Looming US Shutdown And 'Why India Should Care': Explained

The US government seems to be heading for a possible shutdown starting October 1.

US Agriculture Secretary Tom Vilsack warned on Monday that a government shutdown in the US risks nutritional assistance for the approximately 7 million low-income women and children who rely on benefits.

The shutdown if it becomes effective will disrupt several services, including national security. A shutdown could mean delayed paychecks for millions of federal workers as some federal offices will also have to close or face shortened hours during a shutdown. Lawmakers also warn that a shutdown could rattle financial markets. Besides a shutdown could have far-reaching effects on government services as people applying for government services like clinical trials, firearm permits, and passports could see delays.

In addition, businesses closely linked to the federal government, like federal contractors or tourist services around national parks, could see disruptions and downturns. According to the US Travel Industry Association, the travel sector could lose $140 million daily in a shutdown.

In the normal budget process in the US, Congress appropriates funds to various federal departments and agencies in the country by September 30 of every year for the following fiscal year by passing the appropriation bill. These government agencies rely on the annual funding approved by Congress and according to the procedural requirements, they are supposed to submit their requests.

If this does not happen, then a continuing funding resolution or a temporary funding measure is implemented. If Congress disagrees even on that, then the government shutdown takes place.

Government funding expires October 1, the beginning of the federal fiscal year. A shutdown will effectively start at 12:01 a.m. if Congress fails to pass a funding plan that the president signs into law.

The shutdown threatens to slow growth and spook investors globally. While, the shutdown will impact US citizens, a shutdown of the US government is not likely to have a major impact on the Indian economy.

Here's how the shutdown will affect Indians.

1. New visa issuance: Indian IT companies earn a large chunk of their revenues from the US, thus a prolonged shutdown can likely their business. If the shutdown in the US goes beyond 15 days, it can also likely impact the issue of new visas as the fresh year for US visas starts on October 1, and people can face a delay of almost 10-15 days in that case.

2. The Indian Rupee may come under pressure: If uncertainty remains on how long the shutdown will continue in the US, there will be hesitation in placing new orders in investment and exports in the absence of essential trade facilitation. This could weaken our exchange rate.

3. Volatility in the Indian equity market: The performance of US indices also impacts the performance of stocks in the Indian equity market. So, given the uncertainty over the shutdown, investors can expect the global equity market to be volatile and India will be no exception.

4. The American economy is among the largest destinations for (India's) exports and the shutdown is likely to impact Indian shipments to the US. Indian exports to the US can also get affected because of the crippling of the trade facilities at the ports and airports.

5. Indian equity markets tend to be entwined with the US equity markets, a possible contagion can be expected through currency and stock markets.