How does the debt dilemma in west impact India?

Mon, 22 Aug Pre-Open

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The western world is grappling with problems of mounting debt burden. These lingering debt woes have made financial markets unstable. But it is important to keep these things in perspective before drawing any conclusions about the current mayhem. Europe is likely to find its way out of the current debt trap by sharing the burden as default would question the credibility of Euro. Further, many European countries are indebted to each other. Hence, allowing the weaker economies to default would mean that the entire European Union would be blown away by the debt bubble.

As far as the US is concerned default is certainly out of question as the debt is in US dollars itself. Basically, the Fed can just print money to repay the debt. While this money printing exercise can avoid default it cannot avoid the crisis that comes along with higher debt. Higher debt brings in currency and inflation risk over time. The budget and fiscal deficit would also worsen. So, while it is clear that the chances of default are narrow but the long term implications of this debt dosage are perennial.

And since we live in the era of globalization these problems of high debt and resultant financial and fiscal instability can have huge repercussions across the global markets. So, what does this current debt problem mean to India and other Asian economies?

Since US and Europe are witnessing slower growth with interest rates nearing zero investors are looking out for promising opportunities elsewhere. Holding on to the respective paper currencies of these countries presents the risk of eroding purchasing power due to loose monetary policies. In such cases investors would look out to pour capital into other emerging countries like India. Higher capital will provide avenue for future growth in these economies.

Secondly, the current debt trouble may also set pillars of change as far as structural growth in Asian economies is concerned. Most emerging economies are dependent on West for their exports. As the western world started slowing down trade (exports) amongst the emerging markets has increased considerably. This has filled the western consumption void to a certain extent. Thus, the export dependency on West has reduced considerably.

However, we believe that for growth to be sustainable in long term reforms in education and social sector are required. Better infrastructure facilities, higher R&D spend and strong technological know-how are also essential ingredients for long term economic development.