debt-stuck economies such as Greece, Spain, Italy andPortugal is far more
limited to 4% of total exports.
According to the latest macro-economic figures, India¶s IIP data has registered a growth
of 5.1% compared to 3.7% witnessed during April 2009. The Central Statistical
Organization has pegged India¶s GDP growth for 2009-10 at 7.4%.
Thus, there are various parameters on which Indian stock markets have out-performed the
global indices while going passing through the turmoil phase of European crisis.
Investors waiting on sidelines should use every dip from here to create a portfolio for
long-term duration

How European crisis could impact India?

Impact on exports
The European Union accounts for nearly 21 per cent of India's total export
andExports to Greece, Spain and Portugal, including Italy, is only 4%.Indian finance
ministerrightly said that¶s Indian export to PIGS are marginally low and will not have any
impacton it ..India export mainly textiles, pharmacy products, Gems etc to European countriesbut
these sectors were not effect much on crisis
Increase in foreign fund inflows
International investors lost trust in world markets becauseof
series of crisis in US and Europe. But a majority of FII and other individual investorschoose
Indian markets to invest as showed its stability in their economy with a strongfiscal policies .
since the start of 2010, the time when fears of sovereign debt crisis inEurope especially in
Greece .. There was net inflow of foreign institutional funds into thedomestic capital markets
since the start of 2010 till April-end, which was Rs 54,606 croreand the stock market barometer
Sensex rose 93.9 points in the four months to close at17,558.71 on April 30


The current debt crisis in some European Union member states will have a negative
impact on Indian exports and the Indian stock market, a top official said Saturday.

At least 27 percent of India's trade is with Europe and the crisis will impact India's export
to the region, Sunil Prasad, the Europe India Chamber of Commerce (EICC) secretary
general, said in Brussels Saturday.
The chamber has become the "first port of call" for those doing or wanting to do business
with India, Prasad said, adding that the EICC will help anyone "looking to build business in
India or Indian companies in Europe", EuAsiaNews reported.

Recently, an analysis carried out by the Associated Chambers of Commerce and Industry
of India (ASSOCHAM) had also warned that nearly 10-12 percent slump is foreseen in
export proceeds of India in European markets particularly that of Greek, Portugal and
even Spain in the first quarter of current fiscal.

On May 6, global rating agency Moody's had downgraded the Greece's debt to junk status,
resulting in a crisis of confidence in the European markets.

The European crisis comes at a time when Indian exports emerged out of the crisis
following recession in leading world markets. Exports, which account for about 17 percent
of the country's total economic activities, had contracted by over 39 percent in May 2009.

Meanwhile, a new agency reported that the Board of Trade, headed by Commerce and
Industry Minister Anand Sharma, will review on 14th June the impact of European debt
crisis on the Indian exports.

The Board of Trade (BoT), which also comprises leading industrialists, business chambers
and trade bodies, would discuss the changing rupee-euro equation, as the euro zone
currency has been hit by the Greek crisis.

This would be the second meeting after the BoT was reconstituted by Sharma in July last
year. Its first meeting was held in August 2009.

The BoT advises the government on policy measures connected to global trade.

EU Crisis - India and the Emerging World

Category: Global Economy Sub-category: World Economy

Document type: article

Shradha Diwan, Research Analyst

16 Dec, 2010

Greece - where it all began...

In early 2010, fears of a sovereign debt crisis, the 2010 Euro Crisis, developed concerning some European
states, including European Union members called PIIGS - Portugal, Ireland, Italy, Greece, and Spain
(see article). The crisis led to a severe dip in confidence in the European economy, manifested by an
increase in sovereign bond spreads and risk insurance on credit default swaps between these countries and
other EU members, most importantly Germany. Financial markets have since been alarmed due to concerns
about rising European government deficits and downgrading of sovereign debt.
Huge foreign capital inflows led to a fast growing Greek economy
(from 2000 to 2007) at a rate of 4.2%. The Greek government ran huge structural deficits, supported by a
strong economy and falling bond yields. The financial borrowings of the country were initially sustainable
due to high currency devaluations. After the introduction of the euro, Greece was able to borrow due to the
lower interest rates commanded by the government bonds. The global financial crisis gave an unanticipated
bolt to the growing Greek economy as two of the country's major revenue lines - tourism and shipping -
were badly affected by the downturn.

In early 2010, it was discovered that the Greek government had constantly misrepresented the country's
economic statistics and had even paid Goldman Sachs and other banks hundreds of millions of dollars for
arranging transactions that hid the actual borrowing levels. These misrepresentations allowed the Greek
governments to spend beyond their means and hide the actual deficit levels from the EU overseers. Greece
was identified as the worst case of reporting irregularities, usage of derivatives, and fudging statistics,
among other EU countries including Italy.

