International Crisis Affecting India

RITHVICK.B.RAM RAHUL SATPATHY

Background
Financial Crisis has led to many nations defaulting

on their debts. It created sharp economic downturns, low revenue and high deficits There are many nations suffering from financial crisis. Mainly France, Greece, United States, United Kingdom etc.

Cases Study

Introduction
To meet budget deficits, Greek government heavily

borrowed from the international market This led to shifts in investor confidence from 2009, where the debt rate of GDP has risen from 6.7% to 13.6% approx Greeks acceptance of Euro and access to capital at low interest rate has caused this problem

Build Up To The Current Crisis

Greece adopted Euro in 2001 to meet budget deficits

It deficit was higher than eurozone deficit by 3%

It has high external debts reaching 115% of the GDP It has a current account deficit of 9% with Eurozone

being 1% in 2009

Outbreak
In 2009, there was a shift in investor confidence

The capital borrowed became illiquid with the debt

being doubled with each successive government There was downgrading of Greek bonds by credit rating agencies Greece must borrow additional 54 billion Euros to meet its maturing debt obligations

Contd
Many countries including IMF are willing to provide

loans worth 30 billion Euros at 5% interest rate The difference in the Greek estimate and Eurostat estimate, latter showing higher debt level This, created suspision, leading to the crisis in April 2010

Possible Causes of Crisis: Domestic

Domestic problems like 87% increase in expenditure

and 31% rise in revenue created budget deficits Aging population also reduced human productivity Costly pension and healthcare systems Inefficiency in the public sector enterprises contributed to the current crisis

International Problems
Greek adoption of Euro had created greater access to

cheaper loans Lack of rule enforcement by the European authority deepened the crisis Thus, no financial sanction was imposed for violating norms So, the Greek governments crossed its limits and broadening the crisis

Expert Opinion
Greece might quit the eurozone, in order to reduce

the level of borrowings. Plans to start a new domestic currency So, that it can help to increase the level of exports. It might not happen, if it exits then the level of debt will increase thereby creating problems for the government

Greek Domestic Reforms

Austerity measures were introduced to reduce debts

from 13.6% to less than 3% of GDP, i.e. from 2009 to 2012 It was welcomed by the Eurozone members The government aims at increasing tax on luxury goods, fuel prices, tobacco and liquor from 19% to 21% Rise in income tax rate by 1% for personal income over 100000 Euros(133000 rise)

Contd
It also brought reforms in civil service in order to

reduce cuts in expenditure It also changed employment ratio to 5:1 (retirement/recruitment ratio) It also reported 10% cut in salaries and reported 30% cut in public expenditure Also brought reforms in the pension and health schemes to minimize costs

Problems To be Faced

Cut in expenditure could lead to

large scale unemployment Itll reduce the economic growth due to rise in costs The money supply will reduce It might hinder the industries from growth due to limited money supply in form of loans

Solutions
Government plans to encourage investment of

foreign capital, to accelerate economic activity Itll alert the European Union to take stringent measures to control borrowings of its members Government will borrow 15 Billion Euros from IMF to clear maturing bonds to reach the path of recovery

Influence of Greek Crisis on India

As, per Kaushik Basu opinion on Greek Crisis, the

Chief Economic Advisor of Ministry of Finance There will be some additional capital flows coming in in search of a safe haven mainly India, due to secure financial system and a small drop in Indian exports to Greece Only 0.05% of India's exports go to Greece and Indian banks have virtually no direct exposure to Greece.

Case Study

U.S DEBT CRISIS

Background
It was caused due to poor policy making in the fields

of taxation, finance and economics It encouraged the Americans to resort to counterproductive behavior United States may end up with nations like United Kingdom, Portugal with huge debts with no way to find a path to recovery

WHAT IS DEBT CEILING ??????????????????????????

Drawbacks
Though being a flexible and an innovative economy

in the world. It has many problems. Economic growth is anaemic: at 1.9 percent real GDP growth in the first quarter of this year Unemployment and underemployment is high and chronic: at 9.2 percent with only a little than a million of 8 million getting their jobs back after recession

 U.S. consumers, savers and investors are weighed

down by a staggering 32 percent decline in the value of residential housing3 a percentage decline similar to that during the Great Depression; Serious commodity inflation is dragging down consumption and production; the CRB commodities index has increased about 30 percent in the last year.

Measures to be Taken
The government might raise the debt ceiling, but

needs to optimize its spendings So that the debt rate can reduce from 9.2 of GDP to 8% It should cut its spending up to $2 trillion, i.e $ 200 billion a year It may reduce employment, but most the revenue will be used to pay back loans

Solution to be Adopted
Using dollar imperialism as an advantage to stabilize

the downturn through payment of debts Reducing the burden of corporate taxes to increase productive activities Phasing out or restricting mortgage interest deductibility for income tax purposes for owneroccupied housing

 Stopping new mortgage

finance activity by Fannie Mae and Freddie Mac and eventually running off their current loan inventory while shifting to a pure insurance-based model for government support for mortgage finance.

Influence of American Debt Crisis on India

India holds 41$ billion in the U.S treasuries as

foreign exchange, any disruption in dollar could tamper rupee value As, per C.Rangarajan, slowdown in U.S economy could tamper Indias exports The crisis may bring back the value of share market back to the lows of the year 2008 Rise in foreign funds in Indian markets could appreciate the value of rupee, thereby reducing current account deficits

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