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  1. 1. The Eurozone Crisis & its Impact on India by Sateesh Kulkarni Director Corporate Catalyst India Pvt Ltd Published in Kaleidoscopemagazine of Standing Conference of Public Enterprises, Govt. of India       (July, 2012)
  3. 3. ARTICLEThe Eurozone Crisis & its Impact on India Sateesh Kulkarni Director, Corporate Catalyst India he Eurozone consists of it also has serious implications Austria, Belgium, Cyprus, for its other global dreams and T Estonia, Finland, France, ambitions. Germany, Greece, Ireland, Italy, Luxembourg, Malta, the India - Europe Trade - Netherlands, Portugal, Slovakia, a ReviewApart from the fact that the Slovenia, and Spai n..Ehe European The European Union is a majorEurozone crisis has impacted sovereign debt crisis has emerged trade partner for India. It accounts out of a situation that has made for close to 20 per cent of Indiasglobal trade and a contrac- exports and 13 per cent of Indias it difficult or impossible fortion is inevitable, it is also some countries in the euro area imports. In 2010-11, Europeanimportant to analyse the key to re-finance their government Union countries imported rough- debt without the assistance of ly USD 46.8 billion worth of agri-factors that led to and con- culture products, fuel and mining third parties.tributed to this state of af- The European sovereign debt cri- products, machinery and trans-fairs. For India, in particular, sis has its genesis in a series of port equipment, chemicals, semi policies followed by countries in manufactured products, textile ti redthese are testing times from and clothing products in 2010 response to economic challenges.different perspectives. The from India. the EU exports to an- These policies can be traced toEurozone crisis has wiped the period 2002-2008 when access dia amounted to USD 44.5 billion. to easy credit paved the way for This largely constituted of ma-out the benefits of a weak high-risk lending and borrow- chinery, chemical products andrupee, which is down 20 semi manufactured items which ings. Subsequently, the periodpercent in a year. As consum- 2007-2012 saw the emergence was almost 2.6 percent of FU ex- of a global financial crisis, start- ports. Bilateral trade between theers in these countries reduce ing with the 2007 sub-prime cri- two has been growing on an av-their spends, this has a resul- erage of 9.6 per cent during 2006- sis in the US and soon turningtant impact on the exports into a global recession and now 10. The table below summarisesas well. Indias economy too has become a sovereign debt cri- the trade relations between India sis in Europe. This crisis has not and the European Union over thehas been going through a years: just challenged the European vi-trough and growth rates sion of economic unification, but Given this situation, the Eurozonehave already dipped to new India - EU Tradelows. Given the tight moneysupply position and the pre- Year Exports % Imports % (US $ million) Growth (US $ million) Growthcarious position of lenders 2006-07 26,831 15.51 29,856 14.84in Europe, the Indian corpo- 2007-08 34,535 28.71 38,450 28.72rate sector is now finding 2008 - 09 39,351 13.95 42,733 11.14cheap money from European 2009-10 36,028 -8.45 38,433 -10.06banks, for expansion and 2010-11 46,819 29.95 44,540 15.89acquisitions difficult to 2011-12* 26,421 - 24,473 -come by. April-September KALEIDOSCOPE July - 2012 7
  4. 4. ARTICLEcrisis and its impact on world Share of Total Exports in GDPeconomic scenario is definitely a 45cause for concern. Even the Indian 40 40%Prime Minister Dr. Manmohan 35Singh has said that the situation 30% 30•)in Europe is of particular concern _ 30 29%as Europe accounts for a signifi- 0. 25cant share of the global economy 0 20and is also Indias major trade and 16%investment partner. "Continuing I 15 °. 13% 11% la 4problems there will further 10%dampen global markets and 5-. 3%adversely impact our own eco-nomic growth. It is our hope that World Euro Braz.4 China India Japan South UK USEuropean leaders will take reso- Atealute action to resolve the financialproblems facing them," he said. It is however to be noted that from India is in the range of 18-20It is also important therefore, to per cent. Also of significance is the presence of a large domesticanalyse the impact that this will the degree of exposure of Indian market and growing demand forhave on the Indian economy in exports to those countries of the goods and services will serve as ageneral and its exports and EDI Eurozone which have been the cushion to absorb some of thesein particular. worst affected by the crisis. The 17 global shocks. It will therefore be expected that growth will be only nations that comprise of the EuroShare of Exports in GDP marginall y affected by the slow- zone together contribute aroundThe current global economic 14.6 percent to Indias exports.slowdown