July 6th, 2015
We reported yesterday on the historic and emphatic vote in the sudden referendum in Greece that caught the European Union and the world unawares. The Greeks have said no to the ‘humiliating’ terms set for the bailout plan offered by the IMF, European Central Bank and the European Commission troika. There seems to be a lot being said about how this could be the beginning of the end for the EU, with the Grexit (Pretty cool new word, we must say ! For those unaware, its cool speak for the Greek Exit.)
Now among all this hullabaloo, what does it really mean for you and me in India? Well thankfully, things won’t be turning upside down for us.
India and Greece don’t do a lot of direct trade with each other, so there will not be a heavy direct effect of the Greek crisis on the Indian economy. However, we live in a global noodle-bowl where everything is linked to everything, so there are bound to be some indirect effects.
The EU Route:
What happens in Greece will affect the European Union. Greece leaving the EU is more a when question than an if. When it does leave, it will mean a fall in the value of the Euro, which in turn will mean higher value of import and lower value of export for the EU member nations. This means lesser revenues for them, and this will force to them to reduce their imports. India does significant trade with the EU, so we will probably see a slight fall in revenues through exports to the EU.
The Cascading Effect of the Global Noodle-bowl:
Now, when the EU is affected, it will affect every country who does business with the EU. This means, that our exports to those countries will be affected as well.
The Scared Market:
Everything scares the stock market. Traders preparing for the worst will go into a selling flurry (actually, they already have, thus the 310-point drop in the Sensex, at the time of writing this article). But experts have predicted this as more of a knee jerk reaction, rather than a long-term trend – so we can expect to see the Sensex back on track soon.
The Hit on India’s GDP:
Experts currently predict a 0.2% to 0.5% reduction in India’s GDP growth rate as a worst case scenario. That too, in the short term. So things don’t look that bad.
This is probably the most significant of the different possibilities. There has been a great influx of investment into India from foreign investors over the past year. However, with things looking very uncertain in Greece and the EU, foreign investors might try and reduce their investment in higher risk emerging economies like India. This will mean that a lot of foreign investment might flow out of India. This in turn could mean that many companies might put foreign-funded projects on hold, putting off hiring.
Now, will all this lead to a second global financial slowdown? No one knows for sure, but most experts don’t think so. Especially in India’s case, India has a relatively strong internal economy, which means that in the long term, the Grexit will not affect us immensely. However, it looks like in the short term, we will have to put up with the effects mentioned above!