We are living in uncertain times. One never knows when Lehman Brothers can trigger an economic Tsunami bringing the world to a state of recession, bordering depression; or a prosperous and flourishing Dubai can default to create financial uncertainty or Greece can create a crisis that threatens till-recently a strong currency like Euro and ignite the dreaded republic debt default. But only if we look into seeding and sprouting of these events in a little more objective manner, it would be noticed that there were ominous signs and such unfortunate developments were only waiting to happen.


What is even more blissful to our Motherland is that our first, second, third and fourth reactions to such development are dismissive one, which is "not going to impact" India. That is what the powers that be, always state; though with passage of time, when everyone else thinks that India will be impacted, that the realization dawns on our Government leaders. It will be recalled that when US Sub-Prime Rates had triggered the recession, right from our Hon'ble Prime Minister down to mandarins in North and South Blocks pooh-poohed the possibility of any impact on India. It was much later that everybody in his own wisdom realized that their assessment about the US triggered global downturn was not right and that it will make an impact on India, which it did.


Things are not very different this time too. Our Finance Secretary, Ashok Chawla is on record to say, "It (Greek debt crisis) will have minimal impact on country's export. As far as overall India economy is concerned, the impact will be very minimal. In fact, in the short run, the Greek debt crisis might help us in terms of India being regarded as a relatively safe place to park funds." However, Subir Gokarn, Deputy Governor, Reserve Bank of India, seems to disagree, adding, "There might some nervousness among investors worldwide which might provoke capital outflows from emerging markets in the short run; so there is a risk of short-term vulnerability of capital outflows." However, Chawla is sure that in the long run, the impact would be negligible as India has faced bigger crisis of larger volumes without letting its economy shrink beyond a point", while treating the current crisis of Europe to be a "temporary affair."


However, the latest assessment from the Government, in this case-Pranab Mukherjee, is closer to the realities than Chawla or even Gokarn. The Finance Minister has acknowledged that "The Greek debt crisis roiling markets worldwide may at most "influence" India, but will have limited "adverse impact" on the country. "However, he acknowledged that the present Greek debt crisis was not as lethal as 2008-09 crisis triggered by the US Sub-prime Crisis. And in any case, India had "very little direct exposure to European countries at the centre of the crisis with the country's banking system having no direct inks with them and exports to Greece, Spain, Portugal and Italy are only 4% of our total exports."


Significantly-and wisely, Mukherjee added, "That way, our exposure is not much. But the fact of the matter is even when the Sub-prime Crisis hit the US, we did not have any direct relation with it. But when it converted into a major financial crisis, capital outflows started, developmental support came down, FDI came down...exports starting sinking."


What Finance Minister has mildly referred to the impact of US Sub Prime crisis on India, needs to be delved more deeply. It must be acknowledged that the crisis spread its wings, far too beyond the US and traveled almost all over the world, once again reminding us that the world today is a global village and any pulsating part of the world cannot remain immune to the financial problems in another part of the world. Had Greece not been a part of European Union, it would have been a different story altogether. Any sovereign debt default in the present case would have had extremely seriously repercussions on Euro and the European Union.


Ground Realities


As soon as the news of imminent first-ever republic debt default by Greece emerged, it sent shock-waves across the world. When the Euro celebrated its 10th anniversary last year, it seemed to b a solid currency. Only a few eccentrics could speculate about whether it could face the possibility of its break up one day. In the past few weeks, Greece has changed all that. After initial hesitation, the European Union and International Monetary Fund came out, rather quickly, with 110 billion Euro bailout package for Greece. It did set off euphoria, which could see bailing Greece through the crisis. But it was short-lived for an incredible short period of just one day. It gave way to doubts whether the package would enable Greece to see it through. The package raised more questions that it answered, and like so many of the policy responses of Western governments in the past two years may well be too little, too late. The crisis in Greece is essentially fiscal, but its implications for Greece and the Euro zone countries may well go beyond the purely economic. The New York based investment bank, Morgan Stanley is among those saying that the possibility of a Euro collapse has to be considered. Next to the demise of the Euro, the implosion of Lehman Brothers Holdings would look like a fairly trivial event.

