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EDITORIAL SPECIAL FEATURE An Interview with Mr. Harish Hulyalkar, Director, M&A, Citigroup India
Financing the Indian SME’s: Challenges and The way Forward……. By- Saurabh Aggarwal
Subsidy Cuts and FDI Inflow: Two Catalysts for Indian Economy Revival
By Vivek 2Srivastava & Tushar Sharma, PGDM-IFMR, Chennai
Fiscal Cliff in Totality By SIMSREE FINANCE FORUM
The government of India has a major problem to tackle this financial year- Fiscal Deficit. It has tried all possible means to reduce the deficit to the acceptable level. Subsidy bill are a major part of government spending in India. So GOI is now determined to reduce the subsidies on diesel. It has now agreed to deregulate the prices of diesel in a gradual manner. So is the case with LPG cylinders. These steps suggest the desperate need of the government to bring its spending below the threshold. Another important step that has been taken is disinvestment of PSUs. Another important issue in India is the financing of SMEs. Small and medium enterprises are growing in India. However they have not yet found a proper and a simpler way to finance themselves except for a few. In fact it can be said that there is a lack of adequate access to finance for the SMEs which is a bottleneck in itself. The problem here is not just with the banking sector but also with the ignorance among the SMEs with the options available. India can become a sustainably growing economy if all these bottlenecks are addressed. Finally we had the huge global issue of Fiscal Cliff. The US government have just taken a decision to defer the tax discount cuts. So the situation is still not absolutely clear. The danger has been deferred and not avoided. In this issue we have taken the interview of Mr. Harish Hulyalkar, Director, Investment Banking (M&A) at Citigroup. He shares with us some important details about the M&A industry. As part of our forum activity we have an article on “Subsidy cuts and FDI inflows:Two catalysts for the Indian Economy” written by Tushar Sharma and Vivek Srivastava from IFMR. We also have an article from our alumnus Mr. Saurabh Aggarwal on “Financing the Indian SMEs: Challenges and the way forward.” Finally we have an article from our team on fiscal cliff. Happy Reading! TEAM ARTHNEETI 2
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Interview: Mr. Harish Hulyalkar, Director, Investment Banking (Mergers & Acquisitions), Citigroup India Topic: M&A trends in India Q.1 What according to you are the problems facing the M&A market in India and around the world?
reaches a certain ownership threshold, the acquirer has the ability to delist the target company and squeeze out the minority ownership to achieve 100% control. However in India this is not allowed. This tends to be an inhibitor specially for international companies looking to acquire listed Indian companies.
Ans: The M&A volumes are strongly correlated with the global economy and growth sentiment around the world. The GDP growth of major economies in Europe and North America has been slow which has been reflected in the M&A volumes as well. However these economies are now recovering slowly and hence the M&A market is also seeing a revival. As such there are no hurdles in the way of this market and it is a function of the economy and global sentiment. This is the case in India as well as around the world. Cross-border M&A volumes will continue to contribute a greater percentage of total volumes, as companies look to invest capital in growth opportunities outside their home country.
Q.3 What is the role of CCI in M&A deals in India? Ans: The role of CCI is to ensure that mergers, acquisitions and similar arrangements do not stifle competition and provide undue bargaining power. The CCI role has been very clear and most of the M&A deals have been cleared by the CCI in line with the prescribed rules and within the prescribed time frame.
Q.2 Are there any regulation problems with respect to the M&A taking place in India? If yes what are those?
Q.4 Tetley was acquired by TATA tea which is a smaller company when the market share is considered for the beverages market. Why would such a large company let a small company acquire itself? Or what are the factors considered by a larger company before such a deal happens?
Ans: India is a relatively highly regulated market from an M&A perspective. Every transaction in India has to closely evaluated from a tax, legal and regulatory perspective. A key regulation which impacts M&A is the ability to delist the target company from stock exchanges. In many countries, if an acquirer acquires a majority stake in a target company and
Ans: One reason can be the attractiveness of the offer. If a target company gets an attractive offer, then its Board of Directors have a fiduciary obligation towards their 3
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shareholders to evaluate whether accepting the offer creates more shareholder value than steady state operations.
Ans: We saw the first wave of outbound M&A deals from India in the 2006-2008 timeframe, pre financial crisis. As you will appreciate, the world was a very different place then; there was ample liquidity in the global financial markets and economies around the world were confident about the growth prospects. So during this timeframe, we saw some large acquisitions done by Indian corporates.
