Impact of Eurozone

Crisis On India

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 debt
levels
2009: Greece Prime Minister announced that Greeces debts exceed
the nations economy
Markets began driving up bond yields in Greece and other heavily
indebted countries: Contagion Effect

Yield rates ad Public Debt Ratio in Eurozone

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 resort
Response to the crisis
oBailout funds to Greece, Ireland and Portugal
oECB made credit available to troubles banks and ultra low rates
oCurrent status
oYields on European debt plunged to low levels
oHowever, risk of deflation looms large

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

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 $32.4
billion in 2013
After that several measures specially on curb on gold imports helped ease
the situation.
Intuitively, Countries with high dependence on trade and in particular with
a high export share of the European Union market were likely to be more
affected since the crisis dampened demand for exports and henceforth
lead to a fall in the output of these countries

Trade Linkages (NX) - Total trade of goods

Increased 32.6% in 2007-2008 from the previous
year with exports growing at 28.9% and imports
at 35.1 %.
In 2008-2009, total trade increased at a slower
pace of 17.4% from the prior year with exports
growing 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% and
imports 2.6%.

Global trade dropped by 23% in US dollar terms

in 2009
The decline in 2009-2010 was short lived and
Indias total trade rebounded year-over-year
gains 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).

Trade Linkages (NX)- Trade with the

European 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) accounted
for 20.8% of Indian exports and 13.9% of Indian imports
Since 2007-2008 exports to the eurozone and the EU make up a smaller
percentage of total exports as India looks for new export markets.

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

Trade Linkages (NX)

Since the large decline in
exports during 2009-2010,
trade in the EU and eurozone
rebounded.
However, for the next 2
years, the growth was below
the trend in India, causing
exports as a percent of total
exports to fall.

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

and Department of Commerce Government of India, 2013).

As the crisis continues and

global growth slows, trade to
these regions appears to be
faltering.

Trade Linkages (NX) - Composition of exports

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

These five categories makeup approximately 80% of the total

exports for each of the years.
The data clearly shows that the profile of items exported from
India to the EU and eurozone has remained relatively stable over
the past eight years.
Therefore, while the eurozone crisis has impacted overall trade
and specifically trade to the EU and eurozone, it has had little
impact on the profile of goods exported.

Trade Linkages (NX) Trade in Services

Services consist of Travel, Transportation, Insurance,

Software Services, Business Services, Financial
Services, 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 20092010. 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 services
has slowed. Total trade increased by a minuscule
0.6% in 2011 -2012 and a slightly higher, but still
disappointing, 2.7% in 2012-2013.

India total trade of services in US$ billions (Planning

Commission, Government of India, May 2013).

Share of Exports declined from

16.1% in 2008 to 12.8% in
2012
Merchandise export declined
from US$42. 7 billion in 2011
to US $37.8 billion in 2012
Share of Software services
export declined from 26% in
2009-2010 to 24% in 2011-12

Consolidated claims of
European banks on India
declined from US $ 146 billion
in Dec. 2010 to US $139 billion
in Dec. 2012
Trade credit, infrastructure
financing and external
commercial borrowings
affected
CAD financing became a major
challenge

Eurozone accounts for 15% of

FDI in India; continued crisis
will affect FDI inflows
FIIs pulled out money from
India because the investors
faced difficulties in home
markets

Europe accounted for around 19% of

private transfers in 2008-09
There may be an adverse impact on
remittance flow to India as
unemployment situation in Euro area
continues to be grim

Close to 6.8 million foreign tourist

arrivals in 2013; Europe accounts for
nearly 35% foreign tourist arrivals in
India
Travel receipts have suffered because of
lower tourist arrivals from the euro area

Remittances
80
70
60
50
40

30

Remittances

20
10
0

Source : Ministry of Tourism

Country wise FDI Inflows

Another channel through which the euro zone crisis could impact India is through
financial channels i.e. Foreign Direct Investments (FDI), Foreign Institutional
Investors (FII).
Mauritius
14%
1%

Euro Zone

1%

Singapore
5%

41%

6%

US
UK
Japan

7%
UAE
Switzerland

10%
15%

Others

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

FDI inflows in India during 201112 (Apr-Sept) increased by

33.6%, peaked in Jun 2011 and
declined 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 .
Figure 8. Annual and cumulative FDI inflow to India 20012013 (Planning Commission, Government of India, May
2013).

