A weak euro, triggered by the crises in Greece and Spain, has meant a decline in exports. India's exports in March fell for the first time since the 2009 global financial crisis as demand weakened in the United States and Europe. Exports did pick up in April, but only grew 3.2 per cent from a year earlier.
At present, Greece, Spain and Italy are in the process of implementing supply-side reforms such as public sector wage cuts and pension reforms aimed at reducing the strain on government finances.
Here are the potential impacts of five alternate economic scenarios in the euro zone on India’s growth in 2012-13, according to rating agency Crisil:
1. India’s GDP growth could slip to 5.8 per cent in 2012-13 if the recession in Greece and Spain deepens due to short term adverse effects of economic reforms. These reforms are a part of the bailout packages announced for these countries.
2. In the worst case scenario, where Greece could exit from the euro zone in the next 3-4 months, India’s GDP growth could slip further to 5.0 per cent in 2012-13. While the probability of Greece’s exit from euro zone in 2012 has declined after the outcome of national elections on June 17, such an event cannot be entirely ruled out.
3. Relatively aggressive monetary easing by the Reserve Bank of India is likely if the euro zone growth declines considerably, but fiscal stimulus would be limited, given its likely adverse impact on fiscal deficit, interest rates and inflation. In the worst case scenario of Greece’s exit from the euro zone, India’s fiscal deficit to GDP ratio could climb to 6.3 per cent in this fiscal.
4. Software (IT/ITeS) and iron and steel industries would be impacted the most, as a result of a sharp slowdown in exports to European countries. Trade credit to Indian exporters would be vulnerable if deleveraging in Eurozone gathers momentum in the coming months.
5. Any sharp fall in commodity and oil prices, triggered by a worsening Eurozone crisis, would alleviate pressure on India’s high import bill and inflation. It would also reduce the petroleum subsidy burden of the government.
With inputs from Crisil report