The entire world has been in a standstill over the United States Debt Ceiling Crisis. We all hold our breath while Congress makes a decision before the x-date. Many are wondering what this means for the Indian economy.
What is the US Debt Crisis?
In the simplest of words, for over a decade, the United States has been spending more than they should and instead of taking control, they raise their budget every year. This year, they have reached a debt of $31.4 billion. Congress now has to come to a decision wherein they should yet again raise the budget. The problem arises with the fact that the Republicans are against this decision. They have posed a substantial argument saying that the ceiling should be raised only if the government funding is cut back starting from the next fiscal year. But the president of the country, a Democrat, is against this decision. He is adamant on not signing the bill in order to avoid cutting the budget later.
Because of all of these factors that could lead the country into a possible recession, according to CFR, there are economists who think that there is a prospect of a US default. That is, if the government declares that they cannot pay their debts, the entire country will face recession. The taxes will soar high and the funding for government operations will plummet.
What does it have to do with the world economy?
It is not a secret that the US Dollar has been running the world since the first ever world war. It continues to do so even after the financial growth of other countries. In fact, 58% of the global foreign reserves are in the US dollar. So imagine if the dollar weakens. Inflation will be initiated which is never a good sign. A default would erode their value and send a ripple effect throughout the market of the world with massive geopolitical consequences that the world would have to fight very hard to recover from.
If the circumstances reach this point, it is estimated that around 7 million people will be forced to lose their jobs.
How will the Indian Market be affected?
The United States is the world’s biggest trading nation and one of the two biggest economies of the world. Any decision that will be reached by the congress and the treasury is going to affect the entire world in many different ways. For India, the US is one of its biggest trading partners. With recession and inflation in the white country, India will receive a massive blowback in the merchandise export market.
Furthermore, the consequences of the crisis will exponentially increase the pre-existing trading crisis which arose because of the Russia-Ukraine war. Both the trading paths were forced to shut which derailed world trade. If the trading relations with the US also have a negative impact, world trade will be affected aggressively. India will have to find other ways which could be financially detrimental.
Moreover, the change in interest rates will start buying traffic of the US dollar. This could result in the withdrawal of FIIs from the Indian stock market. This puts pressure on the rupee. Any business to deal with the dollar will face the effects of the crisis.
Conclusion
With a nation that has the biggest impact on the world going into probable recession, there is natural panic in the world. Everyone fears the ripple effects that will be brought with the US default. India’s relations with the US are strong and dependent on survival. Indian markets and economy will face a difficult time along with the rest of the world, but not as difficult as the epicentre of the crisis.
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