Eurozone Crisis Impact on India

8/10/2019 Eurozone Crisis Impact on India

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Impact of Eurozone

Crisis On India


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Eurozone debt crisis

A group of 10 central and eastern European banks asked for a bailout

Maastricht Treaty 1992: pledge to limit deficit spending and debtlevels

2009: Greece Prime Minister announced that Greeces debts exceedthe nations economy

Markets began driving up bond yields in Greece and other heavilyindebted countries: Contagion Effect


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Yield rates ad Public Debt Ratio in Eurozone


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Causes, Response and Current Status

oDifferent Fiscal Policy with same Monetary Policy

oHigh structural debt before crisis

oRecession and declining competitiveness

oNo lender of last resortResponse to the crisis

oBailout funds to Greece, Ireland and Portugal

oECB made credit available to troubles banks and ultra low rates

oCurrent statusoYields on European debt plunged to low levels

oHowever, risk of deflation looms large


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Effect In Balance of Payments

Balance of Payments

Current Account

Net exports of goods and services /Trade Deficit or Surplus (NX)

Flow of invisibles (unilateral flows , ODA, Grants, remittances)

Capital and Financial Account

FDI

FII


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Current Account Balance - india

Current account has been in deficit for most part since 2006.

Since 2009-10, the deficit has been increasing to record high of $32.4billion in 2013

After that several measures specially on curb on gold imports helped easethe situation.

Intuitively, Countries with high dependence on trade and in particular witha high export shareof the European Union market were likely to be more

affected since the crisis dampened demand for exports and henceforthlead to a fall in the outputof these countries


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Trade Linkages (NX) - Total trade of goods

Increased 32.6% in 2007-2008 from the previousyear with exports growing at 28.9% and importsat 35.1 %.

In 2008-2009, total trade increased at a slowerpace of 17.4% from the prior year with exportsgrowing 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% andimports 2.6%.

Global trade dropped by 23% in US dollar termsin 2009

The decline in 2009-2010 was short lived andIndias total trade rebounded year-over-yeargains of 30.8% in 2010-2011 and 28.1% in 2011 -

2012. In 2012-2013 total trade declined by 4.8%, with

exports falling 6.0% and imports falling 4.0%.

India total trade of goods in US$ billions (Planning

Commission, Government of India, May 2013).


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Trade Linkages (NX)- Trade with theEuropean Union and the eurozone

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) accountedfor 20.8% of Indian exports and 13.9% of Indian imports

Since 2007-2008 exports to the eurozone and the EU make up a smallerpercentage of total exports as India looks for new export markets.

Exports to eurozone and EU in US$ billions (Department of Commerce GoI, 2013).


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Trade Linkages (NX)

EU-India trade and eurozone-India trade (European Commission, 2013,

and Department of Commerce Government of India, 2013).

Since the large decline inexports during 2009-2010,

trade in the EU and eurozone

rebounded.

However, for the next 2

years, the growth was belowthe 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.


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Trade Linkages (NX) - Composition of exports

These five categories makeup approximately 80% of the totalexports for each of the years.

The data clearly shows that the profile of items exported fromIndia to the EU and eurozone has remained relatively stable overthe past eight years.

Therefore, while the eurozone crisis has impacted overall tradeand specifically trade to the EU and eurozone, it has had littleimpact on the profile of goods exported.

Top five Indian exports to the EU, 2005-2006, 2009-2010, and 2012-2013 (Department of Commerce GoI,

2013).


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Trade Linkages (NX) Trade in Services

India total trade of services in US$ billions (Planning

Commission, Government of India, May 2013).

Services consist of Travel, Transportation, Insurance,

Software Services, Business Services, FinancialServices, Communication Services etc.

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 serviceshas slowed. Total trade increased by a minuscule

0.6% in 2011 -2012 and a slightly higher, but still

disappointing, 2.7% in 2012-2013.


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Share of Exports declined from16.1% in 2008 to 12.8% in2012

Merchandise export declinedfrom US$42. 7 billion in 2011to US $37.8 billion in 2012

Share of Software servicesexport declined from 26% in2009-2010 to 24% in 2011-12

Consolidated claims ofEuropean banks on Indiadeclined from US $ 146 billionin Dec. 2010 to US $139 billionin Dec. 2012

Trade credit, infrastructure

financing and externalcommercial borrowingsaffected

CAD financing became a majorchallenge

Eurozone accounts for 15% ofFDI in India; continued crisiswill affect FDI inflows

FIIs pulled out money fromIndia because the investorsfaced difficulties in home

markets


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Europe accounted for around 19% ofprivate transfers in 2008-09

There may be an adverse impact onremittance flow to India asunemployment situation in Euro areacontinues to be grim

Close to 6.8 million foreign touristarrivals in 2013; Europe accounts fornearly 35% foreign tourist arrivals inIndia

Travel receipts have suffered because oflower tourist arrivals from the euro area


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0

10

20

30

40

50

60

70

80

Remittances

Remittances

Source : Ministry of Tourism


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Country wise FDI Inflows

41%

15%

10%

7%

6%

5%

1%1%

14%

Mauritius

Euro Zone

Singapore

US

UK

Japan

UAE

Switzerland

Others

Another channel through which the euro zone crisis could impact India is throughfinancial channels i.e. Foreign Direct Investments (FDI), Foreign InstitutionalInvestors (FII).

