Running Head: INDIAN ECONOMY

The Eurozone Crisis and its Impact on India

Benjamin S. Cheeks
International School of Management, Paris


Author Note
This paper was submitted to fulfill the requirements of Indian Economy, INEC 7017.
I would like to thank the faculty and staff at Amity University, Noida, for their support and
dedication to make the first ISM Amity Seminar a success. I would also like to thank Dr.
Don Mathews from the Coastal College of Georgia for his valuable insight into
macroeconomic theory.

Correspondence concerning this paper should be addressed to Benjamin S. Cheeks.
Email: bencheeks@hotmail.com
INDIAN ECONOMY 2
Abstract
The epicenter of the global financial crisis moved to Europe in 2010 and became the
eurozone crisis. As the crisis drags on, global growth has slowed. Early in the crisis, the
Government of India along with the Reserve Bank of India (RBI) implemented fiscal
stimulus in the form of tax breaks and government spending as well as liquidity measures
such as lowering interest rates and reducing cash reserve ratio to help India manage the crisis.
Additional policy measures to open up financial inflows such as FDI, FII, and NRI Deposits
soon followed. Despite setbacks in financial inflows between 2008 and 2010, the Indian
economy rebounded in the timeframe of 2010-2011, growing at an impressive 9.32%.
However, as the crisis continues, growth in India has slowed to 4.8%; the slowest in a decade.
Years of deficit spending has increased government debt, raised inflation, and depressed the
rupee, a fact that exacerbates the current account deficit. Inflation and the current account
deficit have limited monetary policy tools. Political stalemate, strong regional parties and
government corruption have limited the fiscal policy tools. Business and Consumer
confidence is falling.
The crisis has forced India to look at its trade policy and find other regions to direct
their imports. It has accelerated reforms for FDI, FII, and NRI Deposits further opening the
economy to the outside investor. It has shined a light on the corruption, bureaucracy, and
poor infrastructure and brought them to the forefront of conversation.
Keywords: Indian economy, euro crisis, India Trade, India FDI, India FII, NRI Deposits,
business confidence
INDIAN ECONOMY 3
The Eurozone Crisis and its Impact on India
The eurozone consists of 17 member states, all of whom have adopted the euro () as
their common currency. The current members are: Austria, Belgium, Cyprus, Estonia,
Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands,
Portugal, Slovakia, Slovenia, and Spain. Since 2009 the eurozone has been embroiled in a
financial crisis that has made it difficult for certain member states to pay or refinance their
debt without aid from the other member states, the European Central Bank, and the
International Monetary Fund. The crisis is often referred to as the eurozone sovereign-debt
crisis or just the eurozone crisis.
Mody & Sandri (2012) describe how the eurozone crisis evolved. From the
introduction of the euro in January of 1999 until July of 2007, the risk premia on the debt of
eurozone member states moved in tandem, with little difference across the member states. It
was this assumption of homogeneity between the countries that set the stage for the crisis.
Mody & Sandri (2012) explain how the eurozone crisis evolved in three phases. The
first phase of the crisis began in July of 2007 when the United States sub-prime market began
to show signs of weakness. At this time, the risk premia on bonds issued by the eurozone
sovereigns began to rise from historically low levels. At this time, the assumption of
homogeneity prevailed and the yields rose largely in tandem. The second phase of the crisis
began with the rescue of Bear Stearns by the US Federal Reserve in March of 2008. Along
with the rescue, came the realization that governments would have to support their distressed
banks. With this new view, the spreads on sovereign debt began to diverge as investors
considered the stress in each member states financial sector and growth prospects. The third
phase of the crisis came with the nationalization of Anglo Irish in 2009. The rescue of this
bank gave investors an insight in the amount of fiscal support that may be required for the
INDIAN ECONOMY 4
financial sector. This third phase accelerated in May 2010 with the Greek bailout and
continues today.

