By Arati Nair:
Something has been brewing for quite a while in Greece. Rampant speculation of an economic meltdown, disintegration of the EU and ripple effect in global economies has steadily grown in volume. Every news bulletin over the past week has judiciously devoted some screen time to report this developing story.
However, back home in India the layman remains largely flummoxed. After Sunday’s (5th July) referendum in which over 61 percent Greeks voted decidedly against the bailout package, ‘Grexit’ now seems inevitable, or re-negotiations may get underway soon. But the common Indian fails to comprehend the relevance of the same for our country. This article is an attempt to analyse the lessons in store for us from the imminent Greek tragedy.
How It All Began
Greece had always been a misfit among other EU nations. Like a vegetarian wolf in a family of carnivores, it sought to enmesh itself with the other heavyweights of the region. Having joined the European Union two years after the founding eleven, Greece became the harbinger for other east European countries (‘If Greece can do it, why not us!’) to join the fold and adopt its currency, the Euro.
The current implosion began way back in 2009, when shortly after the infamous Wall Street crash (2008), Greece announced that it had been understating its deficit figures for a long time. This admission sent shock-waves throughout Europe and paved way for its sovereign debt crisis. The dwindling faith in the Greek economy resulted in sharp decline in investments and export.
Long story short, the godfathers of Europe, including Germany and the troika of International Monetary Fund (IMF), European Union (EU) and the European Central Bank (ECB) stepped in to salvage the situation with a three phase credit disbursement mechanism. Needless to say, Greece defaulted in paying these debts as it had channelised all loans to repay the previous arrears of France and Germany. The left leaning political ideology, coupled with a skewed state-funded pension apparatus hightailed the collapse of the Greek economy. Now with ATMs permitting citizens a daily withdrawal of merely 60 Euros, Greece is staring at a financial catastrophe.
The June 30 deadline to accept the austerity measures put forth by the troika has already passed, and the Greeks have chosen to depart the Euro bind. They have also not paid the outstanding debt to the tune of 1.6 billion Euros to the IMF. The leadership had urged its citizens to vote ‘OXI’ (No) in the referendum, which seems to have been accepted.
Its immediate future notwithstanding, the Greece situation teaches us some valuable lessons.
What Has India Gleaned?
Sanjay Baru’s article in The Hindu succinctly sums up the failure of the European Union in achieving its initial ambitious goals. He explains in detail the fallacies of the European federal structure, which could do precious little to safeguard an economic weakling. Its smug aura of invincibility now lies in shambles as the face-off between Greece and big brother Germany adds fuel to the fire.
The stranglehold of international financial bodies like IMF over member nations undermines their spirit of freedom in economic decisions. New institutions such as the BRICS Development Bank and Asian Infrastructure Investment Bank (AIIB) are viable alternatives for India to ease its dependence on the Bretton Woods organizations. Active and sustained participation could redirect our credit needs to these non-Western agencies.
The safety net for India has been its robust, interdependent federal model and an active banking sector. As Raghuram Rajan recently assured the nation, the foreign exchange reserves in India are deep enough to absorb all shocks. However, alarm bells are ringing with the increase in non-performing assets (NPAs) with public sector banks. NPAs are unrecovered loans, the majority of which in India lies with large corporates and industrialists. These contribute to ten percent of the stressed assets of banks.
The Greek conundrum is also the breakdown of a developed nation in the modern age of liberalisation. An implausible scenario of the previous century has come to be today. India, in the quest for development, must restrict its penchant for corporatisation in every sector to safeguard its economy against plutocracy. In a welfare state, the windfall gains of privatisation do not always trickle down to the masses.
But the Greek pension model is a prime specimen of a welfare initiative gone wrong. Financing the pension package using public funds and the state ex-chequer proved fatal for an economy in regression. Along similar lines, the Indian government has undertaken numerous insurance and pension schemes for varied sections of the populace. This bid for inclusive growth must incorporate adequate checks and balances to cushion all adverse effects on the economy. It is possible through a transparent disclosure of how the government makes use of these funds.
Landmark legislations have been stalled in parliament due to political disagreements. As each fiscal year passes, the government of the day will be put to test. For sustainable growth, it remains pertinent that the nitty-gritty of keys bills like GST, Land Acquistion etc. be examined and quick resolution to the periodic deep freeze of parliamentary sessions be put to rest.
As the financial intricacies of an alien land unravel before us, India can ill-afford to stay complacent. The spectre of the 1929 Great Depression and the global economic crisis of 2008 are timely reminders of even developed nations faltering. As we rush up the progress trajectory, these examples, including the ongoing Greek debt situation, are hard lessons that ought to be imbibed well.