Understanding Fiscal Cliff In The USA And Its Potential Impact On World Economy

The word "recession" has a strong connection with the United States of America. Financial experts often say if America catches cold then the entire world sneezes. However, the statement is true in its own terms and there has been enough proof in the past. Year 2008 and 2009 witnessed a bloody recession and the entire world succumbed to the financial troubles of the USA. Almost every country in the world fell flat in their economic growth and in rising unemployment rates. The past 2 years have witnessed a slow and steady growth across the globe. However, experts warn of the fact of falling into another recession if the "fiscal cliff" in America is not resolved within a week. So, what is that "fiscal cliff" in the USA and how it is going to affect all? Let's take a look at this problem.

Fiscal Cliff - What Is It Exactly?

The US government has proposed to cut back of over $500 billion in spending and is hopeful to raise the income tax rates. Reduction in spending by the government indicates the revival of stimulus package or withdrawing it from the market. Government has decided not to pump in fresh money to stimulate growth in market. The current allowances on spending comes to end by December 31st and the government has to take a new decision before that.

What Is The Real Situation?

The President of the USA, Obama likes to continue with the stimulus package offered but is being deterred by the Republicans. Currently, the government is borrowing about $16.4 trillions per year. It has increase this cap and borrow more more to avoid a default. The Republicans want a cut in spending by the government.

Possible Outcome:

If the US fails to meet the deadline, it could see a drop in its GDP by about 0.5% and the unemployment rate could spark to 9% by the year end. It will again trigger a fresh wave of recession across the globe. The problems could worse if Eurozone fails to solve its own problems in Spain, Ireland, Portugal and Greece.

Problems for India:

At the current state, India is badly exposed to all these financial troubles. Our economy is struggling hard to save its face. With a series of bad government policies, in effective implementation of economic reforms, Indians will have to face the wrath of recession. Our economics were strong during 2008 recession and the whole financial system was under control because of which India was isolated in the past. However, the present conditions make it worse for India.

If the fiscal cliff problem is not resolved, there will not be tax breaks for the American companies because of which they will restrict their spending. Indian exports might face a severe crunch and FIIs would pull out their funds from the market. A dip in Sensex and Nifty would again trigger a wave of no confidence in running business in our country.

at 8:05 PM
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