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Greek Crisis & possible Impact on India

From Alexander to Alexis, Greece has come from zenith to the nadir of global supremacy where Alexander the great in 323BC dreamt of conquering the world in contrast to the current Prime Minister Alexis Tsipras who is scrambling to save the country from a meltdown.

Indeed, the Greek society is currently struggling to find a way out of its most severe crisis and in the most likelihood they would come out of it. This optimism is not because the Greek history can boast of Generals like Alexander or the philosophers like Aristotle and Socrates but because several examples can be found across the globe where countries like India and the United States have come out of much deeper crisis like colonialism and Great Depression and have scripted the success stories for the world to emulate.

Current Scenario

On June 30, 2015, Greece became the first developed country to default an IMF loan payment of USD1.7 billion. Greece is at the verge of being declared a bankrupt nation and is urgently needs another bailout package to come out of the current crisis. However, as happened earlier, the package would come on conditions demanding stringent austerity measures which the public in Greece is opposing since long.

Now the Prime Minister Alexis Tsipras has announced to conduct a referendum on July 5 to accept or reject the terms of international bailout package. Another option for the Greece is to exit Eurozone which many refer to as ‘Grexit’ which would provide Greece the freedom to have its own currency and its own monetary policy to deal with the situation. However, it can further erode the confidence of investors as in that case, Europe may not come to rescue of Greece, the weakest link in Eurozone. 

On June 29, Greece imposed capital controls and closed the banks till July 6. Many things would get clear after the country votes in the referendum of July 5.

Factors behind The Present Crisis

Some major factors which played a role in varying to degree to put Greece into the current mess are as under –

• Around 17.5% of the GDP is spent by Greece inpension payments which is highest in the Europe. The inefficient pension system of Greece is unsustainable where 17.5% of the national income is used for transfer payments was bound to collapse without a substantial increase in government revenue.
• The debt to GDP ratio of Greece is as high as 172% which too is highly unsustainable. Most part of the debt and relief package received by Greece was not spent into productive channels of economy but into wages and pensions which only worsened the situation.
• Tax evasion in Greece is also at its peak where only one third of the population pays taxes. Companies also engage in high rate of tax evasion because of which government revenues consistently dwindled while the expenditure kept on rising.
• On the balance of payments front also Greece suffered a lot. Due to high perks and pensions, demand of imports kept on rising while exports suffered due to lack of manufacturing facilities. Appreciating Euro also increased the woes of Greece.
• Unemployment rate in Greece is also highest in Europe at 25% which means that one in every four persons is unemployed in Greece.

If Greece is unable to streamline the above mentioned flawed economic fundamentals by austerity measures, any bailout package would be insufficient to pull the Greece out of current quagmire.

Impact on India

Impact on Greece crisis on India depends on its impact over Europe because India has limited exposure to Greece but Europe is its major trade partner. Allaying the fears, RBI Governor Raghuram Rajan said that direct impact of the crisis would be very limited on account of sound macroeconomic fundamentals of Indian economy.

On indirect impact, he added that the foreign exchange rate could suffer depending upon the way Europe reacts to the Greece in upcoming situation. If interest rates in Europe are increased following the developments in Greece, it can trigger capital outflow from India. As far as exports are concerned, it can have some impact on engineering goods as Europe is the largest market for such goods. So far, Sensex movements have not shown any impact of the crisis.

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