A Word from the Associate Dean: Recession in Europe and Implications for India and South Asia

By Ashok Som, Associate Dean of the Global MBA

Last week in Singapore, Professor Ashok Som participated in a panel discussion on the topic of Recession in Europe: Implications for India and Southeast Asia. Watch the conference video below!

[youtube http://www.youtube.com/watch?v=XOBijb30YNI]

The economic crisis in Europe reaches far beyond just the EU, having a tangible impact on India and Southeast Asian countries. The effect is felt on both a macro and micro level.

At the macro level, the cycle of confidence which evolves over a very long time horizon plays a decisive role; success breeds confidence which unfortunately turns into over-confidence and even arrogance. Complacency sets in. The collapse of bubble based upon this over-confidence leads now to under confidence, which is followed by efforts to rebuild. Thus the cycle begins again.

India and Southeast Asian countries are affected through trade and financial channels, as Europe and the US account for a third of India’s exports. Even if a full recession is averted in Europe, its slow growth would have implications for India. The EU accounted for nearly $47 billion of Indian’s total exports of $254 billion last fiscal year, making it a larger destination than North America. Between 2004 and 2010, services account for 66% of the increment in India’s GDP, of which 9.4% were from software. The deceleration or decline in software export revenues is bound to have an adverse affect on GDP.  Austerity measures put in place by European countries and falling consumer spending may impact exports from India. Though China is India’s largest trading partner, it mostly imports raw materials for finished products for the rest of the world.

Further impact is seen with capital flight, the outflow of foreign institutional investment from the equity market. This has led to a steep depreciation of the rupee. Public debt is another concern. Though India’s gross public debt to GDP ratio is down to 66.2% from 75.8% in 2007, it is will among the highest in the region.

While a recession in just Europe or just the US might not be enough to cause a global recession, the collapse of both economies likely would. Asia’s developing economies would take a significant blow to exports, and GDP growth would decelerate. The UN has stated that a prolonged recession in Europe could have significant impact on growth across South Asian economies, including Sri Lanka, India, and Pakistan. In 2011, Bangladesh, India, and Sri Lanka recorded GDP growth of 6.5% or higher, while the Islamic Republic of Iran, Nepal, and Pakistan registered growth rates of less than 4%. Further, downgrading of sovereign creditworthiness by credit rating agencies would likely be more negative than previously experienced. Further, the services sector in India, including IT, contributes as much as 52% to the GDP growth and is directly linked to job creation and sustenance. For many Southeast Asian countries the Thailand, the Philippines, Malaysia, Indonesia, the recession is occurring in the middle of a long and incomplete transition from authoritarian to democratic forms of governance. Other countries, such as Vietnam, have retrained authoritarian governance but depend on continued high growth to maintain support for the government. The impact of the global recession on exports, therefore, threatens political stability in a number of countries in the region.

The economic outlook towards Asia-Pacific would likely be more negative than previously experienced, and a larger number of negative ratings actions would follow such as downgrading by credit rating agencies.

Within the macro phenomenon I have identified a paradox. A recent study by the Stockholm International Peace Research Institute (Sipri) pointed out that India has in recent years become the world's largest recipient of arms, accounting for 10 per cent of global arms imports in the period 2007-11. In contrast, China, which was the largest recipient of arms between 2002 and 2006, fell to fourth place in 2007-11 due to indigenization over the past couple of decades resulting in a $119 billion defense budget for 2012-2013: China purchases more and more from within its country due to its policy of technology transfer. Most of the donor countries are from Europe be it France, UK, Russia.

On a micro level, multinationals face both challenges and opportunities. Reforming the tax structure in India is an obstacle, but access to a market that is growing while Europe and the US stagnate is an opportunity. A rich talent base exists in India and South Asia, and with growth comes new business opportunities in retail, insurance, private banking, etc. More and more, members of the educated workforce are leaving Europe to seek a better life in emerging economies around the world. Brazil, Canada, and Australia are some of the countries seizing this opportunity to attract top talent. On the higher education front there are implications. Recession in Europe means less jobs and countries tightening their immigration rules and policies for jobs for foreigners which in-turn will lead to less number of students opting to study from India and S.E. Asia in European Universities and thus in the talent pool of the region.

By the way of conclusion the most important moot point is to regain the cycle of confidence and trust within the European Union and that of India and S.E. Asia.