Figure 1. Increase and dispersion of eurozone sovereign spreads (Mody & Sandri, 2012).
The effects of the crisis are not limited to the eurozone. As one of the worlds largest
trading blocks, the impact can be felt globally. This paper will explore the impact of this
crisis on the Indian economy, review key responses by the Government of India (GoI), and
discuss additional responses the GoI should consider.
Framework for the Analysis
Trade channels, financial channels and confidence channels will be analyzed in this
paper.
Trade Channels
In this paper, an analysis of Indias foreign trade has been undertaken to see the
impact of the global financial crisis on international trade. The paper studies Indias foreign
trade by analyzing imports, exports and region-wide trade in detail. The analysis has been
performed by comparing all variables before, during and after the global financial crisis.
INDIAN ECONOMY 5
Financial Channels
The second channel through which the eurozone crisis could impact India is through
financial channels. This paper analyzes the inflow of Foreign Direct Investment (FDI), the
inflow of Foreign Institutional Investors (FII), and finally the deposits and remittances of
Non-Resident Indians (NRI).
Confidence Channels
In addition to the effects of the traditional trade and financial channels, a change in
the confidence channel could not only accelerate the transmission of macroeconomic shocks,
but also amplify their effects. In a 2009 speech by Duvvuri Subbarao (2009), the Governor
of the RBI, when referring to the Global Financial Crisis stated, The contagion of the crisis
has spread to India through all the channels the financial channel, the real channel, and
importantly, as happens in all financial crises, the confidence channel.
To analyze the change in business confidence, the paper reviews survey results from
the NCAER Business Confidence Index, the FICCI Overall Business Confidence Survey, the
Dun & Bradstreet Business Optimism Survey, and the CII Business Confidence Index. For
consumer confidence, the Nielsen Global Survey of Consumer Confidence and Spending
Intentions is reviewed.
Policy Response
In order to mitigate the effect of the eurozone crisis on the Indian economy, the
Government of India as well as the RBI took a number of conventional and unconventional
responses. This paper will explore a number of these actions.
Additional Measures to Consider
INDIAN ECONOMY 6
This paper will also recommend additional actions that the Government of India and
RBI can take as well as discuss current constraints that limit the Governments effective
implementation of these measures.
Analysis
Trade Channels
Global shocks are traditionally transferred through the trade channels. As the Indian
economy has become more integrated with the world economy, Indian imports and exports
are more synchronized with the rest of the world. Mohanty (2009) explains that from 1970-
1991, Indian imports and exports were not significantly synchronized with a low correlation
of 0.38. However, between 1992 and 2009, the correlation has increased significantly to 0.80
during the period from 1992 to 2009. Europe and the eurozone are significant markets for
India and one would expect the crisis to decrease exports to these regions.
Total trade of goods. India trade weathered the first two years of the global financial
crisis. Total trade of goods increased 32.6% in 2007-2008 from the previous year with
exports growing at 28.9% and imports at 35.1%. In 2008-2009, total trade increased at a
slower pace of 17.4% from the prior year with exports growing at 13.7% and imports
growing at 19.8%. The eurozone crisis was truly felt in 2009-2010. Total trade actually
decreased in US dollar terms by 2.9% with exports shrinking 3.5% and imports 2.6%. While
this seems drastic, according to a press release by the World Trade Organization (2010),
global trade dropped 12.3% in 2009 on a volume basis and a whopping 23% in US dollar
terms.
The decline in 2009-2010 was short lived and Indias total trade rebounded; chalking
up year-over-year gains of 30.8% in 2010-2011 and 28.1% in 2011-2012. However,
INDIAN ECONOMY 7
preliminary data for the 2012-2013 shows that overall trade showed another decline. This
time with total trade falling 4.8%, with exports falling 6.0% and imports falling 4.0%.
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Figure 2. India total trade of goods in US$ billions (Planning Commission, Government of
India, May 2013).
From the perspective of total trade, the eurozone crisis hit Indias total trade in 2009-
2010. Trade rebounded the following two years, but as the crisis continued into 2013, trade
has once again fallen is US dollar terms.
Trade with the European Union and the eurozone. As the eurozone member states
and the European Union as a whole are at the epicenter of the eurozone crisis, it is important
to look at trade between India and these two regions. According to data available from the
European Commission (2013), in 2008, India made up 2.4% of total exports for the European
Union and 1.9% of imports. However, during the same year, The European Union (EU)
accounted for 20.8% of Indian exports and 13.9% of Indian imports (Department of
Commerce GoI , 2013).
INDIAN ECONOMY 8
Since 2007-2008 exports to the eurozone and the EU make up a smaller percentage of
total exports as India looks for new export markets.
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 (P)
Exports to eurozone 25.48 29.73 27.39 35.66 40.40 38.23
Exports to EU 34.54 39.35 36.03 46.04 52.56 50.36
eurozone as % of total exports 15.6% 16.0% 15.3% 14.2% 13.2% 12.7%
EU as % of total exports 21.2% 21.2% 20.2% 18.3% 17.2% 16.8%

