US shutdown: What it means and will it impact India?

The US government began a partial shutdown on Tuesday for the first time in 17 years, potentially putting up to one million workers on unpaid leave, closing national parks and stalling medical research projects. After missing the midnight deadline to avert the shutdown, Republicans and Democrats in the House continued a bitter blame game, each side shifting responsibility to the other in efforts to redirect a possible public backlash.

If Congress can agree to a new funding bill soon, the shutdown could last days rather than weeks. But no signs emerged of a strategy to bring the parties together. The political dysfunction at the Capitol also raised fresh concerns about whether Congress can meet a crucial mid-October deadline to raise the government's $16.7 trillion debt ceiling.

So, let’s take a look at why this shutdown happened, what it will affect and what it means for India.

The why?

The main contention is President Barack Obama's landmark health law. The Republicans want to delay implementation of the bill for a year and permanently repeal a tax on medical devices that helps finance it, while the Democrats say the law is already in place and there's no going back on it.

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The Republicans say they will allow the funding needed to keep the government functioning but only if the Democrats agree to the changes in the bill, known as Obamacare, something the Democrats strongly oppose. Since the Senate is controlled by the Democrats and the House by the Republicans both sides have blocked each other’s amendments and proposals and that has meant stopping the flow of money needed to keep the government working. There are many departments that need to be funded each year in order to function. If politicians cannot agree on how to fund them, they have to close down, as simple as that.

What will it impact?

Federal workers: As many as one million federal employees could face unpaid leave or payless paydays.

National parks: National parks would close, meaning a loss of 750,000 daily visitors and an economic loss to gateway communities of as much as $30 million for each day parks are shut.

Defense department: All military personnel would continue on normal duty status, but many civilian employees would be temporarily sent on leave.
Internal Revenue Service: Most of the federal tax agency's 90,000 employees would be sent on leave.

Federal Reserve and other financial agencies: The Fed would stay open, since it does not depend on congressional appropriations to operate.

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Justice Department: Fewer than 18,000 of the department's 114,486 employees would be sent on unpaid leave.

Courts: The Supreme Court would probably operate normally, as it has during previous shutdowns.

What it will not impact?

US military and embassies abroad will keep operating normally. Air traffic control, emergency medical care, border patrol, prisons, law enforcement, emergency and disaster assistance, power grid and guarding federal property will operate normally. All those who operate Social Security programmes and provide veterans and unemployment benefits and food stamps will not be affected.

What it means for India?

If the shutdown lasts for only days and does not stretch into weeks, then the impact will be minimal. But it can hurt India if it turns out to be a prolong shutdown.

Export sector: "The shutdown of the US government will certainly hit Indian exports because of crippling of the trade facilities at the ports and airports," Assocham President Rana Kapoor said. America is literally too big to fail for the rest of the world, whether we like it or not, he added.

IT sector: Indian companies can see a downturn in business if the shutdown drags on.

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Currency volatility: The shutdown has already sent the dollar to a near eight-month low against a basket of currencies and a 1-1/2 year low against the safe-haven Swiss franc. After trading weak in Asian hours, the dollar's selloff gathered pace in European trade with the index falling to 79.864, its lowest since February 13 and down 0.4 per cent on the day. It was last trading at 80.056, still down 0.2 per cent.

Sensex: All central bankers are aware of possible disruptions and will avoid any sudden move; still a long shutdown can make markets jittery.

Investors’s confidence: Investors are viewing the shutdown as temporary, and also as something that may further delay the US Federal Reserve's plans to start closing downs its monetary stimulus.

"The US shutdown is a central point for the markets, but as long as the hope for just a temporary shutdown exists, it will not be a strong burden for equities," Christian Stocker, equity strategist at UniCredit said.

A bigger issue facing investors is the shutdown's implications for this month's negotiations on raising the government's $16.7 trillion borrowing limit, needed to avoid a default on its outstanding debt mountain.

Markets were also absorbing mixed readings on economic activity across the manufacturing sector for September and an announcement of a $50 billion stimulus package in Japan, designed to offset the impact of a sales tax hike next April.

Impact on gold: Gold has already risen by 0.6 per cent to $1,337.49 an ounce and silver advanced 1.2 per cent to $21.95 an ounce. The yellow metal is seen increasing demand as investors worry that the impasse may endanger the recovery in the largest economy. (Source, agencies)