The Eurozone Crisis & its Impact on India

by

Sateesh Kulkarni Director

Corporate Catalyst India Pvt Ltd

Published in

Kaleidoscope

magazine of Standing Conference of Public Enterprises, Govt. of India  

    (July, 2012)

Vol. 32 No. 2

July 2012

Re. 50/

STANDING CONFERENCE OF PUBLIC ENTERPRISES

India - EU Trade

Year Exports(US $ million)

%Growth

Imports(US $ million)

%Growth

2006-07 26,831 15.51 29,856 14.84

2007-08 34,535 28.71 38,450 28.72

2008 -09 39,351 13.95 42,733 11.14

2009-10 36,028 -8.45 38,433 -10.06

2010-11 46,819 29.95 44,540 15.89

2011-12* 26,421 - 24,473 -

April-September

ARTICLE

The Eurozone Crisis & its Impact on IndiaSateesh Kulkarni

Director, Corporate Catalyst India

Apart from the fact that the

Eurozone crisis has impacted

global trade and a contrac-

tion is inevitable, it is also

important to analyse the key

factors that led to and con-

tributed to this state of af-

fairs. For India, in particular,

these are testing times from

different perspectives. The

Eurozone crisis has wiped

out the benefits of a weak

rupee, which is down 20

percent in a year. As consum-

ers in these countries reduce

their spends, this has a resul-

tant impact on the exports

as well. India's economy too

has been going through a

trough and growth rates

have already dipped to new

lows. Given the tight money

supply position and the pre-

carious position of lenders

in Europe, the Indian corpo-

rate sector is now finding

cheap money from European

banks, for expansion and

acquisitions difficult to

come by.

T

he Eurozone consists ofAustria, Belgium, Cyprus,Estonia, Finland, France,

Germany, Greece, Ireland,Italy, Luxembourg, Malta, theNetherlands, Portugal, Slovakia,Slovenia, and Spai n..Ehe Europeansovereign debt crisis has emergedout of a situation that has madeit difficult or impossible forsome countries in the euro areato re-finance their governmentdebt without the assistance ofthird parties.

The European sovereign debt cri-sis has its genesis in a series ofpolicies followed by countries inresponse to economic challenges.These policies can be traced tothe period 2002-2008 when accessto easy credit paved the way forhigh-risk lending and borrow-ings. Subsequently, the period2007-2012 saw the emergenceof a global financial crisis, start-ing with the 2007 sub-prime cri-sis in the US and soon turninginto a global recession and nowhas become a sovereign debt cri-sis in Europe. This crisis has notjust challenged the European vi-sion of economic unification, but

it also has serious implicationsfor its other global dreams andambitions.

India - Europe Trade -a ReviewThe European Union is a majortrade partner for India. It accountsfor close to 20 per cent of India'sexports and 13 per cent of India'simports. In 2010-11, EuropeanUnion countries imported rough-ly USD 46.8 billion worth of agri-culture products, fuel and miningproducts, machinery and trans-port equipment, chemicals, semimanufacturedti red products, textileand clothing products in 2010from India. the EU exports to an-dia amounted to USD 44.5 billion.This largely constituted of ma-chinery, chemical products andsemi manufactured items whichwas almost 2.6 percent of FU ex-ports. Bilateral trade between thetwo has been growing on an av-erage of 9.6 per cent during 2006-10. The table below summarisesthe trade relations between Indiaand the European Union over theyears:

Given this situation, the Eurozone

KALEIDOSCOPE July - 2012 7

India's Exports to different destinations (% share in Total)

98 FY10 FY11

EU Countries 20.0 18.6

Africa 5.8 6.5

Asia 21.8 22.7

West Asia North Africa 20.0 22.6

Mean 10.1 10.9

North America 11.6 10.7

Eurozone (17 Countries)

Netherland 3.58 3.09

Germany 3.03 2.69

Belgium 2.10 251

ARTICLE

crisis and its impact on worldeconomic scenario is definitely acause for concern. Even the IndianPrime Minister Dr. ManmohanSingh has said that the situationin Europe is of particular concernas Europe accounts for a signifi-cant share of the global economyand is also India's major trade andinvestment partner. "Continuingproblems there will furtherdampen global markets andadversely impact our own eco-nomic growth. It is our hope thatEuropean leaders will take reso-lute action to resolve the financialproblems facing them," he said.It is also important therefore, toanalyse the impact that this willhave on the Indian economy ingeneral and its exports and EDIin particular.

Share of Exports in GDPThe current global economicslowdown emanates from theEurozone. However, the conta-gion is being witnessed in all ma-jor economies of the world. Manycountries are seeing a slowdownin their economic activities andoverall pace of investments. Thisis largely a result of the share ofexports in their overall GDP. Thetable below shows the share ofexports in GDP of leading coun-tries. India's share of exports toGDP is around I I% on an averagefor the last 5 years. It is evidentthat countries like China, Japanand UK, with very significantexport-led economies would beimpacted in a more severe man-ner as compared to India.

