EU crisis spells bigger risk for India than Lehman
Though India’s forex reserves of $290bn look comfortable when compared to FY12’s trade deficit of $187bn, it’s important to keep a very close eye on the ever-ballooning crisis in Europe, especially its banks. Indeed, while the US collapse, and post-Lehman recovery, had a far greater impact on global growth, it’s quite the reverse for India. Apart from the fact that a fifth of India’s exports are to Europe as compared to half that to the US, the real area of concern is India’s large exposure to European banks, including for trade finance.
While India’s $290bn of reserves are a source of comfort, keep in mind that around $136bn of this comprises foreign claims which have a maturity of under a year. Importantly, from the point of view of why Europe matters more than the US, European banks had an exposure of over $146.6bn to India at the end of Q3 2012 as compared to around $68bn in the case of US banks. This includes money lent to the Indian private sector, the public sector as well as to Indian banks. While the private sector had foreign borrowings of $169.1bn at the end of Q3 2011, it was $31.5bn in the case of the public sector and $75.4bn for Indian banks. Of this, between a third and half came from European banks—$97.7bn of the forex exposure of India’s private sector to foreign banks comes from those in Europe, the figure is $12.8bn in the case of the public sector and $35.4bn in the case of Indian banks.
Not all of this, needless to say, is at risk. Of the $146.6bn, $81.8bn is from banks in the UK and another $22bn from banks in Germany—but as the near collapse of banks in Greece spreads and banks start getting shaky elsewhere (both Spanish and Italian banks have just been downgraded and are in a severe crisis, the subject of the G-8 Summit over the weekend at Camp David), there’s no telling when European banks, from even the non-crisis countries, could start making its way back from India. There has already been a fair amount of this happening over the past few months. Loans from European banks, which rose to $127.6bn by the end of Q1 2008 fell to $118.1bn by the end of Q4 2008 following the Lehman crash, to $112.5bn in Q1 2009 and $109.1bn at the end of Q2 2009; they began recovering after this, and rose to $152bn at the end of Q1 2011, but have been falling steadily since—to $148bn at the end of Q2 2011, $146.6bn at the end of Q3 and, even faster, to $132.8bn by December last year. The PIIGS, as it were, are coming home to roost.