Another reason could be that the target company is doing well, but its controlling shareholder is in financial distress and hence may consider divesting its stake in the target company based on the most attractive offer (potentially from a smaller bidder).
However since the financial crisis of 200809, Indian corporates have been more cautious about international acquisitions, given the less attractive growth prospects and higher uncertainty in these end markets. The outbound acquisitions in the last 2-3 years have been largely focused in sectors like energy and metals & mining, where Indian acquirors have pursued acquisitions to get access to natural resources like oil and coal.
Q.5 Does the purview of M&A consulting include consultations during splits? Like the one that happened recently with Hero and Honda. Ans: Sometimes joint venture terms need to be restructured. In such situations, the M&A advisor can help in structuring the revised commercial terms of the joint venture. In some cases, the joint venture partners may decide to part ways, by one party selling its stake to the other party, or by finding a new third party buyer. An advisor can help find a new buyer, or advise on funding alternatives to facilitate the buyout.
Q.8 Since you have been in this industry more than a decade now, what was the most attractive deal according to you or rather a historic deal for a particular region or sector? Ans: That is an interesting question. A few global deals come to mind, which transformed the landscape of their respective sectors. For example, CibaGeigy and Sandoz came together to form Novartis, which is a global leader in the pharma industry today. P&G’s acquisition of Gillette and the Exxon-Mobil merger are other examples of transformational deals which created hugely successful global companies.
Q.6 Since 2005 there have been a lot of India companies acquiring firms outside India. Do you see this as a new trend in India or is it just a co-incidence? 4
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As far as India is concerned, we have not seen many such transformational transactions, but one that comes to mind is the merger of ICICI Bank and ICICI, which created a highly successful universal bank, and redefined the banking sector in India
and this trend will continue this year. As far as outbound M&A activity is concerned, it likely to be focused across a few industries only. One other theme which could play out is M&A activity driven by exits by private equity firms. Several PE firms who invested during the 2006-2008 period could look at M&A opportunities to sell their stake, as generally the investment cycle for these investors is around 5 years. Q.10 Can you talk about the M&A activity in the emerging markets like Africa, Latin America and others? Ans: These are fast growing markets, and since the home countries of many global companies are showing low-single digit growth rates, it is obvious that new emerging markets will look very attractive. With the slowdown in China growth, M&A buyers could also look at faster growing Asian economies like Indonesia and Malaysia.
Q.9 Can you forecast the M&A market in India for the coming year in India? Or some deals that you feel are on the verge of consummation. Ans: I think there will be interest in inbound M&A into India across sectors,
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Financing the Indian SME’s: Challenges and The way Forward……. -By Saurabh Aggarwal Small and medium-sized enterprises (SMEs) are widely seen as engines of economic growth. In developed countries, they are credited with creating jobs, delivering innovation and raising productivity. But SMEs in third world countries are not currently meeting that promise. While there is no lack of interest in promoting entrepreneurship in developing countries like India, we do lack evidence about what helps, or even what represent the biggest barriers to growth.
Limited Access to Finance… It will not be an exaggeration to say, Indian SMEs are in dire need for funding. The situation is extremely grim. Look at the contribution of SMEs in the GDP of countries like USA and UK. They contribute 40%-60% of the GDP and provide employment to 50%+ of the workforce. Even in developing countries like China and Vietnam, the ratios are very similar. However, in case of India, the contribution to GDP is just 20%. This shows huge untapped potential for SMEs. The major cause is lack of financing for SMEs.
India is home to about 26 million small enterprises (with investments less than 50 million) that account for about 20 per cent of the country's GDP. Growing at over 10% in the last few years, the small and medium enterprises (SME) sector is considered a vital part of the Indian economy. However, one of the major bottlenecks to the growth of the SME sector is its lack of adequate access to finance. Despite the efforts of Ministry of Small and Medium Enterprises, SIDBI and support from the RBI by inclusion under priority sector, there continues to be a huge demand-supply mismatch in small enterprise financing.
One of the main reasons for banks/financial institutions (FIs) being unable to bridge this gap is the perceived credit risk involved in financing small enterprises. This is primarily on account of non-availability of valid bills, proper accounting systems and lack of known buyers. Accurate information about the borrower is a critical input for decision-making by banks in the lending process which is not easily forthcoming in the case of SMEs, as the sheer ticket size of SME lending makes it non-viable for banks to invest in developing information systems about SME borrowers.
Small enterprises, such as brick-kilns, grocery stores and small restaurants, need finance to purchase raw materials, procure stock, pay wages, meet other working capital requirements and support expansion plans.