Figure 3. Exports to eurozone and EU in US$ billions (Department of Commerce GoI,
2013).
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Total Trade total Eurozone Trade total EU Trade

Figure 4. EU-India trade and eurozone-India trade (European Commission, 2013, and
Department of Commerce Government of India, 2013).
As with total trade, exports to the EU and the eurozone recovered in 2010-2011 and
2011-2012. However, the growth rate to these regions was below the overall growth in
exports causing the percent of exports to these regions to continue to fall. In the year 2012-
2013, exports to the EU and the eurozone fell by 4.2% and 5.4% respectively. Both numbers
were higher than the overall decline in exports of 1.8% resulting in a further reduction in
INDIAN ECONOMY 9
exports to these regions as a percent of total exports. Since the large decline in exports
during 2009-2010, trade in the EU and eurozone rebounded. However, for the next 2 years,
the growth was below the trend in India, causing exports as a percent of total exports to fall.
As the crisis continues and global growth slows, trade to these regions appears to be faltering.
Composition of exports. It is also important not only to look at the total exports in
terms of US dollars but to also consider the make-up of these exports to determine whether or
not the profile of goods exported to the EU and eurozone has changed. The table below
shows the top categories of items exported from India to both the European Union and the
eurozone for the years 2005-2006, 2009-2010, and 2012-2013. These five categories make-
up approximately 80% of the total exports for each of the years. The data clearly shows that
the profile of items exported from India to the EU and eurozone has remained relatively
stable over the past eight years. Therefore, while the eurozone crisis has impacted overall
trade and specifically trade to the EU and eurozone, it has had little impact on the profile of
goods exported.
2005-06 2009-10 2012-13
RMG Cotton Incl. Accessories Petroleum (Crude & Products) Petroleum (Crude & Products)
Petroleum (Crude & Products) RMG Cotton Incl. Accessories Gems & Jewelry
Gems & Jewelry Transport Equipments RMG Cotton Incl. Accessories
Machinery And Instruments Gems & Jewelry Transport Equipments
Transport Equipments Machinery And Instruments Machinery And Instruments

