The endgame in Greece has begun. A bankrupt nation, led by a Left-wing government, has stuck to the view that it cannot frontload the payment of debt (estimated at about €300 billion) before it pays pensions and salaries. Its creditors want Greece to curb spending before they grant more bailouts. A referendum will be held on July 5 to decide whether such terms for receiving fresh bailout money are acceptable. But the world seems prepared for a ‘Grexit’ — which implies that Greece will not accept the conditions and therefore repudiate its entire debt — unless, of course, a fresh offer crops up from Greece or its predominantly European creditors before the end of this week. The experience of the last five years, when the troika of European Central Bank, European Union and the IMF extended €240 billion to Greece on conditions of severe austerity, will have a bearing on Sunday’s referendum. The deficit has come down since 2010, but as a result Greece’s GDP has shrunk by 25 per cent while the unemployment rate too is at 25 per cent. No one wants more austerity, but the prospect of exiting the euro is full of agonising uncertainties, including more pain as capital pulls out of Greece to safer havens. Meanwhile, Russia is not only working on a deal to supply gas through Greece to Europe but has also offered it membership in the BRICS New Development Bank. So, the events are loaded with not just financial, but political and strategic implications as well. This explains the US’ active efforts to broker a truce, even as time runs out.

A flight of capital from euro assets to US securities seems likely. This can lead to higher interest rates in Europe, a fall in the euro and an appreciation of the dollar, perhaps prompting the Fed to defer plans of a rate hike. The last thing the US wants now is a dollar that erodes its competitiveness. The pursuit of risk-free assets could impact markets in India, taking down the rupee. However, a repeat of mid-2013, when the rupee sank to below 68 to the dollar, seems unlikely. India’s current account deficit is 1.1 per cent of GDP today (as against 4.7 per cent then), fiscal deficit is down to 4 per cent (above 5 per cent in 2013) and inflation 5 per cent (double digits in 2013). Yet, we should be prepared for some volatility. A crisis-hit Euro Zone will further hurt India’s declining exports. Commodity prices can, however, be expected to remain low, cushioning the impact of a lower rupee.

With markets expected to remain skittish for a while, India must raise resources internally for an investment push. Achieving 8 per cent growth in this situation will take some doing. As the chief economic advisor has indicated, a relaxed view of fiscal consolidation — a little less austerity — will help.

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