FinMin chalks out strategy to limit US shutdown damage

India may be hit if stalemate in Washington persists over 2 weeks

India has started working out a strategy to deal with any possible impact of the US shutdown continuing beyond two weeks.

Republicans and Democrats are in a gridlock in the US after the Republican-led House of Representatives insisted on delaying President Barack Obama’s healthcare reform as a condition for passing the budget.

With no signs of the deadlock breaking, the finance ministry on Thursday held a meeting, chaired by Economic Affairs Secretary Arvind Mayaram, to assess the impact of the shutdown on India’s economy and the steps it could take if trade and business get affected.

The ministry’s assessment was that the US economy would be severely impacted if the shutdown prolonged beyond two weeks and India would not be able to escape the impact. At a time when the government is trying to promote exports to give a boost to the economy, trade with the US could take a hit because of a prolonged shutdown.

“We hope the problem is resolved in two weeks,” a finance ministry official told Business Standard. “Even the US government wants to end it, because if it prolongs, it would not be in the interest of their own economy. At the moment, there is no impact on India, but we are discussing how it could affect our balance of trade if the deadlock continues for long.”

The silver lining, he added, was that India had some comfort as far as tapering of the quantitative easing by the Federal Reserve was concerned, because the stimulus withdrawal was not likely before December and investors have factored that in.

The benchmark BSE Sensex increased 385 points to a one-week high on Thursday as the shutdown eased fears among investors of the US tapering its stimulus programme. A delay on this front would prevent investors from immediately pulling out of emerging markets to invest in the US.

On Tuesday, a day after the shutdown started, Mayaram had said: “We hope the impasse will be resolved so that there is no spillover to the global economy. As of today, I don’t see any major impact on the Indian economy on that account.”

Earlier this week, engineering exporters’ body EEPC had said Indian exports to the US faced demurrage threat due to the shutdown. Demurrage refers to the extra cost a charterter would have to pay to hold the ship to load or unload goods.

Commercial ports do not come under the emergency service category, and so, could be closed by the US shutdown. This could lead to a delay in port services like clearing of goods due to staff shortage, and might result in huge demurrage for exporters, it said.

India’s exports to the US stood at $36 billion in 2012-13, which is 11.3 per cent of total exports of $300 billion.

The shutdown could also lead to problems in payment of obligations by US.

Industry chamber Assocham cautioned the government in this regard. “India should keep itself in a state of preparedness, bracing for an eventuality where the political showdown in the US leads to the possible unprecedented default by the world’s largest economy of its international monetary obligations,” it said.  

The shutdown, the first in 17 years, was called after Republicans and Democrats failed to reach an agreement on spending and Budget mainly due to differences over US President’s proposed healthcare programme. Though all essential services like police, defence, and air traffic will continue to function, about 800,000 US employees are on unpaid leave.