A globalised trading environ-ment means that India's trade isinextricably linked to the globaleconomic movement patterns andcan no longer remain isolated orinsulted from these. This is likelyto adversel y im pact India's exportgrowth in the coming months.

45Share of Total Exports in GDP

40 40%

35

_ 30 30% 30'•)29%

0. 250 20

16%I 15°.

10%11% la '4

13%

5-. 3%

World Euro Braz.4 China India Japan South UK USAtea

It is however to be noted thatthe presence of a large domesticmarket and growing demand forgoods and services will serve as acushion to absorb some of theseglobal shocks. It will therefore beexpected that growth will be onlymarginall y affected by the slow-down in the euro region debtstricken countries as our expo-sure, i. low.

Destination of India'sExportsAnother important factor to benoted is the destination-wisespread of Indian exports. Thetable below shows that the shareof EU countries in total exports

from India is in the range of 18-20per cent. Also of significance isthe degree of exposure of Indianexports to those countries of theEurozone which have been theworst affected by the crisis. The 17nations that comprise of the Eurozone together contribute around14.6 percent to India's exports.I lowever, the share of these coun-tries in India's exports is quite lowat around 3 percent and will notdirectly have an impact on ourgrowth prospects in exports. Also,the three countries most affected,Greece, Ireland and Portugal, col-lectively account for only 6 per-cent of the Eurozone's GDP

However, it must not be forgotten

8 , KALEIDOSCOPE July 2012

Country•vlse FDI Inflows from April 2000 to September 2011

5% 1% 1%

,IMauritius

Euro ZonoSingapore

US

UK

Japan

UAE

Switzerland

ARTICLE

France 2.17 2.02

Italy 1.90 1.81

Spain 1.14 1.02

Austria 0.14 0.43

Malta 0.40 0.30

Portugal 0.21 0.21

Greece 0.25 0.14

Ireland 0.15 0.11

Finland 0.12 0.10

Slovenia 0.11 0.07

Slovak Rep 0.02 0.02

Estonia 0.02 0.02

Cyprus 0.03 0.02

that there are sectors in India,such as textiles and readymadegarments which have a far greaterdependence on Europe. These ac-

count for about a fifth of the totalexports to Europe. The Eurozonecrisis, if not averted, will have asevere impact of layoffs and un-employment in these sectors, particularly since they are some ofthe biggest employers in India.

Impact on Foreign DirectInvestment (FDI)EDI inflows in India during 2011-12 (Apr-Sept) increased by 74percent to USD 19,136 millionfrom USD 11,005 million for thesame period last year. FIJI inflowspeaked to USD 5,656 million inJune 2011 but declined thereaf-ter. The chart below summarizesthe countries bringing in foreigninvestment into India (luring thelast decade.

Country-wise FDI inflowsfrom Apr 2000 to Sept 2011Over the years, Mauritius hasbeen the top investing countryin India through FDI in equity,with a share of around 41 percent.The share of Eurozone in FDI eq-uity inflows for the cumulativeperiod of April 2000 to Feb 2011was 14.7 percent. Out of this, theshare of Netherlands, Cyprus andGermany has been around 4.4percent, 3.7 percent and 2.9 per-cent respectivel y. The share of the

particular, these are testing timesfrom different perspectives. TheEurozone crisis has wiped out thebenefits of a weak rupee, whichis down 20 percent in a year. Asconsumers in these countries re-duce their spends, this has a re-sultant impact on the exports aswell. India's economy too has

been going through a trough andgrowth rates have already dippedto new lows. Given the tightmoney supply position and theprecarious position of lenders inEurope, the Indian corporate sec-tor is now finding cheap moneyfrom European banks, for expan-sion and acquisitions difficult tocome by.

The fol lowing parallels Can be eas-ily drawn between the Eurozonesituation and Indian scenario

today:

Decreasing competitivenessand inflationary pressures

High fiscal deficits

3. Excessive protection to do-mestic industry

these were some factors whichEurozone countries, in particularGreece, ignored or believed thatthese did not matter. India needs toguard itself against these pitfalls.

other Eurozone countries has beenmarginal. Again, (as observed ear-lier), the share of those particulareuro countries which have been

in economic turmoil - Spainand Greece together contributea very nominal share of around1.3 percent to India's FDI flows.Therefore it can he expected thatEurozonc slowdown would not

have a significant impact on theinflow of EDI into India.

Key takeaways from theEurozone crisisApart from the fact that theEurozone crisis has impactedglobal trade and a contractionis inevitable, it is also impor-tant to analyse the key factorsthat led to and contributed tothis state of affairs. For India, in

KALEIDOSCOPE July - 2012 9