emanates from the down in the euro region debt stricken countries as our expo- I lowever, the share of these coun-Eurozone. However, the conta- tries in Indias exports is quite lowgion is being witnessed in all ma- sure, i. low. at around 3 percent and will notjor economies of the world. Many directly have an impact on our Destination of Indiascountries are seeing a slowdown growth prospects in exports. Also,in their economic activities and Exports Another important factor to be the three countries most affected,overall pace of investments. This Greece, Ireland and Portugal, col-is largely a result of the share of noted is the destination-wise spread of Indian exports. The lectively account for only 6 per-exports in their overall GDP. The cent of the Eurozones GDP table below shows that the sharetable below shows the share ofexports in GDP of leading coun- of EU countries in total exports However, it must not be forgottentries. Indias share of exports toGDP is around I I% on an average Indias Exports to different destinations (% share in Total)for the last 5 years. It is evident FY10 FY11 98that countries like China, Japanand UK, with very significant EU Countries 20.0 18.6export-led economies would be Africa 5.8 6.5impacted in a more severe man- Asia 21.8 22.7ner as compared to India. West Asia North Africa 20.0 22.6A globalised trading environ- Mean 10.1 10.9ment means that Indias trade is North America 11.6 10.7inextricably linked to the globaleconomic movement patterns and Eurozone (17 Countries)can no longer remain isolated or Netherland 3.58 3.09insulted from these. This is likely Germany 3.03 2.69to adversel y im pact Indias exportgrowth in the coming months. Belgium 2.10 2518 , KALEIDOSCOPE July 2012
  5. 5. ARTICLEthat there are sectors in India, France 2.17 2.02such as textiles and readymade Italy 1.90 1.81garments which have a far greaterdependence on Europe. These ac- Spain 1.14 1.02count for about a fifth of the total Austria 0.14 0.43exports to Europe. The Eurozone Malta 0.40 0.30crisis, if not averted, will have a Portugal 0.21 0.21severe impact of layoffs and un- Greece 0.25 0.14employment in these sectors, particularly since they are some of Ireland 0.15 0.11the biggest emplo yers in India. Finland 0.12 0.10 Slovenia 0.11 0.07Impact on Foreign Direct Slovak Rep 0.02 0.02Investment (FDI)EDI inflows in India during 2011- Estonia 0.02 0.0212 (Apr-Sept) increased by 74 Cyprus 0.03 0.02percent to USD 19,136 millionfrom USD 11,005 million for the other Eurozone countries has been particular, these are testing timessame period last year. FIJI inflows marginal. Again, (as observed ear- from different perspectives. Thepeaked to USD 5,656 million in lier), the share of those particular Eurozone crisis has wiped out theJune 2011 but declined thereaf- euro countries which have been benefits of a weak rupee, whichter. The chart below summarizes in economic turmoil - Spain is down 20 percent in a year. Asthe countries bringing in foreign and Greece together contribute consumers in these countries re-investment into India (luring the a very nominal share of around duce their spends, this has a re-last decade. 1.3 percent to Indias FDI flows. sultant impact on the exports asCountry-wise FDI inflows Therefore it can he expected that well. Indias economy too hasfrom Apr 2000 to Sept 2011 Eurozonc slowdown would not been going through a trough andOver the years, Mauritius has have a significant impact on the growth rates have already dippedbeen the top investing country inflow of EDI into India. to new lows. Given the tightin India through FDI in equity, money supply position and thewith a share of around 41 percent. Key takeaways from the precarious position of lenders inThe share of Eurozone in FDI eq- Eurozone crisis Europe, the Indian corporate sec-uity inflows for the cumulative Apart from the fact that the tor is now finding cheap moneyperiod of April 2000 to Feb 2011 Eurozone crisis has impacted from European banks, for expan-was 14.7 percent. Out of this, the global trade and a contraction sion and acquisitions difficult toshare of Netherlands, Cyprus and is inevitable, it is also impor- come by.Germany has been around 4.4 tant to analyse the key factors The fol lowing parallels Can be eas-percent, 3.7 percent and 2.9 per- that led to and contributed tocent respectivel y. The share of the this state of affairs. For India, in ily drawn between the Eurozone situation and Indian scenario today: Country•vlse FDI Inflows from April 2000 to September 2011 5% 1% 1% Decreasing competitiveness and inflationary pressures Mauritius Euro Zono High fiscal deficits ,I Singapore 3. Excessive protection to do- US mestic industry UK these were some factors which Japan Eurozone countries, in particular UAE Greece, ignored or believed that Switzerland these did not matter. India needs to guard itself against these pitfalls. KALEIDOSCOPE July - 2012 9