Greece Crisis and Its Possible Impact on India
July 16, 2015
Published in elections.in (http://www.elections.in/blog/greece-crisis-and-its-possible-impact-on-india/)
It goes without saying that the crisis in Greece has international ramifications. The eurozone leaders have desperately tried to bail out Greece from insolvency and prevent it from leaving the euro. It has taken the Greek Prime Minister Alexis Tsipras all his persuading powers to convince MPs within his own government to back bailout package offered by the eurozone leaders, but one thing is clear – even as the package offers to reschedule Greek debt repayments, it does not lay down any provision for the reduction of the Greek debt as sought by its government.
It is worth mentioning that Greece’s deputy finance minister resigned just before the bailout vote!
Therefore, there’s little surprise that even when the Greek parliament sat to vote on bailout offer late Wednesday (7 July) night, the International Monetary Fund (IMF) fiercely criticised the bailout deal offered to Greece by the eurozone on grounds of the “highly unsustainable” public debt of Greece. It asked for debt relief on a scale “well beyond what has been under consideration to date” so as to restructure the country’s debt. The European Commission proposed a €7bn (£5bn) ‘bridging’ loan to help Greece pay debt interest. Greece has already missed two deadlines to pay €1.6bn (£1.1bn) in debt interest on loans to the IMF and became the first major Western economy to default on an IMF loan.
In Indian perspective, the slump in the Bombay Stock Exchange Sensex by 300 points in early trade on 6 July, after as many as 61 per cent of Greeks voted to reject a proposal by the country’s creditors, did reflect the India’s concerns. However, the Sensex recovered in afternoon trade that day and this presents the true picture – there are reasons for India to be cautious even though experts don’t see any major impact on India because of the crisis in Greece.
To What Extent Can the Greece Crisis Impact India?
India, as experts point out, is not directly exposed to Greece in terms of trade ties. As it is, India’s exports to Greece stood at USD 360.84 million while imports were only USD 127.75 million in 2014-15.
“Our trade with Greece is very low. The crisis in Greece would not have any impact on the trade but if the problem spread in eurozone countries then India’s exports may face issues,” union minister of state for commerce and industry, Nirmala Sitharaman, was quoted as saying in media recently.
Any trouble in the EU, therefore, is likely to affect Indian economy as it will affect its exports because India is an important trade partner for the European Union and the value of EU-India trade stood at €72.5 billion in 2014. More than 50 per cent of India‘s knitwear exports is to EU. In fact, India grants global support to handloom, coir, jute products and handmade carpets under the Merchandise Exports from India Scheme (MEIS). Even India’s software and engineering exports to the EU may take a hit, as per the engineering exporters’ body EEPC India’s estimates. It warned of an indirect impact from the UK, Italy, Turkey and France.
Hence, India may not escape an indirect impact on its trade since Europe is the country’s largest trading partner and India’s merchandise exports has not been in prime health in 2015. The crisis in Europe will only worsen the scenario.
However, as it is, in the last five years, India‘s export growth has seen many ups and downs, being in negative territory twice. In 2009-10, the exports had slumped because of the 2008 global crisis. The decline in exports in 2012-13 was actually due to the eurozone crisis and global slowdown! However, a paper (“ India’s Merchandise Exports: Some Important Issues and Policy Suggestions”) published by the Department of Economic Affairs of the Ministry of Finance in August 2014, pointed out that the “tough negotiations by India in the India-EU free trade agreement went to show that India would not give in that easily to corporate lobby through their governments in those countries.”
The country’s new foreign trade policy did foresee and warn that the government “should be careful while entering into regional trade agreements as there are fears that they are being increasingly used by global corporates to make emerging economies to bend and rule by proxy”.
Besides, the Chief Economic Adviser to the Government of India, Arvind Subramanian, said that India was responding well to the Greek crisis in line with other global economies and hence there was “no cause of worry”.
Concerns for India
However, if current developments hit the Eurozone hard, then India will probably have to bear the consequences given that world financial markets today are closely linked. Global credit ratings agency Standard & Poor’s has warned that India could not escape substantial negative impact in case of a prolonged and widespread debt crisis in Europe. The crisis in Greece might prompt, for example, investors in the USA to pull money out of Indian stocks for the losses in Greece could lead to the crash of Indian stock markets and adversely affect businesses. Another probability is of European investors withdrawing funds from Indian stock markets in case the debt crisis spreads to other nations in Europe and their banking systems.
The Indian government has already foreseen such a prospect of capital outflow from India in view of the Greek crisis and has already got in touch with the Reserve Bank of India to deal with the situation.
Moreover, in face of problems in the world bond markets developed out of the Greece crisis, India might find it tougher to borrow money required for domestic growth that could lead to depreciation of rupee and cause inflation.
There is also a probability of the bond markets losing credibility with nervous investors around the world selling off risky investments (bonds and equities) coming from Greece. This might even compel investors to opt for gold – which would considerably increase the gold prices – or pull out money from Greece, convert them into dollars and invest in the US by buying US government bonds. This would make dollar more expensive and the price of crude oil in Indian market high.
Sitharaman acknowledged on television: “…as it is euro vs dollar taking a fluctuation and euro resulting in further weakening. I am sure all this is going to have an implication on the international currency market.”
It is expected that the effect on trade will be lesser than that on the markets. Hence, global market sentiments are key concerns for India than economics of trade as weak global markets lead to drying up of foreign capital.
Silver Lining
A major positive for India is that its growth is largely driven by domestic demand that is expected to pick up. India has recently been riding on positive domestic data and fiscal deficit has been met with domestic borrowings and controls on government spending. This has considerably reduced exposure to the global markets.
Another major plus that the RBI governor Raghuram Rajan has been emphasising at all international forums, is India’s robust forex reserves, which are at an all-time high of $355 billion. Rajan feels that it will cushion any possible impact of the Greek crisis.
Yet, Greece should serve as an eye-opener for India vis-a-vis the latter’s policies of growth. Greece depended too much on external borrowings to stabilise its economy and failed in the process. A BBC report quoting Indian newspapers and experts stated: “In the light of this experience, India should depend on domestic, not external, drivers”.
It may be pointed out that it was in 1981 that Greece was admitted into EU despite the fact that the country was way behind Western Europe in development and was at par with Eastern European countries none of whom was admitted into EU. It was only on 1 January 2001 that Greece entered the eurozone and started using Euro as its currency. Soon, the country plunged into deep economic crisis as its public debt, which was €95 billion in 1995, became inflation-adjusted €425 billion in 2013!
John Perkins, the author of a 2004 bestseller ‘Confessions of an Economic Hit Man’, in an interview claimed that “In the case of Greece, my reaction was that ‘Greece is being hit.’ There’s no question about it”.
Perkins knows it well. His book had revealed how international organisations such as the IMF and the World Bank, while publicly professing to “save” suffering countries and economies, pull a bait-and-switch on their governments – “Once we identified these countries, we arranged huge loans to them, but the money would never actually go to the countries; instead it would go to our own corporations to build infrastructure projects in those countries…very much like what Greece has today, a phenomenal debt…And once bound by that debt, we would go back, usually in the form of the IMF – and in the case of Greece today, it’s the IMF and the EU – and make tremendous demands on the country”
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