LEARNING WITH THE TIMES India to be hit if US fails to fix ‘fisc cliff’

What's US fiscal cliff? 

-8The term 'fiscal cliff', coined by US Federal Reserve chairman Ben Bernanke, refers to a combination of a series of tax hikes as well as cuts in government spending that may push the world's largest economy, still struggling with lower growth rate and higher unemployment, back into economic recession. If the Barack Obama-led government is not able to make changes to several laws and rules, the tax increases and spending cuts could start as early as January. 
In monetary terms what is the impact on the economy? 
According to some estimates, if the legislative changes are not put in place in time, the tax increases and spending cuts will bring in about $7 trillion, or nearly Rs 39 lakh crore, into the US government exchequer over the next 10 years. So much of cash would have been good news for any government under normal circumstances, but in this case the law curbs the government from spending as well. 
What type of cuts will the 
new rules put in place? 
There would be cuts in defense and non-defense spending. In 2013, tax cuts that give huge sops to wealthy Americans, put in place by former president George W Bush, will expire. The year will also see the end of the extended unemployment benefits to Americans. And the year would also bring in a system under which doctors enrolled under the government-supported low-cost Medicare policy, will get a lower reimbursement from the government. This means the government will be forced to spend less on medical facilities for the needy. The US would also need to change its laws so that the government can borrow more than the current limit of $16.394 trillion. 
What's its impact on the Indian economy? 
According to Indranil Sen Gupta of Bank of America Merrill Lynch, the growth of the Indian economy during Fiscal 2014 would depend on how quickly or slowly the US is able to fix the looming cliff. If Obama is able to fix it by theend of this year, India could see a growth of 7.2% during FY14. If the same is prolonged, and the US economy dips into a recession, we could see a modest growth of 5.5%. The most probable case is that Obama is able to fix it by April 2013, India's growth should hover around 6.9%. 
What's its impact on the 
markets? 
As has already started, the fears are driving people to play safe and sell risky assets, 'a risk-off ' approach in market parlance. This means people will buy US dollar and gold, and sell emerging market currencies and stocks. In such a scenario, FIIs may sell in the Indian market, pulling the market down. FII selling would weaken the rupee, and could also increase our trade deficit. 
What's the impact on corporates? 
If the Indian currency weakens, the rupee-denominated revenues of exporters like IT, pharma and jewelers would go up. But if the fiscal cliff itself brings in a recession in the US, companies from these sectors will witness weaker demand. That may affect several other sectors as well.