Figure 5. Top five Indian exports to the EU, 2005-2006, 2009-2010, and 2012-2013
(Department of Commerce GoI, 2013).
Trade in services. The previous analysis looked only at trade in goods. Country-
wide data is not readily available for trade in services, so it must be analyzed broadly. The
RBI refers to trade in services as one of the invisibles on Indias overall balance of payments.
Services consist of Travel, Transportation, Insurance, Software Services, Business Services,
INDIAN ECONOMY 10
Financial Services, Communication Services, and the catch alls Miscellaneous and GNIE
(Government Not Included Elsewhere).
Research by Borchert & Mattoo (2010), shows that trade in services tends to be more
resilient to change than to trade in goods. This is due to several factors. First, services see
less cyclical demand. Secondly, services are less dependent upon external finance. Finally,
few explicitly protectionist measures have been taken so far in the industry.
In India, total trade of services increased 11.4% in 2008-2009 from the previous year
with exports growing at 17.3% and imports at 1.1%. As with trade in goods, the trade in
services began to feel the impact of the eurozone crisis in 2009-2010. In that year, total trade
decreased in US dollars terms by 1.2% with exports shrinking 9.4% with import growth of
15.3%. Total trade in services turned around in 2010-2011 with a total growth of 39%.
Exports grew by 38.4% that year and imports by 40.0%. As the eurozone crisis continued,
trade in services has slowed. Total trade increased by a minuscule 0.6% in 2011-2012 and a
slightly higher, but still disappointing, 2.7% in 2012-2013. It seems that even Indias world-
class service sector cannot escape the impacts of the eurozone crisis.
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Figure 6. India total trade of services in US$ billions (Planning Commission, Government of
India, May 2013).
INDIAN ECONOMY 11
Financial Channels
The second channel through which the eurozone crisis could impact India is through
financial channels. Foreign Direct Investments (FDI), Foreign Institutional Investors (FII),
and Non-Resident Indians Deposits (NRI) are reviewed in this section.
Foreign direct investment. FDI is an important source of financing and technology
for developing countries. The OECD Benchmark Definition of Foreign Direct Investment
(2008) explains the importance of FDI:
By the very nature of its motivation, FDI promotes stable and long-lasting economic
links between countries through direct access for direct investors in home economies
to production units (businesses/enterprises) of the host economies (i.e. the countries
in which they are resident). Within a proper policy framework, FDI assists host
countries in developing local enterprises, promotes international trade through
access to markets and contributes to the transfer of technology and know-how. In
addition to its direct effects, FDI has an impact on the development of labour and
financial markets, and influences other aspects of economic performance through its
other spill-over effect. (p. 20)
There are many European countries that have investments in India. The Planning
Commission, Government of India (May 2013), shows that from April 2000 to March 2013,
the eurozone accounted for 15.1% of Indias FDI with the entire European Union accounting
for 25.2% of FDI. When determining the source of FDI into India, it should be pointed out
that due to tax advantages, nearly 40% of FDI inflows to India originate in Mauritius; making
the true source of the investment difficult to identify. The same could be said for much of the
10% that flows in from Singapore. Therefore the eurozone and the European Union as a
whole could account for a larger share than noted above.
INDIAN ECONOMY 12
2008 2009 2010 2011 2012
European Union 977.8 386.8 509.2 558.3 418
Total World 1,911.20 1,107.10 1,445.10 1,619.00 1,422.70
% of Total FDI Outflows 51.2% 34.9% 35.2% 34.5% 29.4%
Change In EU FDI Outflows -60.4% 31.6% 9.6% -25.1%
Change in Total FDI Outflows -42.1% 30.5% 12.0% -12.1%

Figure 7. EU and total world FDI outflows in US$ billions (Bertrand, 2013).
Focusing in on FDI Inflow to India from 2008 to March 2013 shows that while FDI
decreased by 9.9% in 2009-2010 and another 7.7% in 2010-2011 before finally rebounding in
2011-2012. The most recent year, 2012-2013 has also been a slow year, seeing FDI fall
20.8% from the year before.
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Annual FDI Flows Cummulative
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
Annual FDI Inflows 41,873 37,745 34,847 46,556 36,860
Cummulative Total 134,070 171,815 206,662 253,218 290,078
YoY % Change 20.2% -9.9% -7.7% 33.6% -20.8%

Figure 8. Annual and cumulative FDI inflow to India 2001-2013 (Planning Commission,
Government of India, May 2013).
The 20.8% fall in 2012-2013 is slightly higher than the 12.1% decline in FDI globally
(Bertrand, 2013). It likely does not reflect on India as a destination for FDI, but rather the
INDIAN ECONOMY 13
slowdown of FDI flows in general. This is supported from the fact that the United Nations
survey for 2012 (United Nations Conference on Trade and Development, 2012) shows that
India ranked third as the top prospective economies for FDI. In addition, the Ernst & Young
Attractiveness Survey for 2012 shows 73% of business leaders are keen to invest in India in
the near future.
Foreign institutional investment. Foreign Institutional Investment (FII) is an
investment in securities in India made by an institution established or incorporated outside
India. FII flows are critical to help a country to manage its current account deficit. However,
FII flows are fickle and can move quickly into or out of a country. With FII, it is difficult to
pinpoint the origin of the investment. Therefore, FII numbers are reviewed in aggregate
rather than country or region specific.
Looking at data for FII from 2008 to March 2013 shows that FII flows have been very
erratic over the past five years.
Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
FII Flows US$(millions) 20,328 15,017 29,048 29,422 16,812 27,583
%YoY Change FII Flows -26.1% 93.4% 1.3% -42.9% 64.1%

