Chief economic advisor Kaushik Basu has warned that if the Eurozone breaks up finally, it will be more disastrous than the 2008 global financial crisis triggered by the fall of the Wall Street banks, from which the global economy is yet to recover.

The government is blaming the Eurozone debt crisis as one of the reasons behind the slowdown in the domestic economy, while exports to Europe too have moderated. Growth has slowed to a 9-year low of 5.3% in the January-March quarter, prompting calls for urgent action to revive growth. The government and the Reserve Bank have a team that is working on different scenarios related to it.

Initially Indian policymakers had shrugged off any adverse impact of the Eurozone crisis when it emerged but there is now recognition in the government that the impact on India could be huge given the trade and financial linkages of the domestic economy with the global economy. 

The European Union accounts for 20.2% of India’s merchandise exports and the US for another 10.9%. India is now diversifying its exports to other regions to overcome the slowdown in the two key markets. 

Further as India is diversifying its export more to Middle-East thus the impact on India might be indirect. As Europe is a major driver of growth and if it slows down the US and China economy will get effected immediately.  So, in turn India will also get affected through trading partners.

According to the chief economic adviser, the problem will arise in 2014, when the LTRO (long-term refinancing operations of the European Central Bank or ECB) payback comes in December 2014 and February 2015, when nearly $1.3 trillion needs to be paid by 800 banks to the ECB. However by 2015, the world economy, especially the emerging economies, will be better off by that time.