US shutdown is bad news

The US government shutdown — around eight lakh US government employees in the non-essential category have been sent on unpaid furlough, while essential services will function with slightly reduced staff — in itself is not likely to impact the US economy severely. But serious trouble is barely two weeks away if the Republicans and Democrats fail to come to a decision on raising the $16.7 trillion borrowing limits of the US government. As President Obama said, the US defaulting on its debt would have a “profound destabilising effect”.
The US government will not be able to repay its treasury bond holders and others if the Congress doesn’t raise the debt ceiling, and this could cause, what some people are calling, a global disaster, more serious than the Lehman Brothers crisis in 2008.
The US government shutdown comes at a time when their economy was showing some signs of revival. This was good news for exporters round the world and the stock markets. If the shut down lasts longer than a few days, it could be bad for India’s exports as the US is a top buyer of India’s goods and services. India is more vulnerable than the other emerging markets because of its huge current account deficit (CAD). India needs exports and investments and if both are uncertain even for a while, it could further widen the CAD. Whatever it is, India will anxiously track the news coming out of the US.

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Mumbai

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