Fiscal Cliff - How it affects India

You all must have always been hearing about this Fiscal Cliff which the US is worried about, all over the media. Many wonder what is it exactly and how will it affect us sitting in India.

Well for the start, “Fiscal Cliff” is the popular shorthand term used to describe the conundrum that the U.S. government was to face towards the end of 2012, when the terms of budget control act of 2011 would have expired.

Simply stated it would end the temporary payroll tax cuts (increasing tax by 2% for workers), the end of certain tax breaks for businesses, shifts in alternative minimum tax that would take larger bite, a rollback of the “Bush Era Tax Cuts” from 2001-2003. A reduction in spending by the government, analogous to this in over 1000 government programs including defense & medicare. Basically tax increase and spending cuts.

We all know what tax increase can do to individuals.
It can radically trim down their spending & saving capacity. Furthermore the tax cuts for businesses will induce unemployment.

Now we sitting in India can get affected by all this, how? read on…

US consumer market is the largest in the world (in terms of spending & not by population). Though some many may think that India is also a very big consumer market but ever wondered why every electronic gadget is first released in the US and released in India only months later. Ever Wondered why a luxury car manufacturer wants to release its cars first in the US and maybe months later, release a toned down version in India. Or ever wondered why every software service company wants to reach out to the US consumer. And why there are more call centres in India catering to the US & EU nation citizens, than the call centres for Indians themselves.

All economies of the world depend upon that very consumer profoundly, right from nations who are producers to manufacturers to service providers; all economies cater to the largest consumer one way or the other. It doesn’t mean that there are no other consumers in the world and that no economies cater to the upcoming spendthrift consumer. But when the largest consumer starts controlling its spending, that is when the bottom lines of the major business houses start getting hit worldwide. That is when business houses will have to trim their losses by either cost-cutting or issuing pink slips to employees. This also includes business houses in India.

Now that the US government has averted the crisis by delaying the fiscal cliff by a couple of months they have just taken an approach which I call, “KICKING THE CAN, DOWNHILL”. Well for now the fiscal cliff has been warded off but it shall come back to haunt us all again

Best time to increase the taxes and reduce funding would be, when the economy starts booming again and there are no fears of a looming recession.