WHAT IS FISCAL CLIFF?
Post the
economic crisis of 2008-09, the US economy has gone through the most difficult
times in its age-old history. The economy had contracted drastically and the
level of unemployment in the country had reached levels of the Great Depression
of 1929. To save its economy, the US resorted to pumping huge sums of money
into the economy (known as quantitative easing or QE) to revive the economic conditional
as well as employment levels in the country. However, as a result of higher spending
the US witnessed a quantum jump in its fiscal deficit. The US economy was
already burdened by high fiscal deficit as a result of its spending over
several social as well as other schemes, including financing of big wars outside
the US in countries like Iran and Afghanistan.
The gap between
spending and revenues was bridged through government borrowings As a result of
higher borrowings, over the last several years its debt also kept on increasing
from 55% of the GDP about two decades back to over 90% of the GDP recently.
WHY THE WORLD FEARS?
Many economists
are of the opinion that if spending cuts and tax hikes contained in the Act
come into effect, it will lead to
a recession in the US and there would be a significant negative impact on
employment levels in the US.
WHAT IT MEANS FOR INDIA?
The US economy
is the largest economy in the world. Many countries including the emerging nations
have close trade relations with the US. I believe that emerging countries
like India have less dependence on the US in terms of exports as most nations
over a period of time have diversified their exposures to other developed
countries of the world. This could, however, mean that the pain would be less
but it is surely going to impact India.
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