To mitigate such credit risk, banks typically look for enhanced collateral or 6
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traditional equity, both of which cannot be brought in by most entrepreneurs. . The credit managers are hesitant to fund new-age business ideas, and definitely not
they have right people to interact with financial institutions. However, in case of any uncertainty, the right way is to avail the services of these consulting firms.
without the guarantee of an asset that is 100% of the value of the asset. This is so owing to the higher degree of involvement required by the banker to understand the underlying cash flows of the business. Further, due to their small size and local presence, the transaction costs involved in financing them are very high.
Today, banks and financial institutions are also actively engaged in imparting knowledge of complex products to SMEs. Regular Events and seminars are being organized to spread information related to modern trade and treasury products. Conclusion The SMEs need to do their management planning and make the processes more formal, so as to have the documentations ready for financing opportunities. Accounting policies and consistency in book information will lead to better reliability from the bankers. The balance sheet clean – up would improve the credit worthiness of the average SME, qualifying the company for more bank loans as well.
In the face of lenders’ reluctance to finance, these enterprises are compelled to resort to high cost, non-continuous financing from money lenders and other informal sources, or continue to operate at sub-scale. Ignorance among SMEs The lack of financing is not only because of lack of interest of banking institutions but also because of ignorance among SMEs on the financing available. Most of them are promoted by 2nd or 3rd generation Entrepreneurs who understand only the traditional financial products. They can’t afford to hire modern day finance managers to deal with banks and adapt to modern financial products.
Institutionally, provisions need to be included in the rules governing the SME sector so that periodically the enterprises are evaluated on a five-year basis and recertified so that they can graduate from SME to mid-size companies. Given the importance of the sector, the government, industry chambers, thinktanks and policy-makers need to come together to create an environment conducive for SMEs to flourish. This would in turn make SMEs banking-friendly. Adequate RBI and SEBI support and institutional reforms are also necessary to take the sector to the next level of global competitiveness.
However, there are many consulting companies that have come up in recent years specifically focused on SMEs. They provide consulting services to them by advising the cheapest way to raise funds, liaising with Government to avail the schemes, and consult on overall operational and technical issues to improve efficiency, reduce bottlenecks, and optimize costs.
To ensure the competitiveness of SMEs, it is essential that the availability of infrastructure, technology and skilled manpower are in tune with the global trends. Currently, the state of infrastructure, including power, water,
It is good idea to speak with such consulting companies for advice. Though SMEs may not need help in many cases if 7
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roads, etc. in most areas where SMEs are set up is poor and unreliable.
In conclusion, at a time when the process of transformation of the economy has thrown up major challenges, it is important that the financial sector gears up for catering to this new segment and, in turn, fuel its growth in the coming decades.
It is worth noting that the current banking infrastructure, utilised for credit cards and ATMs, can be extended to SME financing. The system of SME financing is fundamentally similar to that of credit cards—hence the use of the processes and distribution networks is possible. Similar extension of existing infrastructure will be necessary in order to reduce the transaction costs involved. Thus, a two-sided approach involving innovative lending from the financial sector, and better corporate governance systems in the SME sector can lead to a growing flow of financing.
FIN-QUIZ 1. 2. 3. 4. 5. 6.
Who is father of accounting NYSE is called also as..change The value of a forward contract at its initiation is This term is derived from the Greek word 'Oikanomia' means "House Management". What is it? What is known as "Greenshoe Option" or "Overallotment"? Name the first Indian woman CEO of a Foreign Bank?
September 2012 Issue Answers: 1. 2. 3. 4. 5.
Luca Pacioli Arbitrage Nostro Account Letter of Credit UCPDC – Uniform Customs and Practices for Documentary Credits
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Subsidy Cuts and FDI Inflow: iii post 1991. FDI inflow rose from `2,705 Two Catalysts for Indian Economy Revival
Crores in 1990 to `18,486 Crores in March 2000 and `123,378 Crores in 2010iv. With a growth rate of close to 7.7% over the past decade, India today truly occupies pride of place in the new economic order. India’s journey has been an interesting one. Positive investor sentiment in Indian economy brought about by opening of the doors to foreign investors led to infusion of liquidity in funding starved Indian economy and filled the coffers of the Government. The push in upgrading Indian infrastructure was possible only because Government realized revenues brought about by FDI. The social benefits of this decision can be seen in the wide variety available to the Indian consumers, increased cosmopolitan fabric of our society and increased competitive nature of the nation’s firms.
