Growing deficit? Not an issue! - Views on News from Equitymaster

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Growing deficit? Not an issue!

Oct 21, 2008

US does not mind its growing deficit
The ever expanding US deficit has been a well documented fact. Now it seems that in the present scenario, the US does not mind if this deficit widens further. And widen it definitely will with the gargantuan bailout package that the country has announced to pull out the financial system from the brink of a collapse. The fact that as the economy slows, tax revenues are expected to dip is only expected to worsen the problem further. Plus, the US' war in Iraq and Afghanistan is only adding to the strain on the government's finances.

While the US acknowledges this, its focus on bailing out the troubled financial system is so great that it considers the widening of the deficit as lesser of the two evils and is therefore ready to compromise on this front in a bid to keep the economy from replicating the Great Depression era.

The deficit in the current fiscal year is expected to balloon to US$ 700 bn, up by more than 50% from the previous year. One assumption that the US is banking heavily on is the fact that despite the swelling deficit, people all over the world are still willing to lend to the US as they are confident that the country will not default on its obligations however trying the conditions may be. But if the Americans think that they can keep the deficit issue permanently on the backburner, they will have to think again as this problem is most likely to resurface once the economy recovers. For the time being, however, curtailing the deficit is certainly not the top most priority.

OPEC contemplates cut in crude output
The OPEC (supplier of more than 40% of the world's oil) rejoiced when crude prices soared to US$ 147 a barrel in July. The organisation is now faced with the prospect of falling prices as the global economies slow down. As per reports on Bloomberg, it plans to cut output for the first time in two years given that oil is expected to hurtle towards the US$ 50 a barrel mark as countries sink into recession and demand further cools down. Oil receding further was amply demonstrated by the fact that options contracts to sell oil at US$ 50 by December soared 50-fold in the past two weeks.

While falling oil prices takes the heat off economies and helps in some measure to arrest the rise in inflation, the OPEC nations are not enthused given that their economic growth engine depends upon crude prices staying high. In fact, the growth of some nations such as Iran and Venezuela, whose earnings largely come from oil exports, will need oil to remain at US$ 80 a barrel if they want to sustain growth. Further, ING Bank estimates that GDP of the six countries which are a part of the Gulf Cooperation Council (GCC) will slump 25% if oil hovers around US$ 50 a barrel. However, while the intention to cut prices has been stated, the extent of the same has yet to be determined.

Ratan Tata's generosity
Leaving the 'Nano' controversy aside, Rata Tata has made the headlines for another reason and a positive one at that. As reported in a leading business daily, Mr. Tata has gifted US$ 50 m to his alma mater Cornell University, New York to help recruit top Indian students for the purpose of supporting joint research projects with Indian universities in the fields of agriculture and nutrition.

Given that getting an entry into Cornell may be daunting in terms of the fees to be paid, this endowment will be used to set up a scholarship fund to attract more Indian students to the university. This could be a positive for India in the longer term especially if this move helps in significantly contributing to advances in agriculture, an important component of India's GDP. But only if these scholars turn back to India after receiving their degrees!

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