Why the Fiscal Cliff Matters for India's Growth - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 17 November 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
Recently, the fiscal cliff has dominated the financial press and been the primary driver of global stock markets. The US government must reach a budget deal before the end of the year; otherwise automatic tax rises and spending cuts will take place. According to most estimates, if the fiscal cliff is not resolved, the US will go back into recession, and possibly drag along many other countries with it.

The fears surrounding the fiscal cliff have significantly dragged down Indian stock markets. The rupee has been negatively impacted too. Why is it that a political issue in the US is having so much impact on investment sentiment at home? It turns out that there is a good reason for this.

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If the US economy goes into recession, it is very likely that the Indian economy will suffer significantly. Two variables would be significantly impacted if the US goes into recession. The first is foreign investment and the second is exports. Foreign investment and exports are both variables that are largely dependent on what happens to the US economy, and other global economies.

If we look at India's economic growth over the last 20 years, there is a striking pattern. There is a strong relationship between economic growth and foreign investment and exports. In the past, whenever there has been significant falls in either exports or foreign investment, economic growth falls too. Likewise, when foreign investment and exports go up, economic growth goes up.

This relationship has been more pronounced recently as compared with the past. When India was more of a closed economy in the 1970s and 1980s, exports and foreign investment did not have a significant impact on growth. However, since the early 1990s, the opposite has been true.

Thus, it is certainly the case that the fiscal cliff matters for India's growth. If it is not resolved, the Indian economy will be negatively impacted. This is true for most other countries as well. The markets are aware of this, and as a result they have been falling due to fears surrounding the fiscal cliff. The good news is that the fiscal cliff will likely be resolved, even if they only agree on a temporary solution.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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3 Responses to "Why the Fiscal Cliff Matters for India's Growth"

PG DAS

Dec 29, 2012

Well , if the fiscal cliff is resolved or not the USA economy which is 60% and more depends on unemployment level will face the music of recession starting this fn. year end.

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Calvadel

Nov 18, 2012

The US Congress will draw back from the fiscal cliff, just as it has done on every other occasion in the past, by raising the ceiling for the debt -- and then merrily start printing dollar notes to repay the old debt. The printing of new notes will, of course, mean a new problem. But who cares. Hey, this is capitalism. It rocks!

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Sounderrajan

Nov 18, 2012

One is really amazed by the "analyst" community's resilience! whatever the state of the market they have an explanation, never mind the contradictions when they twist and turn their comments to "explain" and "predict" the markets!! Here we have a comment that the so called fiscal cliff matters for Indian growth which while in a general sense is obvious. While on the one hand analyst community never tire to point out that India's growth is more domestic driven as compared to South East Asian economies and therefore not so much susceptible to external shocks, on the other hand they simultaneously say that the very same external shocks will play a important role in India's growth story!! Its like saying Heads I win and Tails you lose! No matter what is the state of the economy no one can win an arguement with the "analyst" as either way they win! I don't see how the so called fiscal cliff will affect India directly. Fiscal Cliff if not resolved will lead to spending and tax cut removal in US which is good for the US economy as it will go to reduce the huge deficits. Sometimes events have their own momentum and they will solve the problem of deficits which the politicians are postponing without attackign the problem. I for one will throw my hat in the ring with the prediction like an "analyst" that fiscal cliff if unsolved will result in real tangible benefits for the US and global economies.

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