1. 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)

2. Vol. 32 No. 2 July 2012 Re. 50/
STANDING CONFERENCE OF PUBLIC ENTERPRISES

3. ARTICLE
The 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 Review
Apart from the fact that the Slovenia, and Spai n..Ehe European The European Union is a major
Eurozone 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 India's
global trade and a contrac- exports and 13 per cent of India's
it difficult or impossible for
tion is inevitable, it is also some countries in the euro area imports. In 2010-11, European
important 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 red
these 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 to
Eurozone 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 and
rupee, which is down 20 semi manufactured items which
ings. Subsequently, the period
percent 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 the
ers 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 turning
tant impact on the exports into a global recession and now 10. The table below summarises
as well. India's 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 the
has been going through a years:
just challenged the European vi-
trough and growth rates sion of economic unification, but Given this situation, the Eurozone
have already dipped to new
India - EU Trade
lows. Given the tight money
supply position and the pre- Year Exports % Imports %
(US $ million) Growth (US $ million) Growth
carious position of lenders
2006-07 26,831 15.51 29,856 14.84
in Europe, the Indian corpo-
2007-08 34,535 28.71 38,450 28.72
rate sector is now finding
2008 - 09 39,351 13.95 42,733 11.14
cheap money from European 2009-10 36,028 -8.45 38,433 -10.06
banks, for expansion and 2010-11 46,819 29.95 44,540 15.89
acquisitions difficult to 2011-12* 26,421 - 24,473 -
come by. April-September
KALEIDOSCOPE July - 2012 7

4. ARTICLE
crisis and its impact on world Share of Total Exports in GDP
economic scenario is definitely a 45
cause for concern. Even the Indian 40 40%
Prime Minister Dr. Manmohan 35
Singh has said that the situation 30% 30'•)
in Europe is of particular concern _ 30 29%
as Europe accounts for a signifi- 0. 25
cant share of the global economy 0
20
and is also India's major trade and 16%
investment partner. "Continuing I 15 °. 13%
11% la '4
problems 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 US
European leaders will take reso- Atea
lute action to resolve the financial
problems facing them," he said. It is however to be noted that from India is in the range of 18-20
It is also important therefore, to per cent. Also of significance is
the presence of a large domestic
analyse the impact that this will the degree of exposure of Indian
market and growing demand for
have on the Indian economy in exports to those countries of the
goods and services will serve as a
general and its exports and EDI Eurozone which have been the
cushion to absorb some of these
in 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 Euro
Share of Exports in GDP
marginall y affected by the slow- zone together contribute around
The current global economic 14.6 percent to India's 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 India's exports is quite low
gion is being witnessed in all ma- sure, i. low.
at around 3 percent and will not
jor economies of the world. Many directly have an impact on our
Destination of India's
countries 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 Eurozone's GDP
table below shows that the share
table below shows the share of
exports in GDP of leading coun- of EU countries in total exports However, it must not be forgotten
tries. India's share of exports to
GDP is around I I% on an average India's Exports to different destinations (% share in Total)
for the last 5 years. It is evident FY10 FY11
98
that countries like China, Japan
and UK, with very significant EU Countries 20.0 18.6
export-led economies would be Africa 5.8 6.5
impacted in a more severe man- Asia 21.8 22.7
ner as compared to India. West Asia North Africa 20.0 22.6
A globalised trading environ- Mean 10.1 10.9
ment means that India's trade is
North America 11.6 10.7
inextricably linked to the global
economic movement patterns and Eurozone (17 Countries)
can no longer remain isolated or Netherland 3.58 3.09
insulted from these. This is likely Germany 3.03 2.69
to adversel y im pact India's export
growth in the coming months. Belgium 2.10 251
8 , KALEIDOSCOPE July 2012

5. ARTICLE
that there are sectors in India, France 2.17 2.02
such as textiles and readymade
Italy 1.90 1.81
garments which have a far greater
dependence on Europe. These ac- Spain 1.14 1.02
count for about a fifth of the total Austria 0.14 0.43
exports to Europe. The Eurozone Malta 0.40 0.30
crisis, if not averted, will have a Portugal 0.21 0.21
severe impact of layoffs and un-
Greece 0.25 0.14
employment in these sectors, par
ticularly since they are some of Ireland 0.15 0.11
the biggest emplo yers in India. Finland 0.12 0.10
Slovenia 0.11 0.07
Impact on Foreign Direct
Slovak Rep 0.02 0.02
Investment (FDI)
EDI inflows in India during 2011- Estonia 0.02 0.02
12 (Apr-Sept) increased by 74 Cyprus 0.03 0.02
percent to USD 19,136 million
from USD 11,005 million for the other Eurozone countries has been particular, these are testing times
same period last year. FIJI inflows marginal. Again, (as observed ear- from different perspectives. The
peaked to USD 5,656 million in lier), the share of those particular Eurozone crisis has wiped out the
June 2011 but declined thereaf- euro countries which have been benefits of a weak rupee, which
ter. The chart below summarizes in economic turmoil - Spain is down 20 percent in a year. As
the 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 India's FDI flows. sultant impact on the exports as
Country-wise FDI inflows Therefore it can he expected that well. India's economy too has
from Apr 2000 to Sept 2011 Eurozonc slowdown would not been going through a trough and
Over the years, Mauritius has have a significant impact on the growth rates have already dipped
been the top investing country inflow of EDI into India. to new lows. Given the tight
in India through FDI in equity, money supply position and the
with a share of around 41 percent. Key takeaways from the precarious position of lenders in
The 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 money
period 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 to
share 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 to
cent 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