On 27 April 2010, Standard and Poor's (S&P) downgraded Greek debt to the 'junk' status, amidst fears of
sovereign default in Greece. According to S&P's estimates, investors would lose 30-50% of their money in
the event of a sovereign default in Greece. Yields on two-year Greek bonds increased to 15.3% and stock
markets worldwide declined in response to this announcement.

A bailout package was worked out for the country and a loan agreement was reached between Greece, the
other Eurozone countries, and the International Monetary Fund (IMF). An immediate €45 billion in loans
were to be provided in 2010, with more funds available later. The total agreement was for a sum of €10
billion. Without the bailout agreement, there was a high possibility of a sovereign default. The Greek crisis
spread to the other countries of the Eurozone, reducing confidence in the European economy as a whole.

Crisis in Economies

Investors have been prompted to rethink their investment strategies in the light of the European economic
crisis threatening to bring the staggering world economy to a screeching halt. Going backwards, 2 years
back the global economy was infected with the worst recession ever witnessed since the Global Depression
of the 1930s. During that time, it was obvious that the heat of the global slowdown would be felt by Indian
exporters who are largely dependent on the demand from US consumers - be it the IT or the textile
industry. It was at that time that exporters realized the fundamental flaw of a concentrated market and
moved towards diversification of their clients and businesses across the globe, especially the developed
markets of Europe. That was the time when the European crisis was still not palpable on the horizon.
The Greek crisis has now ballooned into a major European crisis. Europe accounts for 36% of India's exports
(as per Commerce Ministry, as on 17th Dec, 2010), and the sharp depreciation of the euro has sent
exporters into a jittery frame of mind. Austerity measures and spending cuts across Europe have led to
export orders' cancellations and postponements. Therefore, when an economy falls into a recession; it

affects the country's trading partners too.

After India's trade with EU having more than doubled in value between 2000 and 2008, EU trade in goods
with India fell in 2009. EU exports decreased from 31.6 billion euro in 2008 to 27.6 bn in 2009 and imports
from 29.5 bn to 25.3 bn. The EU surplus in trade with India increased from 0.8 bn in 2000 to 2.3 bn in
2009. (Figures in euro)

The first nine months of 2010 showed renewed growth in EU trade with India, with exports increasing from
19.7 bn in the first nine months of 2009 to 25.1 bn in the same period of 2010, and imports from 19.1 bn to
24.3 bn. The EU trade surplus with India remained nearly stable at 0.7 bn in the first nine months of 2010.
India is the EU's 9th most important trading partner. Hence, total trade between India and EU could be
harshly impacted by the crisis.

Over the years, cross-border financial linkages have increased substantially and turmoil in one country's
financial markets is easily replicated, both in quantum and magnitude, in other markets. Markets have
become increasingly correlated and Indian stock market indices can no longer be viewed in isolation with the
global indices. The European crisis leads to every possibility of a slowdown in foreign investment in India
because many European companies have substantial base and investment in the country. Both Foreign
Institutional Investment (FII) and Foreign Direct Investment (FDI) will be impacted. In the event of the
spread of the European crisis to other countries, External Commercial Borrowings (ECBs) could also decline.
At a slightly micro level, there could also be a substantial decline in remittances and NRI deposits.
International trade is directly impacted due to concerns over trade financing in the events of an economic
and financial crisis. A decline in confidence in a country's economy can also disrupt international trade and
business investments. This cascades into a decline in credit growth and overall decline a country's


However, even in the face of the crisis, this year has turned out to be a surprisingly good one for the world
economy. Global output has probably risen by close to 5%, well above its trend rate and a lot faster than
forecasters were expecting 12 months ago. Most of the dangers that had been frightening the world
economy did not materialize. China did not suffer a hard landing and America's mid-year slowdown did not
become a double-dip recession. Even though the problems of the Eurozone have posed a threat to the global
macroeconomic well-being, the zone as a whole has grown at a decent rate (considering that the European
economy is an ageing one at that); Germany proved to be the fastest growing economy in 2010.
The emerging markets have been the biggest contributors to growth this year, using up spare capacities and
attracting foreign investment. China and Brazil are both on a growth spree with consumer demand at very
high levels. Although it should be noted that loose monetary policies in the emerging economies would have
to be done away with in order to stop prices from accelerating; they will have to make an optimum trade-off
between tighter monetary policies and sustainable growth figures. The Euro area, however, may continue to
be a source of stress for the global economy, both financially as well as economically. Ireland, Portugal, and
Greece would have to battle it out to stay put on the economic growth map. America's economy may also
shift, albeit in a different direction. Europe's austerity is a stark contrast to America's recent tax-cut
agreement; the stimulus provided by the US government may cause American output to grow by as much
as 4% next year.

Therefore, the emerging markets, the Eurozone, and the American economy are all moving in different
directions in terms of their monetary stances. The divergence between these three biggies of the world
could compound the inherent risks in each one of them. America's loose monetary policy and concerns about
sovereign defaults in the euro zone will encourage capital to flow to emerging economies, making the
latter's central banks reluctant to raise interest rates and dampen down inflation. Emerging economies are
expected to account for over 50% of global growth over the next 5 years, but only 13% of the increase in
net global public debt. The quantum of damages in the coming year 2011 could offset the growth trends
observed in 2010 if the world's economies continue to move in divergent directions.

