Will Greece debt crisis impact India?

The rejection of the Greek government’s call to extend its bailout by EU finance ministers has deepened gloom in the Eurozone. If Greece fails to repay the International Monetary Fund (IMF) 1.6 billion euro, Greece could risk leaving the euro.

A member country of the European Union living by a hair’s breadth, Greece has literally been rattling the global markets with its unbridled debt crisis. Greece pulling out of the eurozone almost seems imminent with European countries set to bear the brunt of the default. The Eurozone, which just about seemed to be recovering after years of economic crisis, once again finds itself in the dock with Greece in a dismal state.

With Greece voting on July 5^th to decide on whether to acceptable cutbacks in return for desperately needed financing, Greek Prime Minister Alexis Tsipras is urging his voters to vote ‘No’ in the referendum and strengthen Athens negotiating capacity. The Greece crisis has impacted the global markets at large. While Europe is expected to bear the brunt with not only Greece but even vulnerable economies such as Italy and Spain who are grappling with an economic crisis, the spillover is expected to be much more in the advanced markets. The major question many people are raising is what impact would this crisis have on a leading emerging market like India?

Impact on India

While it is true that India has usually been impacted by global economic downturns in the past, including the 2008 financial crisis, it has emerged stronger and much more resilient with each growing global crisis. Despite India’s growth slowing down in the years following the 2008 crisis, it still performed better than most other major economies in the world and this had a lot to do with a transitioned economy over two decades. Coming to the current Greek crisis, India may get impacted but it is expected to be much more resilient this time and tide through the crisis easily. Growth forecasts for India over the next few years have been very positively rated by rating agencies and global financial institutions.

Since the European Union economy with 28 countries is India’s largest trading partner, a lot of concerns have been raised. It is possible that the Indian markets in the short term may witness capital outflows but the crisis does not have a direct impact on India since India’s exposure to these markets is limited. India’s reliance on foreign funding is also low for the region as the Central Bank’s strong foreign currency reserves built in the run up to a scare of the balance of payments scenario in 2013 have helped strengthen the economy.

While India’s tech firms, auto makers as well as pharmaceuticals could suffer in the short term if sales to the eurozone gets impacted, the solace for India is that its overall exports to the eurozone is much lesser when compared to other countries such as Bangladesh, Thailand and Vietnam where it has a much larger share. With the Indian economy fundamentally strong and resilient, India in 2015 is in a much better position to withstand the magnitude of the crisis in Eurozone, thereby reducing any kind of panic and chaos which could otherwise have deterred investors.

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