On the news of likely sovereign default on the part of Greece, the world markets convulsed; US shares saw a spectacular intraday fall on deepening concerns that Greece's debt crisis would spread through Europe. US stocks slumped as much as 9%, while European stocks extended a three-week sell to 11% after Asian stocks slumped. India has lost out almost 8 per cent during the last six weeks. The reason for this universal fall was that the market was factoring in the possibility that this Greek problem will spread to Spain and Portugal. The Euro, supported by such strong economies like Germany, shrank to its 14-month lows and the finance ministers of the Group of Seven industrialized nations held a conference call on the crisis. The gold surged, as the investors sought the safe-haven investment, hitting 1,205.00 to 1,206.00 dollars an ounce from the previous close of 1,177.50-1,178.50 dollars. As of now, the US dollar has appreciated by 16.34 per cent against the Euro.


EU Monetary Affairs Chief Olli Rehn compared Greek insolvency to the financial crisis 18 months ago. He said, Little did "authorities of the United States know in September 2008 what the bankruptcy of investment bank Lehman Brothers would lead to. The consequence was that the worlds financial system was paralysed in a way that led to the biggest global recession since the 1930s. Consequences from Greece's insolvency would be similar if not worse." Admittedly, the contagion effect of Greece crisis is hard to ignore.


Impact of Contagion Effect


According to Finance Minister Pranab Mukherjee, "The problem of Greece was mainly ion three counts i.e.(i) Fiscal deficit at 13% of GDP (ii) Debt-GDP ratio a 115% and (iii) the current account deficit of 13.8%. No economy, however powerful or strong it may appear to be, can sustain such deficit levels." Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, says that India is likely to witness a short term impact of Greece's public financial crisis, if it spreads to larger Euro Zone economies. He, however, hoped that "the crisis will remain limited to small countries and will not spread worldwide." Monetary and fiscal policy makers in India have already expressed their confidence in India's ability to withstand any contagion effect of the Greece crisis. Reserve Bank of India Deputy Governor Subir Gokarn said that the Greek debt crisis could trigger short-term vulnerability in the Indian markets, though its long-term impact might not be severe. Ahluwalia, while addressing a CUTS International function said,"If it (Greece bailout package) succeeds in stabilizing the global financial situation that is beneficial for us. The crisis really is the crisis of sovereign debt in the industrialized countriesWe are not in that situation."


To my mind, it is just a wishful or at best a hopeful thinking that there will not be any contagion effect of Greece Crisis. The ground realities, as I see them, are not falling in line with the wishful thinking that pervades the Government of India today. In fact, going by the data emanating from the PIGS (Portugal, Ireland, Greece and Spain), this is only the first of the downgrades that is likely. Others are not way behind. Moody's credit ratings agency has warned, it might downgrade Portugals debt rating and further cut Greeces to Junk status (which it has already done). It continues "Contagion has spread from Greece-historically a weaker credit in the context of the Euro Zone-to sovereigns with stronger credit metrics like Portugal, Ireland and Spain." But this does not seem to be the end of the problem.


Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities says, "Even though one of the worst scenarios-a Greek default-has been avoided for now, in many ways solving the bigger problems has simply been postponed and new issues could emerge in places such as Portugal and Spain.


Impact on Indian Exports


Finance Minister has admitted that since "exports to Greece, Spain, Portugal and Italy are only 4% of total exports; that way, our exposure is not much." In the considered opinion of Ashok Chawla, "It will have virtually very little effect on country's exports. "Perhaps, yet; however, not so in even of garment exports that is what The Stitch Times and its readers are concerned with.


