Friday, May 28, 2010

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.

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timesofindia

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