What India can learn from the Greek Debt Crisis

While the Greek and euro zone debt crisis is the current preoccupation of policy makers, Indian newspapers and TV channels are virtually silent on the matter. After all, India’s economy is booming – growing at a solid 8%; what can India have to worry about?

At closer inspection, the Greek crisis is more relevant to the Indian economy than one would necessarily imagine. India’s budget deficit is nearly at $50 billion – the highest amongst BRIC countries; a 2009 study indicates that India owed about $2.5 trillion – 78% of its GDP at the time. And while it’s true that India has traditionally financed its budget deficits domestically, this is where the Greek crisis becomes a pertinent case study. India, like Greece, is plagued by an evasive tax ethos and a large, informal economy.  

Let’s describe the Greek crisis in a nutshell: Greece racked up government debt so it had to adopt stringent austerity measures and secure a bailout. And why did Greece get itself into this mess? While the most common answer is excessive public spending, one cannot ignore the role of tax evasion in perpetuating a regressive economic system.

Public spending and tax evasion contributed to the Greek crisis in equal measure, and this is where the relevance and parallels to India are evident. India’s public deficit is three times the average of any emerging economy. India has an even larger informal economy than Greece, with the Indian informal economy making up roughly two-thirds of its GDP as opposed to Greece, where the informal economy is about 27% of the GDP. Further, India, like Greece, has been plagued by corruption scandals, some of the foremost examples being the 3G scam (totaling about $40 billion in losses for the Indian Government) and the Commonwealth Games.

The two countries are characterized by a peculiar vicious cycle – where tax evasion makes people trust the system less, and inexact enforcement measures and bribery encourage evasion. Both Greece and India have recently dealt with public protests; Greece is trying to improve its enforcement system, and the Indian government has been compelled to commit to introducing an anti-corruption law known as the “Lokpal Bill” following a popular protest led by Gandhian Anna Hazare.

The main lesson that India can draw from the Greek example is that mismanagement of a macroeconomic system compounded by sociological factors such as tax evasion and a shadow economy. Evidence however, suggests that the Indian government is content to let the large informal economy continue and grow unregulated, while its budget deficit more than doubles. And while India is nowhere close to the danger zone as yet, the Greek example begs the question that given India’s public spending and culture of tax evasion – will India become another Greece?  

 Photo Credit: Dinesh Cyanam