Eurozone break-up could hit us in face, warns Basu
If Europe does slip into a crisis, it is going to be a very difficult time
Chief Economic Adviser Kaushik Basu has warned that if the Eurozone breaks up finally, it will hit India in the face as the country is unlikely to have the strength to overcome that crisis.
"If Europe does slip into a crisis, it is going to be a very difficult time. There is no escaping from that. Though we (government and the Reserve Bank) have a team that is working on different scenarios, to see how we will react, it will be a lie to say that we have the strength to weather that. It will hit us in the face," he said here at a function over the weekend.
On the impact of a possible Greek exit from the Euro on the domestic economy, he said, "We are not out of the woods. There is indeed some risk that this is going to last a while. It will affect us."
Basu said a deeper European crisis would be a jolt and it could spin Europe into a big crisis. "It is going to be a difficult one or two years for the world for sure."
On the positive side he said, "Thankfully, Europe is no longer our biggest export destination, to the Middle-East we probably export more today."
But he said the impact on India will be indirect. "Europe being a major driver of growth and if it slows down, even if we don't get a direct hit, the US is going to get hit immediately, China is going to get hit immediately. So, the impact on us will come to us through our trading partners."
Explaining the rationale for his fear on the global front, Basu said the problem will arise in 2014, when the LTRO (long term refinancing operations of the European Central Bank or ECB) payback comes in December 2014 and February 2015, when as much USD 1.3 trillion need to be paid by 800 banks to the ECB. This will sap the entire banking system, he warned.
Basu, however, expressed hope that by 2015 the emerging economies, will be better off by that time. "The emerging economies are in a position to build strength (during this interval) so when we come out of this tunnel, we will be at the top of it. We will come out on top of growth drivers by 2015," he said.