By Vivek Srivastava and Tushar Sharma PGDM - IFMR Chennai (Winners of Arthneeti Article writing competition- December 2012) “No Power on Earth Can Stop an Idea Whose Time Has Come” -
Manmohan Singh (1991)
Introduction: The growth exhibited by Indian economy over the past decade has been truly inspiring. But the story was not a happy one in 1990. Once derided for its 2% “Hindu Rate of Growth”, the economic might of India was unleashed in 1991. Pre 1991, Indian economy faced a severe BoP crisis. With dwindling exports and rising debt, the situation appeared bleak. Forex Reserves stood at `11,416 Croresi, barely enough to last 3 weeks. The situation was exacerbated by the increasing oil prices due to Gulf War. Inflation had reached its highest level of 13%. Subsequently, India’s credit rating fellii. Simply put, the Indian economy was on the verge of default with respect to its external payments liability.
The Story Today Today, India is slowly slipping from the path of high growth. IIP has plummeted from 9.69% in 2010 to a measly 2.4% in 2012v. There is a wave of pessimism and a loss of investor confidence that the India Growth Story is coming to an end. Fiscal Deficit is showing no signs of contracting, and India’s External Debt has skyrocketed to $ 289.7 Bn from a stable $ 237 Bn just a yearvi ago (a 22% rise in just 1 year). Spiraling budget deficit has led to inflation. Infrastructure projects are all coming to a standstill as major private sector companies are overleveraged and
It was India’s decision to open its door to FDI which led to tiding over the crisis. Sectors such as mining, banking, telecommunications and highway 9
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experiencing funding problems. Banks are constrained in their funding projects because of mounting NPAs on their balance sheets. There are fears of downgrades from credit rating agencies.
PDS system for distribution of food grains and kerosene has spawned practices like black marketing and hoarding. Subsidized urban housing is sold off and beneficiaries revert to squatting. Low-priced public transport tickets have pushed State Transport Corporations towards bankruptcy. Wage guarantees have distorted labor incentives and prevented efficient labor allocation.
The Case against Subsidies The biggest burden on Indian economy is its burgeoning subsidies bill. There has been a 200% rise in subsidiesvii since 200708. In 2010-11, the country's subsidy burden was `164,153 Crores -- or 2.08% of the GDP -- and increased to `223,000 crore in the current financial year, which is 2.5% of the GDP.
The problem with fuel subsidies is that they impose a heavy burden on Government budgets, add to global warming, pollution and cause wasteful consumption in general. This, in turn, diverts much-needed resources from more pressing needs, such as health and education. As National Income rises, so does the consumption of fuel. Indian policy makers have been oblivious to this trap of rising fuel subsidy bill. The lingering uncertainty over the outlook for fuel prices may also affect investor and consumer confidence at a time when the global economic environment is more challenging.
As late as October 2012, the Kelkar Committee recommended that Government cut subsidies in three significant F's - Food, Fuel & Fertilizer - in order to meet its budgeted fiscal deficit target. The Committee further said that the current deficit level of 5.1% could balloon up to 6.1% if no corrective measures were taken. The Committee warned that India was on the edge of a 'fiscal precipice' and headed for a “fiscal storm worse than 1991�viii.
Similar is the case with subsidies in the form of free power, fertilizers etc. The biggest challenge for the government is selecting an appropriate channel for subsidy transfers. The current channels of providing subsidies to the farmers are deeply flawed. The most effective approach to minimizing such distortions is eliminating price subsidies and replacing them with direct equivalent cash transfers. In this context, the proposed Direct Cash Transfer system via Aadhar is revolutionary.
The problems with the current subsidy system are many. The ineffectiveness of subsidies is an open fact. Still, policy makers refuse to infuse a new line of thinking to solve the problems. Low property taxes have made Municipal Corporations unviable. Municipal Corporations and State Electricity Boards are reeling under heavy losses. Low electricity and water tariffs have reduced the incentive to optimize usage and have led to wastage of precious resources. The 10
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The Government, constrained by coalition compulsions, has paid some cosmetic heed to the Panel's suggestions but with the caveat that certain subsidies were unavoidable. The recent hikes in diesel prices and cap on subsidized LPG cylinders are steps in the right direction. For a country with a burgeoning middleclass, such a cut in deficits is not a severe problem. The middle class can afford it. Indian citizens should be ready to pay the price for development.
taken to ensure that FDI inflows increase. This can be achieved by:
IS FDI Really the Engine for Growth? The rationale for economic liberalization during 1991 was to foster greater competition in private sector which would ensure efficient allocation of resources, greater efficiency and achieve a spread of income and prosperity. FDI in itself is not the be all and end all solution. FDI and growth form a complex cycle – where one is the cause of another. Only when there are conditions conducive for growth will multi-national firms invest in India. And their investing will provide a push to the economy. FDI inflows are a signal that the investment climate is fair and investors have a sense of comfort and security.
