Policy makers need to be cautious about the indirect effects of the euro zone’s sovereign debt crisis on India, though the country’s banks do not have a significant exposure to these according to the Reserve Bank of India (RBI).
Speaking at a seminar yesterday, RBI Deputy Governor Anand Sinha said, “The Indian corporate sector and banks had an exposure of about $206 billion as of June 2011, according to data provided by the Bank for International Settlement (BIS). Of this total, our exposure to European banks is not significant.”
However, he also added, India could be impacted due to the indirect effect or the feedback loop in terms of exports, tourism and even remittances.
“The European Union accounts for 30 per cent of India’s total tourist arrivals and a slump in the zone could affect the tourism industry,” Sinha said.
He also cited the example of software exports, as India’s earnings from the troubled area is 30 per cent of the total earnings through total software.
“Remittances from the euro zone are around 18 per cent of the total amount received by India, which is not an insignificant number,” he said.
Sinha said the potential fallout of the debt crisis could be as severe as the subprime crisis in 2008 and suggested looking only at the direct impact due to the debt crisis may not give a holistic picture. There was a need to be careful about the indirect impacts or the ‘feedback loops’.
“The current debt crisis is actually is a continuation of the subprime crisis of 2008,” he added.
