NEW DELHI: India has prepared a contingency plan for Greece exiting the euro zone and even a collapse of the monetary union, Indian officials said on Tuesday. The euro zone debt crisis has already put a damper on India’s exports to Europe— the biggest destination for Indian goods — as well as capital inflows into equity and debt markets. Prime Minister Manmohan Singh’s government blames Europe’s woes for the slowdown in Asia’s third-biggest economy, though economists say Indian policy inertia is also to blame.
Finance ministers from the Group of Seven major economies discussed the progress towards financial and fiscal union inEurope, the US Treasury Department said on Tuesday, after the ministers held an emergency call on the euro zone debt crisis.
“The G7 ministers and governors reviewed developments in the global economy and financial markets and the policy response under consideration,” the US Treasury said in a statement. The US Treasury did not elaborate on whether a consensus was emerging among European leaders for a specific plan of action or whether the G7 was considering a joint response to the EU crisis which has intensified with distressed Spanish banks threatening the global financial system.
“Yes,Indiadoes have a contingency plan. There are different crisis management groups within the government to deal with such a possible scenario,” Kaushik Basu, the chief economic advisor to Finance Minister Pranab Mukherjee, said. He declined to give details of the plan, but another senior official familiar with the planning said the finance ministry and the central bank were prepared to take monetary and fiscal measures if necessary to try to insulateIndiafrom the shockwaves of a euro zone collapse.
He did not spell out the measures, but they could include lowering interest rates, which are among the highest in the world, and lowering the amount of money that banks have to keep on deposit in the central bank.
The latter step would allow banks to lend more money to firms to keep hiring and expanding. At the moment the banks are required to keep 4.75 percent of their deposits with the Reserve Bank ofIndia.
“We are already preparing technical analysis for different possible scenarios that could impactIndiatrade, stock markets and financial institutions,” the finance ministry official said, speaking on condition of anonymity because of the sensitivity of the issue. “We are facing a fast-evolving situation. The question is not only about the exit ofGreecefrom the euro zone, but whether the euro zone will be able to hold as a fiscal entity,” he said.
Finance ministry officials said the group of G20 major economies were not planning their own conference call to discuss the crisis but were preparing instead for their summit inMexicoon June 18-19. “The next G20 meeting… is going to be an important signal to the world that we are all together and that the governments will try to sort out,” the senior official said.
The Indian government is also banking on lower international oil prices, to help blunt the impact of any European crisis.Indiaimports nearly 80 per cent of its oil requirements and heavily subsidises diesel and kerosene used mainly by the poor and the public transport.
During the 2008 financial crisis, the Indian government spent its way out of trouble by increasing spending on job-creating infrastructure projects and tax cuts that boosted consumer spending, a major driver of the economy. This time around, with the Budget deficit at nearly 6 per cent of GDP, it does not have the same room to manoeuvre.