As Greece decides its Hamletian dilemma to stay or not to stay in the European Union come June 5, the rest of the world, particularly stockmarkets, are getting edgy. The fallout will, of course, mainly affect European markets, and India is more cushioned due to strong macroeconomic factors. These include a fairly comfortable current account deficit compared to 2008 when the Lehman Brothers collapse led to a global crisis from which some economies are yet to recover; forex reserves are at $420 billion, and portfolio investments to the tune of $12 billion have come in from June 2014.
If FIIs decide to book profits and exit Indian markets in the event of a crisis and European bonds get more attractive, it would at best be a knee-jerk reaction. FIIs get better returns in India, at eight per cent, than almost anywhere else. The rupee is so overvalued that in case of some deprecation it would help exports. India’s exports to Europe are just 17 per cent of its total exports, and imports are 11 per cent. Industries like auto and pharma with some exposure to Greece and Europe may be hit, and to that extent shareholders in these firms may be impacted. But India’s exports have been going down in the past few quarters for various reasons, so there is nothing to panic about.
The crisis in Greece has been brewing for almost seven years, and despite repeated bailouts its GDP fell every quarter, and today its debt-to-GDP ratio is 174 per cent, despite reforms and austerity measures. Prior to its strict reforms regime, Greece had a very generous pensions policy (96 per cent of an individual’s salary), labour polices and big industries like shipping paid no taxes. Greece owes $1.7 billion to the International Monetary Fund and $144 billion to the EU European Fund. It owes private investors only $38.7 million of its total debt. The current crisis has erupted as Greeks are unwilling to accept more reforms and austerity measures that are only causing more indebtedness. Besides, the left-wing Greek government had been elected on the promise of doing away with austerity measures. The lenders are prepared to give more aid, but only if stricter reforms and more austerity measures are adopted. We will have to see if a majority of Greece’s 11 million citizens will accept these new conditions. The impact of Greece voting to quit the EU could change the geography of the Union. It could, as some newspaper reports suggest, lead to countries like Spain, Italy and France questioning the benefits of austerity measures that these countries have undertaken. India happily has its own problems of chasing the elusive “achche din” promised by Prime Minister Narendra Modi.