Figure 9. FII flows to India, April 2007 to March 2013 (Planning Commission, Government
of India, May 2013).
Several studies have shown that FII flows to India are related to stock market return.
Chakrabarti (2001) concluded in his study that FII flows are correlated with contemporaneous
returns in the Indian markets. Mukherjee, et al (2002) found that returns in the Indian equity
market are indeed an important (and perhaps the single most important) factor that influences
FII flows into the country.
INDIAN ECONOMY 14
Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar
2008-09 2009-10 2010-11 2011-12 2012-13
%YoY Change FII Flows -26.1% 93.4% 1.3% -42.9% 64.1%
%YoY Change Sensex Flows -37.9% 80.5% 10.9% -10.5% 8.2%

Figure 10. Percent YoY change in Sensex and FII flows (Planning Commission, Government
of India,May 2013).
NRI deposits. NRI Deposits are an important source of financing Indias current
account deficits. The RBI (2010) states that 18% of total remittances come from Europe and
therefore could be directly impacted by the eurozone crises.
Apr-May Apr-May Apr-May Apr-May Apr-May Apr-May Apr-May
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
NRI Deposits 41,240 43,672 41,554 47,890 51,682 58,608 70,823
% YoY change 13.7% 5.9% -4.8% 15.2% 7.9% 13.4% 20.8%

Figure 11. Annual NRI deposits April 2006 to May 2013 (Reserve Bank of India 2012, and
Reserve Bank of India 2013).
NRI Deposits have remained strong throughout the Global Financial crisis and the
eurozone crisis. They have increased every year with the exception of 2008-2009 when they
fell 4.8%. Mohapatra and Ratha (2009) attribute this limited effect to several factors. First,
falling asset prices in India, rising interest rate differentials, and a depreciation of the local
currency attracted investments from NRIs. Second, many of the migrants that lost jobs are not
leaving but taking lower paying jobs with other employers. Third, the employment prospects
for Indian migrants has remained relatively stable during the crisis due to the fact that many
Indian migrants work in sectors that have not been hit as hard by the crisis. These sectors
include health care, retail, and professional and technical services sectors. Finally, remittance
flows tend to be more resilient when the migration destinations are diverse. The rather large
increase in 2012-2013 may be attributed to weakening of rupee and deregulation of interest
rate on NRI Deposits.
INDIAN ECONOMY 15
Confidence Channels
This channel shows confidence changes in business and consumer sentiment. So even
if an economys macroeconomic conditions and outlook look favorable, the decline in
confidence can disrupt the economic conditions. Policy makers around the world understand
the importance on confidence in the market. This is demonstrated by the G20 Leaders
Declaration when they convened in Los Cabos on June 18-19, 2012. In the first 19
declarations, the word confidence was used six times. Most notably in the declaration, All
G20 members will take the necessary actions to strengthen global growth and restore
confidence (The White House, 2012).
Business confidence. The following business confidence indicators are obtained
through business surveys with the goal to evaluate and forecast on a short term the status of
the economic activity, by economic sectors and as a whole. These indicators are built on the
company managers subjective responses to a series of questions regarding the past and
future status of their own activity. Business confidence surveys are important tools for policy
makers. Gagea (2002) has shown that industrial confidence indicators can provide important
information on the status and evolution of economic activity. These indicators are closely
monitored by the RBI. The discussion relates to the change in the indices over the past year
and with brief commentary on the most recent survey.
INDIAN ECONOMY 16
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NCAER- Business Confidence Index
FICCI Overall Business Confidence
Dun & Bradstreet Business Optimism
CII Business Confidence Index
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NCAER- Business Confidence Index
FICCI Overall Business Confidence
Dun & Bradstreet Business Optimism
CII Business Confidence Index

