Wednesday, October 2, 2013

US shutdown and its economic crisis

What is the reason for the present economic crisis of shutdown in United States of America?

In USA both the medical expenditure and medical insurance is very expensive.  Due to high cost, a large number of poor and middle class citizens of USA live without any medical insurance.  In the absence of medical insurance, such people find it extremely difficult to foot their medical bill for their various diseases.  In order to mitigate this situation and to cover medical insurance to all people of America, the Democratic president of USA, Barrack Obama introduced a bill in 2009 that culminated into “The Patient Protection and Affordable Care Act, 2010”.  This was signed into law by President Obama on March 23, 2010 and came to be better known as Obamacare.   Its main purpose is to address both the affordability and quality of healthcare, as well as to curb the growth in healthcare spending in the USA. 

Opposition by the Republicans:

Obamacare is well received by the People of America and has earned a good name to the Democratic President Obama.  This is viewed as a threat by the Republicans for the future elections.  Hence, the Republicans opposed the bill in the past.  The reasons put forth by the Republicans before the people at large is that if a huge outlay is allocated towards Obamacare, various other schemes would get adversely affected. Due to Obamacare, the Forbes has also reported an increase in national health spending to the range of to $7,450 per family of 4 between 2014 and 2022. 

US Congress and Indian Parliament:

The United States Congress is the legislative branch of the federal government and consists of two houses: the lower house known as the House of Representatives (Lok Sabha in India) and the upper house known as the Senate (Rajya Sabha in India).  Democrats currently have a majority in the Senate and Republicans control the House.

A Bill (inclusive of Money Bill) can be introduced in either houses of Congress in USA.  Bills originating in the House of Representatives begin with "HR" and bills originating from the Senate begin with "S."   Unlike India, where a Money Bill (Budget is a Money bill) can be introduced only in the Lok Sabha, in the US the Money / Budget bill can be even introduced in the Senate.

In India, once the Lok Sabha passes a Money Bill, it is forwarded to the Rajya Sabha for recommendations. The Rajya Sabha must return the Bill in not more than 14 days with its recommendations.  If the Rajya Sabha fails to do so, the Bill is considered to have been passed by both Houses.  The Lok Sabha has the authority to accept or reject any or all the recommendations of the Rajya Sabha. If the recommendation/s of the Rajya Sabha is/are accepted, the Bill is said to have been passed by both Houses of Parliament after being amended by the Rajya Sabha and then accepted by the Lok Sabha.

The financial year commences in India from April 1 whereas in America it starts from October 1.  The day to day expenditure for Government activities inclusive of salary to the Government employees needs to be allocated before September 30. 

The Budget bill introduced in the Senate passed smoothly since the Democrats have the majority in the Senate. The Republicans who rule the House have rejected the budget and have demanded scrapping of any outlay towards Obamacare.  This has lead to a crisis and the budget for the new financial year remains in abeyance in the US.  The authority of Lok Sabha in India on Money Bill does not foresee any such situation.

USA Government shutdown as budget deadline passes:

In the absence of any budgetary provision, the salary to the US (Federal) Government employees and day to day expenditure for Government offices stands fractured in the United States. Obama has blamed the House of Representatives for the stalemate and said he would "keep working to get Congress to reopen the government [and] restart vital services". Obama in a letter written to federal government employees has stated that "This shutdown was completely preventable. It should not have happened."

National parks, museums, exhibitions, home loan, etc. are the Departments which have become the initial casualties.  Around ten lakh employees of these Departments have been alerted to proceed on leave without salary.  Defence, Passport, Postal, Airport, Courts and Internal Defence, being essential in nature, are presently functioning.  If the crisis continues, the essential services may also be hit.

Resolving the Stalemate:
         At a time when America is recovering from the economic crisis, the present budgetary stalemate has caused some discomfiture.  This is also adversely influencing the US stocks / share markets.  A similar crisis did happen seventeen years back during Clinton Administration.   Bill Clinton stood firmly and after 21 days the opposition agreed to budge to end the crisis.  Obama is already in the process of discussions with the opposition.  It is not known how long the present impasse may continue.

Impact on India:
           According to Economic Affairs Secretary to the Government of India Arvind Mayaram, the US shutdown is unlikely to have any major impact on the Indian economy. The Indian Express reports that “Though the finance ministry and the stock markets may have largely shrugged off the shutdown of the US government, it could still send a tremor down the world economy as the impasse could lead to a debt default by the US later this month. For India, it raises the prospect of a hit on exports as well renewed volatility in the rupee. Though analysts believe that at present it would have limited impact in sectors such as IT or tourism that are dependent on Visa clearances, the bigger concern looming is October 17 when the US government would hit its debt ceiling of $16.7 trillion. If by then the Congress is unable to strike a deal, the US would face a default on treasury bonds and also slash its spending, that would immediately impact the global economy and could destabilize efforts Government of India and RBI have taken in recent months to support the rupee.  Let us wait and see!