US Govt Shutdown Looming: Know What It Means And Whether It Can Affect India

As the US government is hours away from a partial shutdown, let's delve into what this shutdown entails, how the US government arrived at this juncture, and whether it can impact India.

US House Speaker Kevin McCarthy's attempt to avert a shutdown with a temporary spending package failed to pass on Friday.

Source : Getty

The US government is on the brink of a partial shutdown, as hardline Republicans within their own party sow discord, and the Biden administration issues alarming warnings about potential consequences. If lawmakers can't reach an agreement before 12.01 pm Saturday, EST (9:31 pm Saturday, IST), the shutdown is inevitable.

This will mark the first such closure since 2019 and the fourth this past decade. This situation will affect numerous US federal government employees and military personnel, services like air travel to national parks, and marriage licenses are set to be affected and government-funded crucial nutrition programmes will be halted.

According to reports, the US Senate is actively pursuing a bipartisan approach to keep the government running, but progress has been slow in the Republican-controlled House. Speaker Kevin McCarthy's attempt to avert a shutdown with a temporary spending package failed to pass on Friday. Let's delve into what this shutdown entails, how the US government arrived at this juncture, and whether it can impact India.

What Is US Government Shutdown And How Does It Happen?

A US government shutdown occurs when the federal government's funding expires, leading to the temporary cessation of many government functions and services. It happens due to a failure to pass the necessary appropriations bills or a continuing resolution (a temporary budget measure) to fund government agencies and programs. 

A US government shutdown arises from budget disputes, often between political parties, as Congress must pass spending bills or continuing resolutions before the fiscal year ends on September 30. When agreements aren't reached, the government can run out of funds, affecting federal agencies and services. During a shutdown, non-essential federal workers are furloughed, national parks close, and immigration court proceedings stall.

While essential services like defense and law enforcement continue, the economy can suffer due to reduced growth, disruptions in federal contracts, and decreased confidence among consumers and investors. Shutdowns typically end when Congress passes a budget or temporary funding measure, allowing agencies to reopen and employees to return to work.

Last week, the White House said, during a shutdown, "servicemembers would continue working every day to keep our country safe, including our 1.3 million active-duty troops—but wouldn’t receive their paychecks until funding becomes available. Hundreds of thousands of their civilian colleagues in the Department of Defense would also be furloughed, affecting the ways in which the Department manages its affairs globally, including the vital task of recruiting new members of the military. All of this would prove disruptive to our national security."

How Did The US Reach This Point?

According to a Guardian report, the current crisis is largely driven by the weak position of Republican House Speaker McCarthy, who holds a slim majority in the 435-seat chamber. McCarthy's ascent to his position in January required a record 15 ballots and tense negotiations with a minority of hardline Republicans. Now, these same far-right members are effectively holding McCarthy hostage by refusing to support appropriations bills based on spending guidelines he previously agreed upon with President Biden.

While McCarthy could potentially pass the bills with Democratic support, hardline Republicans, led by Florida Congressman Matt Gaetz, have threatened to remove him as speaker in such a scenario.

However, Freedom Caucus members have repeatedly rejected the bill, insisting on attaching more conservative policies, such as addressing "woke policies" and the "weaponisation of the Department of Justice."

Republicans Georgia Congresswoman Marjorie Taylor Greene has proposed amendments, including a resolution to prevent funds from aiding Ukraine and a ban on funding for COVID-19 vaccine mandates.

US President Joe Biden has used his platform to highlight the GOP holdouts, emphasising that they should be held responsible if a government shutdown occurs. He stressed that a shutdown would force US military members to work without pay.

“Let’s be clear. If the government shuts down that means members of the US military are going to have to continue to work but not get paid. Funding the government is one of the most basic responsibilities of Congress. It’s time for Republicans to start doing the job America elected them to do,” Biden said 

How US Citizens Will Be Impacted 

According to an Associated Press (AP) report, a government shutdown could affect low-income Americans' access to food and nutrition programs, with programs like Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) potentially running out of funds, impacting millions. Head Start programs for disadvantaged children may lose federal funding, while free school meals and federal child nutrition programs are expected to continue in the short term but may face issues without full appropriations.

Social Security and Supplemental Security Income payments will continue, but response times for inquiries could be delayed, the report said. Medicare, Medicaid, veterans' healthcare, and Indian Health Service programs are set to continue. Air travel should operate normally, but TSA lines could be affected, and passport/visa processing may continue with possible interruptions. Student loans will still be due, but borrowers might experience delays in seeking assistance. 

What About the US Economy?

Credit agencies are expressing concerns about the impact of political polarisation and brinkmanship on the US financial outlook. Moody's, one of the major rating agencies, has warned that a government shutdown could harm the country's credit rating, potentially making it appear less creditworthy and leading to higher interest rates on its debt.

US Treasury Secretary Janet Yellen has also stated that a government shutdown could disrupt key programs, including those for small businesses, and delay critical infrastructure projects, undermining the nation's economic progress.

A government shutdown will only reduce GDP by 0.2 percentage points each week it lasts," said a report by think-tank the Center for Strategic and International Studies, as per AFP.

"However, halting critical trade functions of the United States will also undermine the United States' overall credibility as a commercial partner, impede ongoing negotiations, and hinder export control enforcement capabilities," the report added.

How It Will Impact India

According to a report by Mint, experts suggest that while the US shutdown could impact other global markets, the Indian stock market is expected to remain relatively unaffected. While the shutdown announcement is expected to come by October 1 or before, in India the bourses will remain closed on October 2 due to Mahatma Gandhi Jayanti. 

 

Foreign flows from FIIs and FPIs into the Indian market are crucial, making events like a US shutdown significant for Indian stock markets. Nevertheless, experts believe that any sharp correction should not be seen as a buying opportunity as it may be driven by continuous FIIs' sell-offs.

"During the most recent government shutdown in 2019, the S&P 500 rose more than 10 per cent. It has been observed that the damage has always been limited and markets have recovered quickly," Rajesh Sinha of Bonanza Portfolio told Mint.