Figure 12. Scores for Indian business confidence from April 2009 to April 2013
(FICCI,2013).
NCAER business confidence index. The NCAER MasterCard Worldwide Index of
Business Confidence is based on a survey which measures business confidence on four
indicators. According to this index, Consumer Confidence in India decreased to 114 in the
first quarter of 2013 from 135 in the first quarter of 2012. Historically, from 2009 until 2013,
India Consumer Confidence averaged 135 reaching a high of 162 in October of 2010 and a
low of 80 in April of 2009. In the latest survey, constraining factors were listed as increasing
input costs and the increasing current account deficit (Voyagers World, 2013).
FICCI overall business confidence. FICCIs Business Confidence Survey surveys
Indian companies belonging to a varied array of sectors such as textiles, cement, financial
services, chemicals, metal and metal products, automobiles, FMCG, electrical equipment and
INDIAN ECONOMY 17
machinery, paper and paper products. According to this index, Business Confidence in India
increased to 61.2 in the first quarter of 2013 from 57.7 in the first quarter of 2012.
Historically, from 2009 until 2013, India Consumer Confidence averaged 63.8 reaching a
high of 162 in January of 2011 and a low of 51.5 in July of 2012. In the latest survey,
(FICCI, 2013) listed constraining factors such as rising cost of raw materials and labor,
inadequate infrastructure, and the high cost of credit.
Dun & Bradstreet business optimism. The D&B Business Optimism Index is arrived
at on the basis of a quarterly survey of business expectations. The survey is conducted on a
sample of companies that are selected randomly from D&Bs commercial credit file.
According to this index, Business Confidence in India decreased to 141.6 in the first quarter
of 2013 from 150 in the first quarter of 2012. Historically, from 2009 until 2013, India
Consumer Confidence averaged 145.4 reaching a high of 183 in April of 2011 and a low of
90 in April of 2009. An analysis of the latest survey by Dun & Bradstreet (2013) stated that,
Factors such as high fiscal deficit, dismal investment activity, high current account deficit,
weak consumer spending and inertia in policy reform have led to deterioration in the business
climate.
CII business confidence index. The Confederation of Indian Industry (CII) Business
Confidence Index is based on responses from 175 members. A majority of the respondents
53% belonged to large-scale companies, 14.8% were from medium-scale ones and 25.2% and
7% each from small-scale and micro firms, respectively. Further, 67.2% of the respondents
were from the manufacturing sector, while 31% and 1.7% were from the services and primary
sectors, respectively. According to this index, Business Confidence in India decreased to
51.3 in the first quarter of 2013 from 52.9 in the first quarter of 2012. Historically, from
2009 to 2013, India Consumer Confidence averaged 59.1 reaching a high of 67.6 in July of
INDIAN ECONOMY 18
2010 and a low of 48.6 in January of 2012. In the most recent CII survey, BS Reporter
(2013) reported that high levels of corruption, persisting inflation, lack of reform, escalated
interest rates, and political uncertainty are major concerns.
All four reports present similar findings. Confidence fell dramatically after the global
financial crisis and then the eurozone crisis. However, much like trade, condition improved
considerably through mid-2011. As the eurozone crisis has dragged on and European leaders
continue to kick the can down the road, global growth has slowed having a continued
negative impact on Indian business confidence. Constraining factors such as increasing input
costs, inertia in policy reform, high interest rates, and the large current account deficit were
common themes across the surveys.
Consumer confidence. Similar surveys are given to consumers to evaluate their
current levels of confidence. Carol (1994) shows that that measures of consumer condence
are correlated with real consumption and therefore may have some short-term forecasting
ability.

