The implications of the Euro-Zone Crisis and Its Impact on India Economy - Coursework Example

THE IMPLICATIONS OF EURO-ZONE CRISIS AND ITS IMPACT ON INDIA’S ECONOMY + Submitted The Implications of Euro-Zone Crisis and Its Impact on India’s Economy The economic world in the 21st century has been dominated by crisis. Some of this crises include; the energy crisis of 2000 that saw the rise of crude oil from $25 per barrel in 1980s to $147.30 in 2008. The great recession in Russia, the United States housing bubble and the Euro-zone crisis. Crisis in the economic world do not only affect the member countries but also countries affiliated to them as a channel become closed leading to a crisis in the affiliated country. In this essay we shall be seeking to understand more on the Euro-zone crisis and its impact on India. India is not part of the Euro-zone but it is a recipient of the crisis as the zone forms its larger market in Europe. We shall look more on the Euro-zone crisis; its genesis, forces behind it and the measures taken to deliver it from total breakdown. We shall also be seeking to understand India’s economy and the economic imbalanced it can be if its market is understood. Lastly we shall conclude with the long term effects of the global economy in India. The Euro-zone is a union composed of 18 member countries that use Euro as a common currency. The countries in the Euro zone compose of Netherlands, Slovakia, Italy, Latvia, Ireland, Luxembourg, France, Finland, Germany, Cyprus, Estonia, Austria, Belgium, Slovenia, Spain, Greece, Malta and Portugal, (EU publication office 2009, 23). The euro zone is under European central bank that is governed by a president. It also has a board that oversees the working of the bank. The bank is mandated to see that inflation is put under control. There is also the euro group that makes decisions regarding the politics of the union and the euro (Gupta & Gupta 2010, 42). In the late 2000, there was a financial crisis and the Euro group acted by establishing provisions that would allow the group to give emergency loans to member countries in return for endorsement of economic reforms. These helped the member countries to get onto their feet from the high-unanticipated inflation that had taken centre stage in the many countries (Singh 1997, 82). Many countries member of the Euro zone do not use the Euro currency as the main currency in their countries but use it to do business in the Euro zone and European Union at large. There are other countries that are part of the European Union but do not fall under the Euro zone. These countries include; Andorra, San Marino and Vatican City. They use Euro as their currency (European communities 2004, 94) A number of factors caused the Euro zone crisis. These included globalisation of finance and the easy conditions of credit that encouraged high risk borrowing and lending. In addition, there were imbalances in the international trade, financial crisis of 2007-2008 and the recession of 2008-2012 (Kapila & Kapila 2012, 93). Further, real estate bubbles, fiscal policy choices which were directly related to expenses and revenues by the government and the bailing out of banks of the member nations by socialising the loses were some other factors that caused the Euro Zone Crisis (The Euro Zone Crisis: Overview And Issues For Congress 2012, 28). The Euro zone crisis has been there and has affected the countries in the euro zone since 2009. This was when some banks from eastern and central totalling to ten asked for a bailout due to inflation. This led to a decline of European Union Economy by 1.8 per cent (Srinivasan 200, 42). This led to a big banking, competitive and government debt crisis. This led to difficulty by other countries to finance the debt without them borrowing from other parties such as the International Monetary Fund. Banks also in the region faced a number of problems such as the liquidity and debt problems. They also became undercapitalised. Borrowing from these banks by investors and the general public at large became either unavailable or too expensive (Corbridges 2013, 59). Though the crisis affected the Euro zone not all countries were affected by this crisis. Some governments came up with ways of salvaging themselves from this situation. Some were the use of complex currencies, inconsistent accounting, off-balance sheet transactions and credit derivatives structure (Kumar 2002, 19). The European Central Bank also came up with measures to salvage the situation. These measures are like providing cheap loans that would e over one trillion, this would work to ensure a smooth and maintainable money flows. This also would work to increase the amount of money borrowed in the bank. It has also lowered interest rates to attract much business. The European Central bank announced its interest to support unlimitedly the countries the Euro zone that was involved in the sovereign bailout programme (Financial Times 2011, 32). The Euro zone crisis led to power shift in the countries involved and brought political tussles in the member countries. The countries that were affected by this include Ireland, Italy, Slovakia, Slovenia, Spain, Portugal, Greece and the Netherlands. It also brought a social crisis with it as member countries are affected by unemployment and the rise in cost of living (Visvesvaraya 2006, 02). India’s economy is one of the largest economies of the world. By the nominal GDP scale, it is the tenth largest (Chandra 2009, 49). In addition, by purchase power parity (PPP), India’s economy is the third largest. It is also 19th largest exporter and tallies number 10 in importing (International Monetary Fund 2013, 185). The economic growth has not been steady but in 2013, the government introduced controls on capital of outward investments. This would affect both corporate and individuals. In the 1947- 1991 the India’s economy was a mixture of socialism and capitalism. This led to an inward looking interventionist policies. It also led to an import substituting economy that could not take advantage of increase of trade in the post war era. This was key in the massive corruption that increased in India. Also poor implementation of this system led to it s collapse (Prakash 2009, 22). In 1991, the economy of India was liberalised and a free-market principle was