From the data presented by Prof. CP Chandrasekhar in his studio published in IndiaIndie, iIn recent months, the Indian economy's efforts to counter the effects of the global crisis are becoming increasingly difficult. On the one hand, the government blames this situation on theincrease in interest rates decided by the Indian Central Bank to fight inflation. On the other hand, the Central Bank itself replies that it cannot reduce interest rates, as inflation is still very high, as underlined in a previous article on FIRSTonline. The government is not in a position to increase public spending, hoping to reduce the budget deficit without resorting to a tax increase. It is therefore probable that the slowdown of the Indian economy will persist and the efforts of restrictive monetary policies will prove to be in vain. Indeed, in lack of efficient energy infrastructure and policies, the risk factors of the economy must first of all be correlated to the uncertainty on the prices of energy resources. Furthermore, the trend torising food prices it is worsening due to the effects that the extreme bad weather conditions that occurred in various parts of the world, such as the USA, Russia, Ukraine and Kazakhstan, have had on the production of cereals, especially maize and soybeans. Not forgetting the scarce supply of foodstuffs in the internal market, given the slow progress in the agricultural sector and an inefficient distribution system. Finally, it is expected that theintensification of the European financial crisis could adversely affect the Indian economy. In Europe, banks have been invited to accept one write-down of the loans granted to the governments of the Eurozone itself, as part of the common effort aimed at resolving the crisis, but thus risking being faced with a substantial erosion of their assets. And so, drastically limiting the disbursement of credit to households, businesses and foreign countries.
The involvement of foreign banks in the country has gradually increased in the last ten years, starting with the implementation of liberalizations in the economic and financial system. The ratio of external credits to GDP in India thus rose from 9,7% in 2005 to 16% in 2007. In 2010, after the outbreak of the crisis, this ratio fell to only 15,3%, demonstrating that investments have not contracted. A year ago, the European banks adhering to the BIS accounted for almost 159 billion dollars of foreign credits against India, having turned to emerging countries in order to expand their business volume, attracted by higher profits. So much so that, a year ago, 55% of the global banking system's foreign credits came from European banks.
Right now, the degree of Exposure of the Indian economy to European investments increases the vulnerability not only of the country, but of European actors themselves. Banks affected by the crisis find themselves having to cover losses in their own countries, carry out recapitalization measures and improve the risk profile of their business. And one way to do that is to raise surpluses by leveraging your position in lucrative emerging markets. It is then necessary assess the risk of European investments in the face of the slowdown in Indian economic performance, especially if you are faced with investments in the medium to long term. A worsening of the situation would, in fact, lead not only to the mere outflow of productive investments from India towards other more profitable markets, but also to a collapse of Indian exports and a worsening of the European recession itself. It turns out then overcoming the deep infrastructural deficiencies, energy and financial inefficiencies in India is fundamental for European interests, i.e. those very reasons that hinder the development of the country.
