Early resolution of the fiscal and debt issues in the two advanced regions is crucial to avert another recession especially USA, where President Obama was desperately trying to avert the ‘fiscal cliff’, with a limited deal with Republicans in Congress, which would exempt incomes upto 250,000 dollars a year from tax rise which would take effect on January 1 for all citizens with the Bush era tax cuts expiring at the end of 2012.

The fiscal cliff, if it materialises, from a combination of taxes going up for all tax-payers, of whom 98 per cent are the middle class, coupled with mandated Federal spending cuts, could trigger another recession in USA in 2013, according to Congressional Budget Office. For two months since his re-election on November 6, on a decidedly pro-Obama vote in regard to handling of the economy, the President had tried to negotiate a balanced package of revenue and spending cuts with Republicans in control of the House of Representatives.

But the Republicans have stood against any tax rise for the wealthy and wanted the President to look for revenue from cutting down some of the stipulated tax exemptions and offer more spending cuts for an equal amount, even as going over a fiscal cliff would have damaging consequences for the global financial markets and US economy itself with high unemployment as well as the outlook for trade and capital flows badly needed for developing economies.

President Obama has made a last-minute appeal to Republicans either to agree on his proposal with incomes upto 250,000 dollars or even 400,000 dollars, or vote for the Senate bill which protects the middle class from income tax hike, extends unemployment insurance for two million Americans looking for a job and lays the groundwork for future co-operation on durable growth and deficit reduction.

Even if a limited deal goes through the Congress on the last working day of 2012, the Obama Administration would be having more problems with the Republicans over spending programmes and in securing a rise in the US borrowing limit of 16.4 trillion dollars which would hit at the end of 2012. Republican obstruction in 2011 to raising the ceiling had for the first time in US history led to a downgrading of US sovereign debt status by Standard & Poor’s rating agency.

The US economy has recently exhibited some signs of pick-up, in the third quarter, and the housing market is recovering. There has been slow but steady addition to jobs and the unemployment rate was down to 7.9 per cent, lowest since 2008. It is against this less than buoyant outlook that the Administration and the Congress were expected to arrive at an understanding to take the economy forward and create more jobs.

In the euro-zone, which was in recession in 2012, decisive steps to overcome the sovereign debt crisis in countries like Greece were still elusive at the end of the year. As it is, only a modest recovery at 0.6 per cent is forecast in 2013 for this 15-nation grouping despite its strong performers like Germany and France.

On assumptions of progress on tackling the crises in these two leading economies, UN expects a modest recovery in world growth at 3.2 per cent and for global trade to improve to 4.3 per cent in 2013. This would help create some global demand for emerging market and developing economies, particularly India which has run into large external deficits.

China, with its high investment ratio and massive infrastructure building is better placed to rebalance its economy. UN, however, projects a significant slowdown in developing Asia with India’s growth put 5.5 per cent in 2012 rising to 6.1 per cent in 2013 while China’s growth at 7.7 per cent in the outgoing year would strengthen to around 8 per cent in 2013.

Overall the world economy is still struggling four years after the eruption of the global financial crisis in 2008 with several countries caught in the “downward spiraling dynamics from high unemployment, weak aggregate demand compounded by fiscal austerity, high public debt burdens, and financial sector fragility”, according to year-end UN Outlook. The deceleration in developing countries and economies in transition reflected both external vulnerabilities and domestic challenges, it said.

With weak demand for exports from global markets, domestic demand has remained the main driver of growth for most economies of the region comprising China and the rest of East Asia, which contributes 40 per cent to global growth. For India, which has also been a driver for global growth till recently, risks are elevated with delays in resolving the eurozone and US fiscal cliff problems.

According to the Reserve Bank of India, with the major US-Euro problems, global outlook continues to be grim and much of the Euro Zone and Japan are experiencing negative growth while growth in the US is still low. For Emerging and Developing Economies (EDEs), the threat of spillovers remains significant in view of the depressed outlook for global trade and volatile capital flows, RBI report on Financial Stability noted.

Apart from elevated food and commodity prices for economies facing domestic supply constraints, for India the major risk to outlook “stems from political economy considerations that could impede, delay or erode resolute policy action and the consequence could be deepened financial stress and heightened risk aversion” RBI said.

Also in India’s case, there are structural impediments such as fall in domestic savings, persistently high inflation, regulatory and environmental issues. These in, RBI view, have caused a fall in investment demand and moderation in consumption spending leading to decline in growth. India has also been experiencing exchange rate volatility and external account deficits at a time of uncertain investment inflows.

Taking note of the global slowdowns and these domestic problems which would require tough handling to restore macro-economic stability, the Planning Commission has re-set its 12th plan (2012-17) growth target at 8 per cent which itself, as the Prime Minister Dr Manmohan Singh points out, is ambitious given the challenges to be overcome in the next couple of years.(IPA Service)