Graph: Country-wise FDI inflows from Apr 2000 to Sept 2011


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Figure 8. Annual and cumulative FDI inflow to India 2001-

2013 (Planning Commission, Government of India, May

2013).

FDI inflows in India during 2011-

12 (Apr-Sept) increased by

33.6%, peaked in Jun 2011 anddeclined thereafter.

The share of the other euro

zone countries has been

marginal. Further, the share of

the euro countries in distress

namely, Italy (0.7%), Spain (0.6%)and Greece (0%) together

contribute a marginal share of

1.3% to Indias FDI flows.

It can be drawn that

euro zone slowdown would not

have a significant impact on the

FDI .


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FII Movement

Source: CMIE

FII inflows increased in 2009-10 to $29,048 mnand the high levels of FII inflow were sustained

in 2010-11 as well with $29,422 mn flowing into

the Indian economy.

FII illustrated a net outflow of $15,017 mn in

2008-09, which can be attributed to the global

financial crisis.

The share of Indias FII in the emerging and

developing markets has declined as a

consequence of the global slowdown.

the FII flows are positively related to the global

investment sentiments. With the global

uncertainties warming up the FIIs are expected

to withdraw from the riskier assets like the

emerging market assets


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Effect on Indian Rupee


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US dollar vs Indian Rupee


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Measures of Inflation In India

WPI(WholesalePrice Index

)

CPI(ConsumerPrice Index)

GDPDeflator


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Pre- Eurozone Crisis During the high growth phase of 2003-08, inflation was low and

stable. All the measures of inflationWPI, CPI and GDP deflatorhovered around 5 per cent.

This was facilitated by the rule-based fiscal policy which enabled

monetary policy to effectively focus on inflation control andexpansion of credit in a non-inflationary manner.

In line with the growing investment demand in the economy, non-food bank credit increased significantly during 2003-08 to 26.7 percent per annum from an average of 15.4 per cent during the 1990s.


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Wholesale Price Index (WPI)

5.5

7.66.9

0

2

4

6

8

Pre- Crisis 2003-2008 Post- Crisis 2008-

2012

Latest 2012-2013

WPI

http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?id=721


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Consumer Price Index - IndustrialWorker(IW)

5

10.1 10.1

0

5

10

15


2012

Latest 2012-2013

CPI- IW



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Consumer Price Index IW (Food)

5.5

10.9 10.5

0

2

4

6

8

10

12


2012

Latest 2012-2013

CPI IW (Food)



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GDP Deflator Based Inflation

5.3

7.7

0

2

4

6

8

10

Pre- Crisis 2003-2008 Post- Crisis 2008-2012

GDP Deflator based inflation



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Causes of this Inflation

Makes imports moreexpensive, contributing to

inflationary pressures

Depreciation of Rupee


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Rise in price of Crude oil


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Continued

Rise in price of Crude oil

Increased price of goods contributing to higher CPI

Cost-push Inflation

Future Expectations of InflationOnce inflation sets in it is difficult to reduce higher prices willcause workers to demand higher wages causing a wage pricespiral.


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Analysis in IS-LM Model

Y

L

M

FE

IS

r

Fig1. IS-LM model at the equilibrium of Money Market(LM),

Labor Market(FE) and Goods Market(IS)

r*

Y*

Eurozone Crisis

o Rise in Global Crude Oil Prices

o Impact of Cost Push Inflation

o Outflow of Money through FII

o Prices (P)

o Money(M)

o M/P

Fig 2. Money Market

r

M/P,Md/P

M0/P0

MS0MS1

MD

M1/P1


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Y

LM0

FE0

IS

r

Fig1. IS-LM model of Money Market(LM), Labor Market(FE)

and Goods Market(IS)

r*

Y0

Effect in Labor Market

o Real Wages fall due to Price rise

o Labor Demand fall due to fall in

Productivity

o Expected Output

o GDP growth

Fig 2. Labor Market

W

Labor, N

ND0

w0

W1

LM1

FE1

Y1

o Real Wage

o Labor Demand

o Unemployment

N0N1

ND1

o Rise in Frictional Unemployment


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Action taken by Indian Govt. and RBI

o Y = C + I + G + GT + Nx

oFiscal PoliciesHigh Fiscal Deficit, Bi-lateral Trade Relations

oMonetary Policy

CRR, Repo Rate and Reverse Repo Rate


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Action taken by Indian Govt. and RBI

0

5

10

Reverse Repo rate

Reverse Repo rate

0

5

10

CRR

CRR

0

5

10Repo Rate

Repo Rate

Source :RBI Source :RBI

Source :RBI


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Y

LM0

FE0

IS

r

Fig1. IS-LM model of Money Market(LM), Labor Market(FE)

and Goods Market(IS)

r*

Y0

o Money supplied by the Central

Bank, RBI

o Attempt to reduce Trade Deficit

o Expected Output

o GDP growth

Fig 2. Labor Market

W

Labor, N

ND0

w0

W1

LM1

FE1

Y1

o Unemployment

N0N1

ND1

o Rise in Frictional Unemployment


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Appendix

Assumptions

oAll the assumptions of IS-LM model are implied

oThe model has been used while keeping goods market at equilibriumwith the purpose to show the effect of Eurozone crisis

oIt is to be noted that Eurozone crisis was triggered by US. Sub-primemortgage crisisthus the effect in the Indian Economy was due toboth.

Eurozone Crisis Impact on India

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