EURO CRISIS’S IMPACT ON INDIA

7/30/2019 EURO CRISISS IMPACT ON INDIA

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Before one to could even think of the end ofgreat recession of 2008, Greece gave birth toanother crisis.

Greece debt crisis is actually an evolution ofthe global crisis.

Greece allowed deficits from Central bankand government bonds to pile up.

Greece debt came to light in 2009.


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Sovereignty having supreme independent authority over a

territory

supreme law making authority

Debt Debt is that which is owed

Moral obligation not requiring money

Crisis When the debt level increases to a level that it cant

be repaid

This can even lead to lower economic growth andworsen the situation of the economy in terms ofrecession.


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Sovereign debt crisis is a situation wherein acountry with a powerful higher authorityenters the state of not being able to repay itsdebts and obligations.

This leads to higher fiscal deficit of theeconomy and lower growth.


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It is an economic and monetary union of 16European union members.

Adopted EURO currency as their sole legal tender. The European Central Bank (ECB) is the institution

of the European Union (EU) tasked withadministrating the monetary policy of the 16 EUmember states taking part in the Euro zone.

Members-AUSTRIA,BELGIUM,CYPRUS,FINLAND,FRANCE,GER

MANY,GREECE,IRELAND,LUXEMBOURG,MALTA,NETHERLANDS,PORTUGAL,SLOVAKIA,SPAIN,SLOVENIA.


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Maintain stability and prevent crisis ininternational monetary system.

Provides advice to its 184 member

countries and raising their living standards. Serve as a forum where they discuss

national, regional and global consequences.

Temporarily financing its members

countries to assist them.


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The European debt crisis came into limelight with

Greece.

This was done by the new government who took

charge after the general elections. Shocking role of Goldman Sachs in the fraud.

New government revealed the facts which actually

happened in which the previous government had

overspent and also reported a debt which ballooned

to 12.7% of the GDP.


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A crisis in an economy impacts othereconomies via three channels

1. Trade Channel2. Financial Channel3. Confidence channel


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When an economy falls into a recession, itimpacts the affected countrys tradingpartners too

Falling household and business demand inthe slump-hit economy hits theexports/imports of its trading partners.


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The share of exports to EU (excluding UK)and imports from EU has fallen over theyears. In 1987-88, exports to EU constitutedabout 18.6% of total exports.

This has declined to 17.5% by 2008-09. Thedecline of imports is higher from 25% in1987-88 to 12% in 2008-09.

Hence, total trade between India and EMU isabout 29.5% and could be impacted due tothe crisis


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World merchandise exports declined in 2010by 12%,

while the GDP came down by 2.4%. Thedecline in trade was on

account of weaker demand due to the slowglobal recovery

from the financial crisis and the Euro debt

crisis of 2010.


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In FY10, the emerging countries like India

and China saw higher capital inflows asinvestors flew to safer havens.

China overtook Germany as the lead exporterof merchandise. India was ranked the 21stexporter of merchandise. Chinas share inworld merchandise imports increased to 7.9%

in FY10 resulting in China becoming the 2ndlargest world importer and India stood atthe14thposition.


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Indias share in world merchandise exportshas increased from 0.8% in FY04 to 1.3% inFY10. Similarly, Indias share in worldmerchandise imports rose from 0.9% in FY04

to 2% in FY10.

European Union (EU), a block of 27 countries,is one of Indias largest trading partner. EU

comprised 21% of Indias exports and 13% ofIndias imports in the first nine months ofFY11.


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The growth in trade between India and the EUhas been remarkable. The average annual growthrate of Indias exports to EU is 18% and Indiasimports from the EU region is 19.5% betweenFY01 and FY10.

Among the EU countries, Germany is the largest

importer of Indian goods with 3.4% of Indiasexports in FY09, which declined to 3% of Indiasexports in FY10. Germany is also the largest

exporter to India among the EU countries with4% of Indias imports, which declined to 3.6% ofIndias imports.


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In FY10, EU-India trade moderated to US $ 95bn on account of the European debt crisis,where spending cuts across Europe led toimport order cancellations and postponement

by some of the European countries.

It has been observed, from historical data andcertain indicator analysis, that the share of EUregion in Indias trade is not very high andhence the impact of the EU crisis has onlymarginally impacted Indias trade.


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Three kinds of financial flows could impactIndian financial markets:

a. Foreign Direct Investment

b. Foreign Institutional Investment

c. External Commercial Borrowings

d. Remittances and foreign deposit


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There are many European companies whichhave investments in India. So, there could bea possibility of slowdown in FDI in India

Top 15 FDI investors in India which constituteabout 92% of total FDI

In case of India, FDI inflows remained positivethroughout the crisis. The FDI inflows actually

helped keep maintain capital account whenall other categories showed sharp decline.


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With a turmoil in global financial markets, FIIinflows will decline

We have a large number of global financialfirms which operate across the world and incase of a decline in one major market, thereis a pull out from other markets as well.


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External commercial borrowings could alsodecline if the European crisis spreads to othereconomies.

ECBs declined in the first stage of the crisisas well


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Another important flow is NRI deposits andRemittances. Former shows whether NRIdepositors withdrew funds in wake of crisisand latter shows whether Indians living

abroad stopped sending funds to their homesagain because of the crisis

The deposits increase in the crisis periodsOct-Dec 2008 and Jan- Mar 2009 and declinethereafter


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It could be that NRI preferred to invest higherproceeds in India seeing crisis in their owneconomies!

In case of remittances, we see a decline incrisis period Oct 08 Mar 09 but seeimprovements as crisis eases


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There were huge concerns of remittancescollapsing because of the crisis.

In some countries they did collapseworsening poverty status.

In India, despite the decline it manages toremain in positive.


