The government 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, although economists say Indian policy inertia is also to blame.
Finance chiefs of the Group of Seven leading industrialised powers will hold emergency talks on the euro zone crisis on Tuesday in what was seen as a sign of growing global alarm over the threat posed by the strains within the 17-nation union.
"Yes, India does 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 adviser to finance minister Pranab Mukherjee, told Reuters.
He declined to give details of the plan, but another senior official familiar with the planning said the finance ministry and central bank were prepared to take monetary and fiscal measures if necessary to try to insulate India from 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% of their deposits with the Reserve Bank of India.
BANKING ON FALLING OIL PRICES
"We are already preparing technical analysis for different possible scenarios that could impact India trade, 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 of Greece from the euro zone, but whether the euro zone will be able to hold as a fiscal entity," he said.
Finance Ministry officials said the wider group of G20 major economies, of which India is a leading member, were not planning their own conference call to discuss the crisis but were preparing instead for their summit in Mexico on 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. India imports nearly 80 percent of its oil requirements and heavily subsidizes diesel and kerosene that is used mainly by the country's poor and 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% of GDP, thanks in no small part to that stimulus spending, it does not have the same room to manoeuvre.