Impact of Euro Crisis on India

Against the backdrop of Euro Crisis, the euro cup 2012 was a blessing and much needed refreshment that relieved some of the tension by creating an atmosphere of mirth in Europe as it is having a financial meltdown. It enthused the lost passion and flared up new hopes to review the sinking economy of Europe. No doubt it was a spectacular sporting event. The Euro Crisis technically known as European Sovereign Debt Crisis (ESDC) which has made it difficult or impossible for some countries in Europe to refinance their government department without any assistance from third parties.

Today the Euro Crisis has engulfed the whole world in its financial distress. In India the markets are swaying to the ripple effects of developments across the globe. The domestic economy, growth and inflation numbers are struggling to cope with the consequences of wars, turmoil and economic crisis of nations miles away. Before we study the impact of the Euro crisis on India we must first understand the very origin of this crisis and its present dynamics. The Euro Crisis ESDC - resulted from a combination of complex factors like globalization of finance, easy credit condition during the 2002-2008 period that encouraged high risk lending and borrowing practices, international trade imbalances and other technical issues, but the most important of them are:

Euro Crisis Bursting of Real Estate Bubbles:

During the 2008-2012 Global Financial Crisis the US has no longer been the favorite choice of investors. When the economy was still in incipient stage, the investors chose Europe for higher yields. This led to the generation of bubble after bubble. Bubble is nothing but a giant pool of money. When these bubbles burst causing assets (housing and commercial) to decline, the liabilities owed to global investors remained at full price and the crisis followed.

Euro Crisis Financial Contagion:

The interconnection in the Global Financial System means that if one nation defaults in its sovereign debt and enters into recession it also pulls other dependent countries into depression. This is what happened in October 2011 when the net amount of Italian borrowings from French banks was 366 billion dollars. Thus when Italy slumped into crisis, it also jeopardized the economy in France. Currently the most affected countries in the Euro Crisis are Greece, Ireland, Italy, Portugal, and Spain. Many bailout schemes, finance pour in methods are being considered to pull them out of the crisis. Greece has also adopted austerity measures to curb its debt.

Euro Crisis Impact on Indian

Now, lets examine the situation in India. The Euro Crisis has casted its spell on our Growth sectors. Capital flows into the economy and exports are likely to take a slump. The sudden surge in Foreign Institutional Investor (FII) has left India grappling with high inflation. Adding to the woes the Central Bank has raised the key interest rates. The quantum of impact of Euro Zone Crisis on Indian markets is yet to be measured. The inchoate European economy has resulted a slump in domestic industrial growth. Unaddressed agricultural woes, rising interest rates and escalating fuel cost have compounded the global factors. A series of scandals emerging from under the carpet have diluted the faith of foreign investors. The volatility in Indian Markets will persist till the European Crisis is resolved. There were other very serious impacts of Euro crisis that have compounded and magnified as a challenge to Indian economy. They are as follows: a) Depreciation of Rupee: Slow growth in Europe has coaxed the investors to invest in US dollar. This refuge to US dollar has enabled the US dollar to appreciate as compared to other currencies in the world. Dropping exports coupled with rising crude oil prices has created immense pressure on Indian rupee, which in turn has deprecated with respect to US dollar. b) Slowdown in the Manufacturing and Service sectors: Due to the contraction in European and American markets, the demand of goods and services from countries like India and China have slowed down considerably. Inflationary pressure has made the cost of products sky high thereby discouraging the consumers. c) Market visibility: The global financial markets are volatile which in turn have impacted Indian Financial markets too. High rates of inflation have forced Reserve Bank of India (RBI) to raise interest rates. Prices of Gold and Silver have spiraled up, pushing the inflation rate still higher.

d) Cash hoarding: Various Indian firms have cut down on expanding. They are holding their cash and saving it for loan debts as well as shielding them from financial crunches. In the wake of the above impacts, our government including RBI has claimed to form a contingency bailout plan for European countries as well as for India. The plan is not yet disclosed but economists believe we are prepared with monetary and fiscal measures if necessary and try to insulate India from the shockwaves of the European collapse. This plan may include lowering of interest rates and lowering the amount of money that banks home to keep on deposit in the Central bank. This will ensure that the banks can lend more money to firms so that they can keep hiring and expanding, a major driver of the economy. Coming back to Euro Cup the economy is not very different from football. Spain which won the Euro Cup this year did not have any star player in their team but they won on the basis of sheer team work, extraordinary coordination among themselves and a strong belief that they can win. Just like Spain we all need teamwork among the relatively stable countries like India, China, Brazil and a belief that we can do it to hammer out a solution for the Euro Crisis and stabilize the economy.