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India and the next crisis

India and the next crisis
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First Published: Mon, Mar 30 2009. 10 26 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Mon, Mar 30 2009. 10 26 PM IST
A new emerging-markets crisis is here. Should India be worried?
If it was Latin America in the 1980s and East Asia in the 1990s, it is East Europe in the first decade of the 21st century. These past few weeks have been traumatic for several countries that were once part of the communist bloc—Hungary, Poland, the Czech Republic, Estonia, Romania… The list is a long one.
Illustration: Jayachandran / Mint
What has happened to these emerging stars of capitalism has a lot in common with the factors that toppled Latin America and East Asia into their financial crises in earlier decades—a credit bubble, huge borrowings from international banks, a growing current account deficit and weak banks, among others. The economic problems at the eastern fringes of Europe have already led to growing unemployment, street protests and political instability (the prime ministers of the Czech Republic and Hungary have already resigned).
What now? As far as the affected countries go, a lot depends on whether the recession that follows will be V-shaped or L-shaped. In other words, will they experience a sharp drop and quick rebound as East Asia did in the 1990s or will this be the beginning of a long period of stagnation as had happened in Latin America after the 1980s debt crisis?
Citigroup economists David Lubin, Johanna Chua and Alberto Ades asked this question in a recent report. They suggest that East Europe is more likely to go the Latin American way: “Yet, emerging Europe’s chances of a V-shaped recovery are constrained by the contraction in external demand and a very weak international financial sector. A V-shaped recovery for emerging Europe would, we think, at least require further real exchange rate depreciation than we have seen so far.”
India has to look out for two threats. One, will what is happening in East Europe spark off a new round of global risk aversion and further financing problems for all emerging markets? Two, will contagion spread to India via trade?
Neither seems likely right now. India has a very high fiscal deficit and a moderately high current account deficit, both of which worry global investors. But India is unlikely to be directly threatened by any risk aversion arising in East Europe; our economy is loosely clubbed with emerging Asia rather than East Europe.
The threat of contagion through the trade channel, too, is unlikely, because neither does India trade a lot with these countries, nor does it produce competing goods whose prices may collapse.
Will the East European crisis spread to India? Tell us at views@livemint.com
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First Published: Mon, Mar 30 2009. 10 26 PM IST