India has prepared a contingency plan in case Greece exits the euro zone, and even a collapse of the single currency union, 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. The Centre blames Europe’s woes for the slowdown in the economy, although economists say 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 strains within the 17-nation union.
“Yes, India does have a contingency plan,” Kaushik Basu, the chief economic adviser to Finance Minister Pranab Mukherjee, told Reuters. “There are different crisis management groups within the government to deal with such a scenario.” He declined to give details.
Another senior official said the finance ministry and the Reserve Bank of India were prepared to take monetary and fiscal measures if needed to try and 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.
“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 on condition of anonymity.
“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.
The Indian government is banking on lower international oil prices to help blunt the impact of any European crisis. India imports nearly 80% of its oil requirements.
In the 2008 financial crisis, the government spent its way out of trouble with stimuluses. This time around, with the budget deficit at nearly 6% of GDP, it does not have the same room to manoeuvre.