WORLD worries- US Fiscal Cliff !!

Why market worries about the US Fiscal Cliff?

If the Fiscal Cliff deal is not reached, then it can impact the global markets & economies

Jitendra Kumar Gupta / Mumbai Dec 22, 2012, 12:06 IST Indian equity markets have corrected almost 2% in last few days ahead of deadline of the US Fiscal Cliff. US Fiscal Cliff is considered to be the biggest road block for the global markets including India because if the Fiscal Cliff deal is not reached that could have a huge impact on the global markets and economies including India. "Markets are hoping for a solution to the US ‘fiscal cliff’ issue because if a solution is not reached, it can impact sentiments negatively. We expect the issue to be resolved and the same can provide relief in short term," says Dipen Shah, Head of Private Client Group Research, Kotak Securities Origin of Fiscal Cliff Ever since the global economic crisis hit in the year 2008-09 the world economy importantly the US economy has taken a severe beating. Globally to avert the crisis the central banks have relied on the deficit spending including the US. However the deficit spending also called as money printing and the quantitative easing by the economists came along with huge burden of debt. Similarly in the year 2011, when the US wanted to borrow more money it had to raise the debt ceiling because there is limit to its borrowing which can only be increased with a vote of congress. In the same year the US passed the bill and extended the debt ceiling to $14.3 trillion. This would not have been possible without the government’s promise of controlling the spending and restoring the tax cuts and other subsidies in the stipulated time so that the fiscal deficit could be controlled. Thus the Budget Control Act 2011 was passed, which said that if it fails to do so and achieve the desired economic growth than that will automatically trigger the restoration of the tax cuts and subsidies. Spending on different programmes like administrative and the defence spending will be cut automatically. Unfortunately the time has come when all these terms of Budget Control Act will expire by the end of December 2012, which is also known as Fiscal Cliff.  So the Fiscal Cliff was created due to the series of such actions including the approval of Bush era tax cuts in 2001 and 2003. Quantum of worry Including all the automatic tax increases and spending cuts the estimates suggests that the US economy could take a hit of about $500-600 billion, which is about 4% of its GDP and good enough to take the GDP back to recession. On an average about $2,200 extra in taxes will be paid by the average family. Link to India Although India does not have much dependence on the US, but a possible downturn in the US is going to hit the world economy particularly in the backdrop of fragile economic conditions in the Europe and China. This will certainly have its impact on the global markets as that will impact the sentiments and liquidity (foreign money flow), both so far have been supporting the Indian equity markets. Also there is risk averseness among the investors because of which there have been selling in the market. Investors are also seeking for more clarity on this issue before committing any fresh money. In the interim despite all the positive policy announcements, hopes of rate cut and economic news the bigger issue of Fiscal Cliff could keep the markets under pressure. “As of now fiscal cliff issues continue to overshadow any other economic news,” says Amar Ambani, Head of Research, IIFL. Good news is that some progress on this front is already made and the economists are saying that there is about 60-75% probability of the deal. So the probability is with the market, and if that actually materialise there is feeling that the Sensex could go back to 20,000 to 21000 levels. http://www.businessstandard.com/india/news/why-market-worries-aboutus-fiscal-cliff/200345/on