India can turn euro crisis into opportunity

NEW DELHI: As the global and Indian markets feel the jitters of Europe's debt crisis, investors are
keeping their fingers crossed, trying to gauge the possibility of another downturn of the global
economy, which is recovering slowly from the impact of the 2008 subprime crisis in the US.

However, the Indian economy and markets are quite safe and not likely to be impacted hard by the
sovereign debt crisis of Eurozone, feel bankers and economists. "India is almost insulated from
the euro crisis,'' assures C Rangarajan, chairman of Prime Minister's Economic Advisory Council,
expressing his confidence in the resilience of the Indian economy. Nobel laureate economist Joseph
Stiglitz also thinks that India can emerge unscathed from the Eurozone crisis.

"If the crisis is contained soon, India will not be affected,'' says Jaspal Bindra, head (Asia) of
StanChart. "There is a possibility that India can benefit from the crisis as inflow of foreign funds will
improve for better returns. But for this, the crisis should not be allowed to be blown up to the extent
that it affects the liquidity in the system.''
The Eurozone crisis has some positive factors for India. First, India will be able to contain its fuel
subsidy bill as the crisis has pulled down commodity prices, including petroleum products.

Second, lower prices will also contain inflation (around 9% at present). According to a senior
economist, if inflation comes down with lowering of prices of commodities, the country will be able
to achieve 8.5% growth.

Third is the continuation of the soft interest rate regime. Earlier, there was speculation that RBI may
push up interest rates to control inflation. If inflation starts to cool off, RBI may continue with its soft
interest rate regime.

Countries like India are suffering because of wrongdoings of the developed nations. While the US
crisis had broken out as most of the borrowers could not repay home loans, in Eurozone, the
problem has been created by governments. These countries lived beyond their means on borrowed
money, which they are finding it difficult to repay now. Countries like Greece, Spain, Ireland, and UK
have double-digit fiscal deficits. According to a report, the fiscal deficit of Greece in 2009 was 13.6%
of GDP, that of UK 11.6%, Spain at 11.2% and Ireland 11%. "Such a huge fiscal deficit is clearly
unsustainable,'' said Stiglitz.

Compared to this, the fiscal deficit of India is 9.5% of GDP. "It's not a big problem as the country has
high economic growth,'' feel economists. A Citigroup report said, "India predominantly funds its
deficit through domestic sources. As against this, Greece, Spain and other developed countries
finance their deficits from external borrowings. While India's total foreign borrowings are around 5%
of GDP, that of Greece and Spain are over 100% of GDPs.''

Another problem of Eurozone countries is that they can't tweak their currency to improve
competitiveness by pushing up exports and containing imports to fund loan-repayment . A Credit
Suisse report said major risks to countries like India is stemming from indirect effects, like a repeat
of widespread credit crunch, flight of capital, falling import demand from developed markets and
possibility of a global double-dip recession . India's trade with EU as percentage of GDP has declined
from 27% in 1992 to 23% in 2009.

Europe's crisis has again brought dollar to the centrestage. Investors, who had started putting money
into Eurozone after the sub-prime crisis, are reverting to dollar assets. This has made dollar
appreciate in the last couple of months.

Any change in economic condition of the country affects the consumer behaviour after all economy is just a
market set up where consumers and buyers transact. This will lead to reduction in demand, which will
impact the exports to European countries from India and China. This is because European Union (EU) is one
of the largest trade partners for both the fastest growing countries of the world. Though, the impact is
expected to be minimal and transient.
The investing community in India believes that there will be some amount of capital outflow in the short
term as the investors in euro zone would withdraw the funds for their own use invested in India, but some
also believe that on the contrary FII’s (Foreign Institutional Investment) may invest in India as they would
find India as a safe place to park their funds having high growth potential. There would be short term
susceptibility, due to anxiety amongst investors as the risk appetite will reduce.

Large chunk of Indian borrowers who borrow from abroad at the floating interest rate of LIBOR (London
Interbank Offered Rate) plus some margin will find an increase in the cost of funds because negative
sentiment emancipating from Greece crisis has increased both the LIBOR and the quoted margin over it.
This will make the foreign borrowing option less lucrative for borrowers and will thereby pressurize the
domestic interest rates.

Trade and Services sector would take a hit as Europe accounts for 27% of India’s exports causing a few
weeks of stagnation barring any long term impact. The hospitality sector, which was trying to recover from
the losses on account of volcanic ash issue, will also feel the heat faced by tourists from Western Europe.
Not only is there currency depreciation effect but consumers’ purchasing power has also gone for a tailspin.
The tourists from Western Europe accounted for over 30% of the foreign tourists arrivals in India.