Figure 13. Indian consumer confidence scores as measured by the Nielsen global survey of
consumer confidence and spending intentions from September 2009 to March 2013 (Trading
Economics).
The Nielsen global survey of consumer confidence and spending intentions. The
Nielsen Global Survey of Consumer Confidence and Spending Intentions utilizes the Internet
INDIAN ECONOMY 19
to track consumer confidence, job prospects, personal finances and spending intentions.
Consumer confidence levels above 100 indicate optimism and below 100 indicate pessimism.
Consumer Confidence in India decreased to 120 in the first quarter of 2013 from 121 in the
fourth quarter of 2012. Consumer Confidence in India is reported by Nielsen. Historically,
from 2009 to 2013, India Consumer Confidence averaged 119 reaching an all time high of
131 in December of 2010 and a record low of 92 in March of 2010.
Consumer confidence in India has been on a slow decline since the beginning of
2011. However, it should be noted that in the latest survey, India has the second highest
consumer confidence rating in the world at 120 (Trading Economics, 2013).
Policy Response - Trade Channels
Gupta (2010) divides measures to promote exports into two broad categories, price
measures and non-price. Price factors would include things such as devaluation of currency
and various indirect and direct tax benefits. Tax benefits have been the one of the key
measures the Indian Government has used to stimulate exports since the financial crisis.
Since the start of the financial crisis, the Government of India has made several price
responses in order to help the export sector. These include things such as duty refunds, low
interest loans, and tax waivers for exporters. Roy & Kala (2013) report in the Wall Street
Journal that the recent $555 US million export stimulus package offers a 2% financial
incentive on exports to the United States, Europe and Asia. In order to encourage exporters to
seek out alternative markets, it is also expanding the program to include exports to African
and Latin American countries. The stimulus package also extends for the same period a low-
cost loan program for exporters and a waiver of taxes on imported capital goods.
Gupta (2010) lists non-price factors as things such as comprises the upgradation of
quality of product, fast delivery of consignment, and post-sale services. These factors are
INDIAN ECONOMY 20
more long lasting as they are more difficult for competing nations to emulate. On the non-
price side, the governments response has been muted. It has however relaxed minimum
export requirements in certain industries.
Discussing trade in India would not be complete without mentioning Special
Economic Zones (SEZ). SEZ are geographical regions within India to setup the export of
goods and provide employment. These zones usually benefit from reduced or no tariffs as
well as reduced to no taxes in order to make exports more competitive. SEZs were dealt a
blow recently following an imposition of an Alternative Minimum Tax as well as a Dividend
Distribution Tax. According to the Ministry of Commerce, India (n.d.), there are currently
156 SEZs operating in India with another 588 approved. One of the major difficulties in
setting up additional SEZs is the ability to obtain large tracts of uncultivable land to set up an
SEZ. The government has responded to this limitation by reducing the minimum land
requirement, but land acquisition remains an issue.
Additional Measures and Limitations Trade Channels
On the price side, the Government of India is restricted on more aggressive measures
than those they have already undertaken due to the high fiscal deficit. Reuters (2013) reported
that 2013 fiscal deficit to be 4.9% of GDP. However, on the non-price side, the GoI has
opportunity in streamlining logistics to reduce transportation and transaction costs. Nordas,
H., Pinali, E., & Grosso, M,. (2006) found that a 10% increase in transport costs reduces trade
volume by 20 and that the tariff equivalent per day in transit is equal to 0.8%. They also
mention studies that show a 5 to 25% reduction in trade value for every 10% increase in time
for exports, depending on sector and export destination.
The Government of India could also negotiate new free trade agreements. They
currently are discussing Free Trade Agreements with a number of countries/regions;
INDIAN ECONOMY 21
including the EU, Thailand, and Australia. However Free Trade Agreements must be
negotiated carefully to ensure domestic production does not suffer or that domestic industries
are overshadowed by their international competitors
Policy Response Financial Channels
At the onset of the financial crisis, the Government of India initiated a large stimulus
package containing tax breaks and increased government spending to offset the effects of the
slowdown. The RBI took measures to ensure proper liquidity was maintained. These
measures included lowering the repo and reverse-repo rate as well as reducing cash reserve
requirements through 2009. This policy was reversed in 2010 and 2011 as inflationary
concerns weighed on the economy. However, after disappointing growth in 2012, the RBI
has reduced rates three times in 2013.