FII Movement
FII inflows increased in 2009-10 to $29,048 mn
and 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

Source: CMIE

Effect on Indian Rupee

US dollar vs Indian Rupee

Measures of Inflation In India

WPI
(Wholesale
Price Index
)

CPI
(Consumer
Price Index)

GDP
Deflator

Pre- Eurozone Crisis

During the high growth phase of 2003-08, inflation was low and
stable. All the measures of inflation WPI, CPI and GDP deflator
hovered around 5 per cent.
This was facilitated by the rule-based fiscal policy which enabled
monetary policy to effectively focus on inflation control and
expansion of credit in a non-inflationary manner.
In line with the growing investment demand in the economy, nonfood bank credit increased significantly during 2003-08 to 26.7 per
cent per annum from an average of 15.4 per cent during the 1990s.

Wholesale Price Index (WPI)

WPI
7.6

8
6

6.9

5.5

4
2
0
Pre- Crisis 2003-2008 Post- Crisis 20082012

Latest 2012-2013

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

Consumer Price Index - Industrial

Worker(IW)
CPI- IW

15

10.1

10.1

Post- Crisis 20082012

Latest 2012-2013

10
5

Pre- Crisis 2003-2008

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

Consumer Price Index IW (Food)

CPI IW (Food)

12
10
8
6
4
2
0

10.9

10.5

5.5

Pre- Crisis 2003-2008 Post- Crisis 20082012

Latest 2012-2013

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

GDP Deflator Based Inflation

GDP Deflator based inflation
10

7.7

8
6

5.3

4
2
0

Pre- Crisis 2003-2008

Post- Crisis 2008-2012

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

Causes of this Inflation

Makes imports more
expensive, contributing to
inflationary pressures

Depreciation of Rupee

Rise in price of Crude oil

Continued
Rise in price of Crude oil
Increased price of goods contributing to higher CPI
Cost-push Inflation

Future Expectations of Inflation

Once inflation sets in it is difficult to reduce higher prices will
cause workers to demand higher wages causing a wage price
spiral.

Analysis in IS-LM Model

FE

o Prices (P)

Eurozone Crisis
o Rise in Global Crude Oil Prices
o Impact of Cost Push Inflation
o Outflow of Money through FII

L
M

r*
IS

MS1

o Money(M)
o M/P

MS0

MD

Y*

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

Labor Market(FE) and Goods Market(IS)

M1/P1

M0/P0

Fig 2. Money Market

M/P,
Md/P

Analysis in IS-LM Model

LM1
FE1

FE0

LM0

Effect in Labor Market

o Real Wages fall due to Price rise
o Labor Demand fall due to fall in
Productivity

o Labor Demand
o Unemployment

r*
IS

o Real Wage

ND0
ND1

w0
W1

Y1

Y0

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

and Goods Market(IS)

N1

o Expected Output
o GDP growth

N0

Labor, N

Fig 2. Labor Market

o Rise in Frictional Unemployment

Action taken by Indian Govt. and RBI

= C + I

+ G + GT + Nx

o Fiscal Policies High Fiscal Deficit, Bi-lateral Trade Relations

o Monetary Policy CRR, Repo Rate and Reverse Repo Rate

Action taken by Indian Govt. and RBI

Reverse Repo rate

CRR
10
5
0

10
5
0

Reverse Repo rate

CRR

Source :RBI

Source :RBI

Repo Rate
10
5
0
Source :RBI

Repo Rate

Analysis in IS-LM Model

o Money supplied by the Central
Bank, RBI
o Attempt to reduce Trade Deficit

LM1
FE1

FE0

o Unemployment

LM0

IS

r*

ND0
ND1

w0
W1

Y1

Y0

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

and Goods Market(IS)

N1

o Expected Output
o GDP growth

N0

Labor, N

Fig 2. Labor Market

o Rise in Frictional Unemployment

Appendix
Assumptions
oAll the assumptions of IS-LM model are implied
oThe model has been used while keeping goods market at equilibrium
with the purpose to show the effect of Eurozone crisis
oIt is to be noted that Eurozone crisis was triggered by US. Sub-prime
mortgage crisis thus the effect in the Indian Economy was due to
both.