|Giving India a good name|
|Tuesday, 22 November 2011 03:01|
Giving India a good name
US logjam makes India’s warring MPs look responsible
Fortunately for the world, the European crisis diverted all attention from the US which, with a debt burden just a tad under its GDP, is probably even more scary—indeed, FE columnist K Vaidya Nathan has pointed out (www.financialexpress.com/news /column-the-big-gaap-in-us-debt-numbers/829649/0), once you take into account huge deficits that have not been counted ($22.8 bn is the shortfall in Medicare and it is $8bn in Social Security, among others), the real debt is likely to be three times as large. The stalemate reached after more than two months of negotiation to cut $1.2tn over 10 years (the actual deadline will expire by the time you read this piece, so there is an outside chance of some deal) makes it clear US politicians are as bad as those elsewhere in the world, putting partisan politics above all else. Even India’s squabbling politicians, it has to be said, do pass the budget eventually, even if this means they don’t scrutinise the details of the expenditure—indeed, one of the big reasons behind S&P’s downgrade was its view that US politicians were not serious about effecting budget discipline.
It is true the US is different from Europe or anyone else since the dollar’s status as the reserve currency allows the US far more leeway, but no party can last forever. From the pure fiscal deficit point of view, the stalemate doesn’t really matter since, under a deal hammered out earlier, there will be automatic cuts that will come into effect. In the event the Democrats and the Republicans don’t come to a last-minute agreement, this will mean cuts in the temporary payroll tax cut and jobless benefits—while this will hurt Democrats, a 10% cut in defence expenditure will anger Republicans, but not enough for them to want to broker a peace. This means the tentative recovery in the US could just as well slip into zero growth or worse. It is true US growth was 2.5% in Q3 but these were ‘advance’ estimates which are likely to get pruned significantly and, while personal consumption expenditure rose dramatically (2.4% in Q3 vs 0.7% in Q2) despite the 1.7% fall in personal disposable income, this meant savings rates of already stretched consumers fell. Add to this the likely impact of the crisis in European banks on US banks. Whether Indian MPs, in turn, unite to give their US counterparts a good name later this week is now the million dollar question!