adopted. Strict controls by government on setting up of industries were also abolished. This had been borrowed from the British government (The Economist 30-09-2012, 64). The new strategies that were adopted by the government saw the great improvement of economy. This also led to increase in per capita incomes. India has continuously been one of the world’s fastest growing economies due to liberalisation and creation of a free market. The worldwide financial predicament of 2008 led to moderation of the otherwise growing economy of India (Sengupta 2007, 43). Today India is seen as the fastest growing economy of the world and is said to overtake countries like Italy, UK, Russia, Germany, France and Japan by 2035. It’s also said to play a major role in the world economic class. India’s economy is characterised by many sectors. These sectors include The industry sector contributes to a GDP of 26% and boosts of a workforce of 22%. This is a sector that was greatly affected by the liberalisation of the market (Mohanty & Hazary 1997, 32). This is because with the removal of high restriction that characterised the economy imports from China greatly competed with products from the industries. This made some industries to be privatised, the FDI regime was also privatised, and its saw an increase in infrastructure development (Sengupta 2007, 43). These measures were all put in place to handle the competition with cheap imports (Ghate 2012, 95). Cheap labour and technological advancements also made it easier for local companies to compete favourably with other international companies. This also led to a large number of increased unemployment of people in the country as machines replaced them (Kumar 2005, 63) The textile industry contributes 20% of the output from manufacturing industries. It also has a large base of employment and is the second largest employer in the country with over 20 million people (Datt and Sundharam 2009, 119) Cheap labour in the textile industry is contributed by the child labour employed from the fields to the mills. Service industry provides 27% employment .by 2012 it contributed to a GDP of 57% (Krueger 2002, 11). In the service industry, the fastest growing areas are the business process and outsourcing. Specialisation, increased skilled and educated workers have contributed to growth in the Information Technology industry (Krueger 2002, 11). The retail industry is approximated to US$ 450 billion. In economic value its one of the top five retail market in the world. It employs more than 1.2 billion people. (Mckinsey, Sanjoy 2011, 38) There are strict regulations in the retail industry that prevents international investment in the India’s retail industry. Tourism industry contributes to 6.23% of the GDP of the nation. It employs a total of 8.78% (Nabli 1999, 33). Tourism industry in India is not very developed. It attracts tourism in its geographical and cultural diversity appeals to international tourism. The mining industry has 75 different minerals which include; bauxite, chromate, asbestos, gypsum, ochre, phosphorus, limestone, chromites, manganese, mica and silica sand among others. (Sandri 2011, 312) The world economy in general has faced a setback due to the crisis that has faced the economy. Many are trying to adjust in the crisis so that they can stand again. The domestic economy has been most affected by the crisis. The euro zone crises are a threat on economies of nations that have a big domestic growth (Sandri 2011, 312). Euro zone crisis will greatly affect India. There is a likely negative impact on economy exports and capital flow. The Foreign Institutional Investor is also likely to get a high volatility. The risen increase in investment pattern will also cause harm to the economy just like the increased withdrawal. An asset bubble that can burst at any given time is likely to occur because of a surge in FII that puts pressure on inflation. Inflation in India is very high and has caused the Central Bank of India to increase its key interest rates over and over again. A rising fuel cost due to the Euro zone crisis has been felt and this has affected India’s energy industry. The escalating borrowing rates from the banks make it hard for foreign countries to borrow money (Fund 2011, 92). Increased government debt, depression of the rupee, the surge in inflation has also been experienced in India. This has been brought up by the deficit spending that has been adopted by the government. The euro zone crisis has also impacted negatively in the India’s economy as it has led to limited monetary policy tools (Lapavitsas 2012, 38). Fiscal policy tools have been on the other hand been caused by regional parties that are very strong, stalemate in the political arena and the massive corruption in the government. This has led to falling of confidence by consumers and business people. This has made India to look at other countries to export to its goods and to import from. It has also made India to change its economic policies. Reforms have also been made in FDI, NRI and FII deposits. This has opened the economy to the outside investor. (Benjamin & Cheeks 2013, 83) The Euro-zone crisis also led India to implement a fiscal stimulus in association with the bank of India. This was implemented by government spending and tax breaks. Reduction of cash reserves and lowering interest rates were also measures the India government took to protect itself from the Euro-zone crisis (Benjamin & Cheeks 2013, 29) As a result of the Euro-zone crisis tourism in India has also been affected. Most of the tourists that come to India are from USA and United Kingdom. India has a rich cultural and geographical diversity. This attracts a wide number of tourists. The Euro zone crisis has led to decrease in the number of tourist that are visiting India therefore affecting one of the sectors of the economy (Benjamin & Cheeks 2013, 29) India now has an immediate concern due to reduce its current spending. Some measures have been taken with regard to import of oil and gold which is their major import. The augment in import duty on gold and restriction of the financing of bank against pledge of gold are measures the government has taken. Inflation index bonds have contained gold demand (Ghosh 1999, 84). In general there are a number of areas that the Euro-zone