US ‘fiscal cliff’ deal small step, not a climb

Jan 08 2013, 00:00 IST
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SummaryPostponing a crisis is one way of tackling a challenge and that is exactly what the US has done in dealing with the fiscal cliff.

Postponing a crisis is one way of tackling a challenge and that is exactly what the US has done in dealing with the fiscal cliff. Most of the existing tax rates have remained unchanged, but the spending cuts would be applicable till March.

The tax hike for the middle income group and richer class would imply a reduction in private consumption. The US economy has been performing comparatively better than many other developed economies with productivity in manufacturing showing a rising curve.

But after the three months period, it would be interesting to observe how it faces the challenges of massive fiscal deficit without adopting a few painful measures involving cut in social expenditures. History shows that our country is adept in pursuing this strategy quite a number of times but with limited success.

In the 1980s, economic reforms were pushed back and India missed the bus which China hopped onto and moved ahead.

The reforms in 1991 were pushed from the top with the country’s economy hopelessly seeking a reprieve. Whatever our country has achieved today largely owes to the economic sagacity and timely steps taken by the then finance minister backed up by an unsuspecting prime minister.

Economic reforms deemed to be necessary for a country do not offer multiple chances to be successful. Currently, iron ore prices have moved up from a low level of $121/t cfr China in the third week of November’12 to $154/t cfr, a jump of 27% within a period of one and half months.

The rise is due to restocking by China to take advantage of lower prices, which is also reflected by the increased stocks at the ports.

Similarly, the hard coking coal that came down to around $160/t fob by $10/t in Q4 of 2012 may move up caused by the continued restocking efforts by China.

The forecast for Q2 in the current year has already been estimated to reach $175/t. Apart from taking advantage of the low prices, there was an indication by mid of October’12 that steel demand in China would enhance due to the announcement by the National Development and Reform Commission that a number of railway projects worth of $111bn investment would be implemented and also road projects in order to connect the interiors of China with the developed coastal region.

The rise in iron ore prices has enabled a number of mines in

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