Effects of Euro Zone Crisis on India

Effects of Euro Zone Crisis on India

The effects of euro zone crisis on India have been felt in different ways. The euro zone crisis refers to the inability of the countries in the euro area to pay their debts that had built up over the past decades. The effects of this crisis are being felt world over since 2009. Countries in the Euro zone such as Greece, Spain and Italy are having huge debt-GDP ratios. They also have unsustainable huge fiscal deficits. These debts are likely to spill over to affect the financial health of the developed economies while impeding economic recovery of the developing countries.

What are the effects of euro zone crisis on India?

  • Reduction in capital flows

Capital flows to the Indian economy as well as exports are likely to be affected by the euro zone crisis. The investment pattern for the Foreign Institutional Investor (FII) is highly volatile. A change in the investment pattern can be detrimental just like an unannounced withdrawal. An FII investments’ surge will cause more inflationary pressures as well as an asset bubble which can burst any time.

  • High inflation

India is facing high inflation. The central bank is raising major interest rates severally within a year and a half. This will greatly impact on India because Greece and other European countries affected by the crisis will depend on the IMF and the European Union for funding in order to navigate out of the crisis. The IMF and the EU might not have adequate funds to loan countries in the euro zone and India.

  • Depreciation of the Rupee

The domestic speculative activities have aggravated the depreciation of rupee. These speculative activities can be traced back to the sovereign crisis in the euro zone. In August 2011, the rupee’s value was at 44.50 rupees to 1 US dollar.  However, it had dropped to a low of 54 rupees to one dollar in December 2011.

  • Slowdown in the GDP growth

A slowdown in the growth of the GDP to 6.2% in 2011-12 and 5% in 2012-2013 was in a way due to the euro zone crisis. This is because the Euro zone crisis placed a damper on the exports from India in Europe, which is the largest destination for most exports from India and capital inflows to the debt markets and Indian equity. Over the recent years, the slowdown of economic growth in India has been blamed on the European crisis.

How the effects of euro zone crisis on India are being addressed

India is trying to resolve the effects of euro crisis by resolving problems like inflation. This is because it is only after solving such problems that the other problems like high interest rates will be solved. For instance, after taking control of inflation, RBI can cut the interest rates and give a push to the investment. This will eventually promote industrial growth. An increase in infrastructure investments, as expected, will lead to an expansion of the domestic demand for the capital goods. This will lead to increased growth rate. Besides, India has the ability to realize a growth rate of more than 8 percent based on its domestic market. This is because it still has the high growth fundamentals even on its supply side.

In 2013-2014, India had high investment and saving rates between 30 and 32 percent. Nevertheless, to enhance higher growth, capital should be raised through speedy implementation of the stalled infrastructure as well as better governance. These are some of the issues that India is addressing to deal with the impact of the euro zone crisis.

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