US, EU debt crisis seen crimping Indian economy

Amid speculation rife over a double-dip recession in Europe and the US, a United Nations report, on  Tuesday, said this would seriously affect emerging markets and other developing countries through trade and financial channels.

The UN report on ‘World Economic Situation and Prospects 2012’ also said that economic activities across South Asia will be significantly impacted through the crisis in the two developed economies.

“A recession in either Europe or the United States alone may not be enough to induce a global recession, but the collapse of both economies most likely would….. The Asian developing economies would likely take a significant blow through a drop in their exports and GDP growth would also decelerate,” it said.

Europe and the US account for a third of India’s exports. The sovereign debt crisis can affect exports and moderate capital flow into the country.

Although India has taken steps to diversify exports to new and emerging markets of Africa and  Latin America, the traditional destinations of Europe, US and Japan still constitute about 60 per cent of India’s exports. Even if a recession is averted in Europe, the slow growth would have implications for India. The European Union accounted for nearly $47 billion of India’s total exports of $254 billion last fiscal, making it a larger destination than North America.

Exporters are worried that debt crisis will hit demand and lead to payment problem. But, the Federation of Indian Export Organisations said that European crisis will not have severe impact on India’s exports in the long run because of country’s diversified shipments to new trade destinations. The UN report also pointed to a downside risk to India’s economic growth this year and in 2013 on account of problems in Europe and the USA, says a UN report.

“India’s economy is forecast to expand at a pace similar to 2011 in the following two years... at 7.7 per cent in 2012 and 7.9 per cent in 2013,” the report said adding the downside risks to the regional outlook have sharply increased in recent months particularly in case of India.

The report said the Indian government is unlikely to achieve its deficit target of 4.7 per cent of the GDP for 2011-12 as lower growth has brought down tax revenues and disinvestment in state-run companies has been put on hold.

It, however, gave a positive outlook for India’s job market, saying, “India is enjoying gains in employment rates.”