Figure 14. Indian interest rates and CRR (Kshitij Consultancy Services).
To help keep FDI flowing, the GoI either opened FDI or raised the FDI maximum
investment in areas such as insurance, telecommunications, retail, pensions, commodity
trading, and broadcasting.
INDIAN ECONOMY 22
In order to encourage more FII, the RBI has increased the limit for investment in
long-term government and corporate securities. In addition, they have reduced the lock-in
period for the corporate bonds and infrastructure debt funds.
In order to stimulate additional NRI Deposits, the RBI has increased the interest rate
paid on these deposits.
Additional Measures and Limitations Financial Channels.
The financial channel is facing many limitations at the moment. These include an
elevated fiscal deficit, a rising current account deficit, inflation above the RBI target, and a
falling rupee. The GoI has made positive steps toward addressing the fiscal deficit. Reuters
(2013) reported the fiscal deficit for 2013 was 4.9% and is narrower than 2012 that came in at
5.8%. On the current account side, in addition to the policy to stimulate capital inflows, the
GoI has raised duties on gold imports. In addition, the RBI has implemented a policy
requiring companies with in the SEZ to repatriate their funds within one year of the date of
sale.
High inflation has kept the RBI from being aggressive in reducing interest rates. In
the most recent quarter, inflation appears to be cooling. However, it is currently the
depressed rupee that is preventing the RBI from reducing interest rates further.
To make India a more attractive destination for foreign investment, the government
must take more steps to make doing business in India easier. Some basic recommendations
are to invest in market-driven infrastructure, crack down on corruption, reduce bureaucratic
hurdles, and loosen rigid labor laws. These recommendations are not original. Most Indians
that you talk to would point out the exact things. However, at the moment, India is wrapped
in political deadlock due to recent allegations of corruption among top governmental officials
INDIAN ECONOMY 23
and the emergence of strong regional parties. These strong regional parties also make
coordination difficult between state and central government.
Policy Response Confidence Channels
Recently, the Government of India has done little to boost business or consumer
confidence. If anything, it seems to have done the opposite. Dhume, & Milligan (2012) from
reported:
As economic growth slows to below 6% and yet another corruption scandal gridlocks
governance, are Indians losing faith in their politicians? A spate of recent articles
suggests thats certainly true of Prime Minister Manmohan Singh. Once seen as an
incorruptible champion of economic liberalization, Singh has recently been termed
The Underachiever (Time Magazine), and a dithering, ineffectual bureaucrat
(Washington Post) presiding over a corrupt government that has passed no
substantial laws (The Economist).
Conclusion
Former president of the European Central Bank, Jean-Claude Trichet (2013) wrote in
the New York Times, The epicenter of the worst global financial crisis since World War II,
located in the United States since 2007, crossed the Atlantic at the beginning of 2010. As Fed
Chairman Ben Bernanke told me at that time: Now it is your turn.
Early in the crisis, the Government and India along with the RBI implemented fiscal
stimulus in the form of tax breaks and government spending as well as liquidity measures
such as lowering interest rates and reducing cash reserve ratio to help India manage the crisis.
Additional policy measures to open up financial inflows such as FDI, FII, and NRI Deposits
soon followed. Despite setbacks in financial inflows between 2008 and 2010, the Indian
economy rebounded in 2010-11 growing at an impressive 9.32%. However, as the crisis
INDIAN ECONOMY 24
continues, growth in India has slowed to 4.8%; the slowest in a decade. Years of deficit
spending has increased government debt, raised inflation, and depressed the rupee, a fact that
exacerbates the current account deficit. Inflation and the current account deficit have limited
monetary policy tools. Political stalemate, strong regional parties and government corruption
have limited the fiscal policy tools. Business and Consumer confidence is falling.
Everything is not all bad though. In 2012-13, the fiscal deficit decreased to 4.9% of
GDP down from 5.9% of GDP the past two years. The latest wholesale inflation reading was
a 42 month low of 4.7%. Indian remains a preferred destination for FDI and there is still
room to further open the Indian economy to investment. NRI Deposits had risen to a record
$70 billion US in 2012-13.
The eurozone crisis has been a drag on the world economy and India has slowed with
it. However, it has had some positive impacts. As trade with the EU and eurozone slows,
India is forced to look to other export markets for their goods. To date this has been
successful as total trade with the EU continues to fall as a percentage of total trade. The
crisis has increased the urgency of reforms for FDI, FII, and NRI Deposits further opening
the economy to the outside investor. It has shined a light on the corruption, bureaucracy, and
poor infrastructure and brought them to the forefront of conversation. The GoI must address
these issues in order to restore confidence in the international community.
Projects to improve infrastructure can stimulate the industrial sector and reduce
transportation costs making Indian exports more competitive. Indian has huge resources at its
disposal to overcome the crisis, lets just hope it finds the political will to do so.
INDIAN ECONOMY 25
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