Mumbai, June 10 (PTI): Chief economic adviser Kaushik Basu has warned that if the Eurozone breaks up, it will hit India in the face as the country is unlikely to have the strength to overcome that crisis.
"If Europe does slip into a crisis, it is going to be a very difficult time. There is no escaping from that. Though we (the government and the RBI) have a team that is working on different scenarios, to see how we will react, it will be a lie to say that we have the strength to weather that. It will hit us in the face," he said.
On the impact of a possible Greek exit from the euro on the domestic economy, he said, "We are not out of the woods. There is indeed some risk that this is going to last a while. It will affect us."
A deeper European crisis will be a jolt and it can spin Europe into a big crisis. "It is going to be a difficult one or two years for the world for sure," Basu said.
"Thankfully, Europe is no longer our biggest export destination. We probably export more to West Asia today."
But he said the impact on India would be indirect. "If Europe, being a major driver of growth slows down, even if we don't get a direct hit, the US and China are going to get hit immediately. So, the impact will come to us through our trading partners."
Explaining the rationale behind his fear on the global front, Basu said the problem would arise when the LTRO (long-term refinancing operations) payback of the European Central Bank (ECB) comes in December 2014 and February 2015, when as much $1.3 trillion need to be paid by 800 banks to the ECB. This will sap the entire banking system, he warned.
