The US fiscal cliff, shorthand for an economic double whammy of higher tax rates and spending cuts that sets in from the New Year, will test the weary global markets through December. India will be not be insulated from the financial convulsions, which means some fairly tough challenges ahead for the disinvestment programme and the Rs 60,000 crore borrowing plan by leading public sector institutions. Reports on Thursday said the US treasury secretary, Timothy Geithner, had opened talks with Congress leaders from both Republican and Democratic parties to work out a compromise. While the predicament is provoked by the expiry of the Bush era tax cuts of about $500 billion, the Republican-dominated US Congress has demanded that the Obama administration also implement the spending cuts of $1.2 billion that it had agreed to last year. If there is no agreement on the cliff, the impact of the two could push the US economy into another round of recession.
While analysts are hopeful about a compromise before the January deadline, the recent tendency in the world’s largest economy to go to the wire for major deals puts the rest of the world in a difficult place. The decision to allow the Obama administration to raise its debt ceiling was also taken just hours before the deadline last year. For India, the timing of the cliff is particularly poor. The economy has already plummeted to a 5.5 per cent rate of growth in the first quarter, and the second quarter figure on Friday is expected to be no different. This means a lot will ride on the performance of the economy in the last two quarters of the year.
For now, the markets are optimistic that the unfavourable international news will begin to be counterbalanced by domestic factors. Developments like the resumption of Parliament, with the government and opposition agreeing to a debate on foreign investment in retail, and an endorsement from Goldman Sachs on Indian stocks, are the sort of incentives the economy has been missing for quite some time.