We are not Greece OR US.

Saturday, May 15, 2010

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

US economic downturn was followed by Bankruptcy filling by quite a few corporates then came Dubai international corporate crisis and now Greece seems to have got into the economic mess. Its pointed out huge Budget deficit and maturity payment of Government bonds seems to be the main issue.

Can a similar situation happen to Indian Economy?. As there are lot of similarities between India and Greece has higher budget deficit (approx 7% of GDP), external debt, large scale tax evasion so the common question will be whether India would got into a similar situation. Most likely not,

Greece is part of European union and hence it does not have its currency and has only Euro, so naturally, it will not be in position to devalue its currency on its own will. The European Union and IMF and in the process of bailing out Greece with funding arrangement, but not without imposing certain conditions.

As Greece situation is similar to other European countries like Spain, France, Ireland or Portugal can the European Union depreciate the Euro? It may be a solution to depreciate Euro, but Euro is considered as reserve currency and however far behind USD as reserve currency and so if it tries to depreciate it might even lead to a collapse, if the Government holding Euro tries to en cash it to a different currency.

Similarly, for US though it has its own currency, it difficult for it to think about depreciating its value in cause of a crisis, this is due to the fact 70% of the reserve currency is in form of USD. Hence, a slightest indication might result in problem for USD exchange rate.

Considering all, the options looks to be limited, Greece and European countries has work towards not only bringing down its Fiscal deficit but also look at the ways to improve its balance of trade in the future. This mean Greece has to cut government expenditure including imposing additional taxation.

The same situation may not arise for India , as India has it own currency, it can devalue as needed, on top of it INR is never considered as Reserve currently. Hence, India can print money and devalue on its own. More importantly more than just export, India remittance by expatriate is a quite significant amount compared to any other country with only China being better. Hmmm.... benefit of brain drain !!!?!....

Having a stronger currency has its own peril...these days weaker currency seems to suit the world better this has been the case of India, China and other developing countries.

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