Chief economic advisor Kaushik Basu has said the ongoing sovereign debt crisis in Europe may, in fact, turn advantageous for the country's capital markets if it is contained at the present level.
But if the crisis snowballs into an overall global meltdown, then we cannot remain immune to its impact as the country is now integrated with the world, Basu told PTI in an interview.
"If a crisis in another industrialised country is a relatively small crisis, in fact, we get some very unusual advantage. More money flows into India," Basu said, adding people look for safer havens to park their money.
However, if the trouble gets very big, people get nervous about the world economy itself and there may be an outflow of money as people then put money into gold and other assets, rather than into stock markets anywhere in the world, he pointed out.
Basu's views are corroborated to a large extent by the movement of foreign capital into the country since the start of 2010, the time when fears of sovereign debt crisis in Europe, particularly in Greece, began to come appear.
There was net inflow of foreign institutional funds into the domestic capital markets since the start of 2010 till April-end, which was Rs 54,606 crore and the stock market barometer Sensex rose 93.9 points in the four months to close at 17,558.71 on April 30.
The fears of worsening crisis, however, led to the announcement of a massive $147-billion bailout package for the debt-stricken Greece last week by the Eurozone nations and the International Monetary Fund. And following this the domestic market, too, started feeling the heat and began to tumble down.
The domestic markets got battered last week as sentiment was hit due to the reports of worsening sovereign debt crisis in two other EU nations-- Portugal and Spain-- on the one hand and the Greek problem escalated on the other.
The Sensex fell all the five days last week, shedding a whopping 789.6 points to close at 16,769.11 on Friday, 4.5 per cent down over the preceding week.
In the first week of May, the FIIs were net sellers in the market, decreasing their exposure by Rs 840 crore. Though the net outflow may not be large, the impact on the domestic market was massive.
Basu said the country is now sufficiently interconnected with the world that a serious global crisis will wash ashore into our country and we will have to be prepared for that.
The chief economic advisor, however, said, "if the astronomical figure of over USD 140 billion bailout package helps contain the crisis and stop it at Greece, I think we will be fine. In fact, we may get some additional capital inflows in search of a safer haven."
Basu pointed out that debt contagion is always a risk in financial markets and very often it can fly from one country to another through the psychological behaviour of investors and peculators. They begin to play the game differently, he said.
"Lot of the reasons, I think, the IMF and European Union have stepped in so aggressively into Greece is they want to stop the contagion. But financial markets contagion is always a bit of a risk. We have to live with that," he said.
"So, a lot will depend on the size of the crisis that comes out of the Greek sovereign (debt) problem," he added.
There are already fears that many other European countries like Portugal and Spain may also face similar sovereign debt problems.
