India is not U.S.A or Greece

Posted on May 18, 2010 in Business and Economy

Guha Rajan:

There seems to be no respite from the economic woes the world is facing these days.

The US economic downturn was followed by bankruptcy filling by quite a few corporates. Then came the Dubai international corporate crisis and now Greece seems to have gotten into the economic mess. It has pointed out a huge budget deficit and the maturity payment of Government bonds seems to be the main issue.

Can a similar situation be faced by the Indian Economy?Similarities between India and Greece, including higher budget deficit (approx 7% of GDP), external debt, large scale tax evasion, gives rise to the question of whether India would get into a similar situation. Most likely not, as Greece is a part of the European Union and hence it does not have its own currency; it has only the Euro. Hence, naturally, it will not be in a position to devalue the currency at its independant will. The European Union and the IMF are in the process of bailing out Greece with funding arrangement, but not without imposing certain conditions.

As the situation in Greece is similar to other European countries like Spain, France, Ireland or Portugal, can the European Union depreciate the Euro? It may be one solution to depreciate the Euro, but the Euro is considered to be a reserve currency and if the EU tries to depreciate it, might even lead to a collapse, if the Government holding the Euro tries to encash it in a different currency.

Similarly, for the US, even though it has its own currency, it is difficult for the United States to think about depreciating the value of the currency in the case of a crisis. This is due to the fact that 70% of the reserve currency is in the form of USD Hence, the slightest skewness might result in a problem for the USD exchange rate.

Considering everything, the options seem limited. Greece and other European countries have to work towards not only bringing down their fiscal deficit but also look at ways to improve their balance of trade in the future. This implies that Greece would have to cut government expenditure, including the imposition of additional taxation.

The same situation may not arise for India, as India has it own currency, it can devalue it as and when needed. Besides, INR isn’t currently considered as Reserve. Hence, India can print money and devalue it by itself. Indian remittances by expatriates, more significant than exports comparatively, is quite a considerable amount compared to any other country apart from China. Having a stronger currency has its own perils. These days weaker currencies seem to suit the world better as has been seen in the case of India, China and other developing countries.

The writer is a correspondent of Youth Ki Awaaz.