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Again like in the trade channel, the impact offinancial markets could be more via theindirect linkage.

Financial markets are far more integratedthan the trade channel


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This channel shows confidence declines inbusiness and households seeing the globaluncertainty

Decline in confidence is also one of thereasons for decline in business investmentswhich led to decline in overall Indian GDPgrowth.

Credit growth also declined because ofdecline in business investments.


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Even if an economys macroeconomic

conditions and outlook look favorable, thedecline in confidence can disrupt theeconomic conditions


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Domestic banks can lend to companies inother economies as well. A problem in lattercould lead to worsening of the conditions ofdomestic banks/financial firms as well (this

was seen in the case of Swedish banks). Banks are at the center of the international

trade as they provide trade finance and otherfinancing facilities that facilitate trade. Aproblem in financial markets will disrupt theinternational trade as well.


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Stability in Pricing, slowdown in hiring andtough negotiations by the clients is expectedand all the vendors are preparing for suchscenario.

IT sectors strong correlation with USearnings growth leads to moderate volumegrowth with stable pricing .


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Europeans coming to India, as they will starttravelling within Europe and take shortholidays

Business travel is likely to be hit more than

leisure tourism


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Sensex rose 623 points , biggest gain in 22 months, From 17823.4 to18446.5


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The reason behind this rise was

Governments lower-than-expected fiscal deficit

estimate for 2011-12

The government pledged to contain fiscal deficitin 2011-12 at 4.6% of GDP compared with 5.1% in

2010-11

But the rising crude oil prices raise doubts on whether the

government would meet its budget shortfall target, sothe investors were a bit sceptical.


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Sensex fell by 371 points to 16,469.79, its lowest level in

nearly 15 months.


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The reason for this drop

European markets fell sharply amid deepening

fears of major global economies, including the

US dipping into recession again

Renewed Eurozone debt crisis also dragged the

index down


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SENSEX ended the day 513.19 points higher at 18,240.68


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Reasons Greece won the consent of international lenders for a

five-year austerity plan intended to avoid looming

bankruptcy

Its prime minister pledged to push radical economic

reforms through parliament.

JPMorgan and Goldman Sachs slashed forecasts for

crude prices in the third quarter after the International

Energy Agency announced the release of 60 million

barrels of oil


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The SENSEX continued to fall and closed at 16745.35


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The SENSEX continued to fall and closed at 16745.35


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Investors feared a Greek default within weeks after

International lenders told Greece on Monday that it

must shrink its public sector and improve tax collection

to secure a vital 8 billion euro rescue payment Greece's prime minister cancelled a US trip to chair an

emergency cabinet meeting at home

German Chancellor Angela Merkel suffered a regional

election loss EU finance ministers also failed to make progress on

the debt crisis


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The BSE Sensex shot up 354 points to cross the 17k mark toreach 17099.28


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The reasonsHope of weakening rupee would boost earnings of

the IT companies and a firm global trend Infosys, rose

by 3.22% and TCS gained 3.94%

Greece expected to clinch the release of a 8 billion

euro ($11 billion) aid that it needs to avoid running

out of cash next month.

S&P downgraded its rating on Italy by one notch toA/A-1 but European Central Bank buying Italian debt

also aided the sentiment.

Britain's FTSE was up 1.22 percent at 5,323.93 points


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The reasonsHope of weakening rupee would boost earnings of

the IT companies and a firm global trend Infosys, rose

by 3.22% and TCS gained 3.94%

Greece expected to clinch the release of a 8 billion

euro ($11 billion) aid that it needs to avoid running

out of cash next month.

S&P downgraded its rating on Italy by one notch toA/A-1 but European Central Bank buying Italian debt

also aided the sentiment.

Britain's FTSE was up 1.22 percent at 5,323.93 points


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The reasons Fresh signs ofslowdown in manufacturing activities in

China and Germany.

IMF warned that Europe's sovereign debt crisis risks

tearing a giant hole in banks' capital. In Europe, questions about the ability of the euro zone

to manage some of its countries' heavy debt remain,stock losses amounted to a fall of over 21 percent for

the year-to-date. The slide was further aggravated by the weakness of

the Indian rupee.

The FTSEurofirst 300 fell more than 4 percent, FTSE

100 lost 5 percent


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Sensex jumped 472.93 points or 2.95% to 16,524.03


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The events that led to the rise are

Hope of euro zone officials would act to corral Greece'sdebt woes and prevent another banking crisis.

The parliaments of Finland and Germany were set to

vote on the approval to extend the powers of the eurozone rescue fund considered critical to bailing outEuropes weak economies.

The new plan was to leverage the 440-billion rescue

fund, known as the European Financial StabilityFacility (EFSF), to help struggling European nationsavert debt defaults

A positive opening at European markets also helped

buying sentiments.


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Reasons for low impact on Indian economy The slow pace of financial reforms taking in India

Cautious approach towards permitting foreign

investments in Indian business sectors

Bureaucratic hurdles & regulatory constraints

Indian companies have major outsourcing deals with

American & European companies. Indias export to US and European countries has grown

substantially in the past few years.


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Full but gradual opening of current account. Capital account and financial sector: More

calibrated approach towards opening up. Equity flows encouraged

Debt flows subject to ceilings and some end-

use restrictions. Capital outflows: progressively liberalized

External commercial borrowing is subject to Strictrules and regulations.


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Macro ceiling stipulated on portfolio investment inGovt. Securities and Corporate Bonds by FIIs.

Imposition of prudential limits on Banks, such asinter-bank liabilities, borrowing and lending, money

market, assets

Implementation of Basel II.

Banks credit quality remained high.

Less percentage of NPA .


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EURO CRISIS’S IMPACT ON INDIA

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