Home Facts


As our readers are aware, garment exports have not been in the pink of their health. In fact, garment exports have been plagued with one problem or the other; most of which are our own creation. As the AEPC, apparel exports declined around 13 per cent to $8.79 billion in the first 11 months of 2009-10, primarily due to significant increase in raw material cost during the year, which led to loss of orders. Earlier, garment exports have been reeling due to global economic downturn which caused rapid reduction in orders from developed markets; exchange rate fluctuations and lately due to unprecedented rise in raw material costs. Premal Udani, Chairman, AEPC is on record to say, "The last six months have been particularly rough for our sector. Raw material prices (cotton yarn) went up by an astronomical 40-50 pr cent in this time frame,which they could neither pass on to buyers nor could these be absorbed." Thus, internally, we are not very happily placed in the matter of our price edge which stands blunted. While it needs to be admitted that the indigenous price rise of raw material has no direct link with Greece crisis; however, nonetheless, its impact becomes more pronounced when we examine the question of garment exports in the new, developing situation. In any case, this would be only a constant factor.

Impact on Garment Exports


Exports to EU


During the last eight months, Indian Rupee has appreciated both against Euro and US dollar. It appreciated almost by 21% against the Euro. As against this, the US dollar has appreciated almost by 16.34 per cent against the Euro. However, Indian Rupee has appreciated by only 5.23% in relation to US dollar. I think we can forget about garment exports to the EU since appreciation of Indian Rupee vis--vis Euro has already blunted our price edge, rendering Indian imports in the EU costlier rich and stable economies like Germany. However, for low-end economies like Portugal and Italy, the Indian exporters may not like to take risk by exporting our garments without being sure of their remittances back home. Second, the niche, high-end garments that the EU has been importing from India and other countries must have lost their demand among Europeans; given the massive austerity drives now in full force in all the European countries. Third, since the raw material prices in India have shot up and the final products i.e. garments would become costlier, the European demand for Indian garments is expected to dwindle away. Fourth, the deep depreciation of Euro in relation to Indian Rupee would make Indian garments almost unaffordable.


Indian exporters would thus like to avoid exporting garments to the EU in general. Non-export or reduced exports to the EU, which has been our major trading partner with 40% of Indian garments going to the EU, would be a big loss to Indian garment exports, and not "minimal" as stated by the Government. This is where, I think, our policy makers are getting it wrong.


Export to US


Though appreciation of Indian Rupee has been 5.23% only, but when combined with much higher costs of raw material would render our exports to the US uncompetitive. This, I think, should adversely impact our garment exports.


Volatility in Indian Rupee


Above all, are we sure which way our currency will go? Will it appreciate or depreciate? When? How much? There is whole lot of imponderables to which no body in the Government of India can be sure. As I had said earlier in one of my articles, the exchange rate of Indian Rupee is governed not by us or our Government, but the FIIs, whose mercurial behaviour has been responsible for strong bouts of appreciation or depreciation with our helpless and hapless Reserve Bank of India and Ministry of Finance together failed to influence.


With the kind of deep, continuing and even growing uncertainties because of new phenomena coming up without any notice or our anticipation, one can never be sure of what will be our exchange rate, on which our exports hinge. We have proven failure to regulate the prices of cotton and cotton yarn, which was not so much because of the crop failure, but its sheer management in terms of ensuring abundant and easy and cheaper availability of cotton and cotton yarn to Indian mills, which is basic and central to the cost of garments that we target to export.


Impact of Greece Crisis Will Not Be Minimal


To sum up,


  1. when the garment industry is unsure of both the prices and availability of their basic raw material like cotton and cotton yarn,
  2. when the exchange of Indian Rupee is highly volatile and unsure,
  3. when we have already been facing a decline in our garment exports
  4. when there is a serious economic climb down in the major-most export destination of European Union and
  5. when there is a general uncertainty or unease in the economic outlook of the world, it would be nave to think that the Greece Crisis would have only a minimal impact on Indian exports, of which garments are an integral part.