crisis will affect India. Trade is the first of these areas. Europe is one of the largest markets India has. With its wide range of economic sectors ranging from textiles, mining, agriculture, tourism among others. The crisis will tend to lower its buying power and this will mean that India has to look for alternative markets or lower their prices of goods in the European market (Ghosh 1999, 84). Secondly, there is the issue of currency. The shift from certainty to uncertainty of the Euro has made many to shift from using the Euro to using the dollar or the gold (Stallings & Peres 2000, 98). This shift has led to increased demand of the dollar compared to the rupee making it to decline in value. This has directly led to expensive import of goods and also cheap export. This has affected the spending of the India government as it has to cut on its spending cost and the direct impact will be to the quality of service delivery to its citizens. Oil is also a major import by India. The decline of the value of rupee has made it expensive to import a lot of it affecting the energy industry. It has led to increased fiscal deficit. Information technology and other outsourcing companies will also affect India. Europe is one of the biggest customers of these services from India. Decline of the rupee will make it expensive to export these services. These will greatly affect the revenues collected from such (Stallings & Peres 2000, 98). If the situation in Europe will stabilize then the India’s economy will stabilize as well and its growth will be tremendous. The growth in technology has increased the consumer base mostly in the service industry. The shift also from a developing economy and developed economy has also been a rising trend in many states (Dutz 2007, 87). These directly impacts in the management of business organisations. Increase of global labour markets has also been an emerging trend in the business world. This is seen to increase the imports and exports of countries bringing more revenues with them (Dutz 2007, 87). The increased information technology will also go a long way to the flow of information from one part of the world to another. Natural resource management has also been seen as one of the drivers of economy in many developing countries. These resources are either natural or human resources. Good management of these resources will serve to ensure that governments do not import them and use the money to advance other areas of the economy (Cheese & Thomas 2008, 22). In many countries, the environment provides the required resources in the manufacturing and industrial sector. In India the textile and the industry sector are one of the key drivers of the economy. Management f the resources used will mean that the production cost will lower and returns increase. The government has a greater role to play in coping with the current trends. The government is crucial in putting in place laws and policies that greatly affects the economy of the country. Corruption in many sectors that had been experienced in India during the pre independence era saw major decline of the economy. These shows the great role the government has to play in managing the economy of the country. The government has also a mandate to control its spending and creating an urgency list that would prevent import of goods that are not needed (Cheese & Thomas 2008, 22). The government has also a role of creating a conducive environment to attract business investors. Also making borrowing of credits easier increases the business base. Risk and growth management has also become one of the trending issues in many developing countries. Young economies have become the focus of consumption. They are also targeted in production and management of talents and innovation. These shows that a lot of competition will prevail in the current economy therefore a lot needs to be done to advance the working conditions and a space for competition needs to be created (Mujumdar 2007, 32). Many companies are recruiting talents from developing states, working to developing partnerships and developing new business models. Information flow is another sector that has to be improved. Information flow among countries is key to business management and allows for improvement of the business. Without information, it means that many of the businesses will be hit without information. Information flow helps to know the current systems that are put in place (Information Resource Management Association 2007, 20). The Euro- zone crisis has affected greatly on the economy of India. Among many impacts has been the decline of the Rupee, decline of the export to the Europe zone and decrease in the tourism industry among other. Measures have also been taken by the Indian government to help it not deepen in a crisis. These measures include reduction on import taxes and also increased lending and creation of a favourable ground for investment. Reference List 1. Top of Form INFORMATION RESOURCES MANAGEMENT ASSOCIATION, & KHOSROWPOUR, M. (2006). Emerging trends and challenges in information technology management. Hershey, Penn, Idea Group. http://www.books24x7.com/marc.asp?bookid=13270. MUJUMDAR, N. A. (2007). Inclusive growth: development perspectives in Indian economy. New Delhi, Academic Foundation.Bottom of Form CHEESE, P., THOMAS, R. J., & CRAIG, E. (2008). The talent powered organization: strategies for globalization, talent management and high performance. London, Kogan Page. DUTZ, M. A. (2007). Unleashing Indias innovation: toward sustainable and inclusive growth. Washington D.C., World Bank. STALLINGS, B., & PERES, W. (2000). Growth, employment, and equity: the impact of the economic reforms in Latin America and the Caribbean. Washington, D.C [u.a.], Brookings Institution Press [u.a.]. GHOSH, R. (1999). Good governance issues and sustainable development: the Indian ocean region. New Delhi, Atlantic Publ. LAPAVITSAS, C., & KOUVÉLAKIS, E. (2012). Crisis in the Eurozone. London, Verso. FUND, I. M. (2011). Government Debt Issuance in the Euro Area. Washington, International Monetary Fund. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=1587188. SANDRI, D., SANDRI, D., & MODY, A. (2011). The Eurozone Crisis How Banks and Sovereigns Came to be Joined at the Hip. 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