Adopting a transparent policy framework Conducting an overhaul of the regulatory framework Evolving transparent procedures for allotment of land, power, environmental clearances, etc. Time-bound single-window approvals of various clearances Developing physical infrastructure comparable to international standards Developing a social infrastructure to attract both highly-skilled and semiskilled human resources
For achieving high growth, India requires more knowledge cities, SEZs, Industrial clusters, IT Parks, Highways and R&D Hubs etc. A 9% GDP growth would need $1 Trillion worth of investment in core infrastructure alone. Funding for such ambitious prospects mean that we pave way for FDI. FDI provides immense job opportunities to local people and also assists in improving the economic situation. Sentiment plays a major role in the growth of an economy. Government recently allowed 51% foreign investment in multi—brand retail but left it to the states to permit global retailers to open stores.
Though it is a vital step for the improvement of economy – it is only an addition that bridges the gap in capital formation required to sustain a targeted growth. Our economic strategy cannot be entirely based on FDI-led growth alone. In India, it is estimated that FDI contributed just 0.7% - 2.1% to GDP growth during the period from 2003-10. Thus, to root out prevailing pessimism, steps should be
The sectors where we are seeing stupendous growth today are the sectors in which FDI has played crucial roles. The drugs and pharmaceutical sector has seen 11
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a 15-fold jump in FDI in FY12. India has gained from FDI in automobile, IT/ITES and telecom sectors in terms of lower prices and myriad choices, flourishing infrastructure and continuous accumulation of knowledge capital. Parting Shot Faltering FDI flows have affected India's economic growth process and undermined its position. For India, considering its demographic challenge, achieving high growth is not an option but a necessity. The two catalysts - subsidy cuts and FDI inflows - are crucial Indian for unleashing the “Animal Spirits”. Only time will tell if the revival in FDI is here to stay. Transitory or not, revival in FDI flows is certainly good news for the economy. And sooner our baggage of subsidies is trimmed, the better off we will be. i
Bulletin RBI (Table 45); Economic Survey 2011-12 India’s Credit Rating - Rajwade (Business Standard May 1,2006) iii Study of FDI And Indian Economy – Sapna Hooda (NIT-K) iv Impact of FDI on Indian economy - Mahanta Devajit (RJMS Sept, 2012) v www.indexmundi.com vi Finmin.nic.in – India’s External Debt (End Sept, 2011) vii 10 Problems Ailing The Indian Economy & Solutions To Revive It (ET June 2, 2012) viii Kelkar Committee Report (RBI) pp4 ii
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The Fiscal Cliff policy
The Fiscal Cliff in Totality
Some important features of the fiscal cliff policy are as follows: An increase in the payroll tax by two percentage points to 6.2% for income up to $113,700 A reversal of the Bush tax cuts for individuals making more than $400,000 and couples making over $450,000 which entails the top rate reverting from 35% to 39.5% An increase in the tax on investment income from 15% to 23.8% for filers in the top income bracket 3.8% surtax on investment income for individuals earning more than $200,000 and couples making more than $250,000 A 2 per cent payroll tax cut was enacted during the economic slowdown. This would be allowed to expire as of the deadline of December 31, 2012
BY SIMSREE FINANCE FORUM
The Fiscal Cliff overview “Fiscal cliff” is the popular shorthand term used to describe the situation that the U.S. government was speculated to face at the end of 2012. This was the period when the terms of the Budget Control Act of 2011 were scheduled to go into effect. The deadline of December 31, 2012 was set to make some changes such as: End of last year’s temporary payroll tax cuts which would result in 2% tax increase for workers End of some tax breaks for businesses Shifts in the alternative minimum tax that would take a larger bite A rollback of the "Bush tax cuts" from 2001-2003 Beginning of taxes related to President Obama’s health care law
An estimate of budgetary impact of the various provisions suggested is as follows: Raising taxes on individuals making more than $400,000 and couples earning more than $450,000 would help in raising $617 billion in revenue. Extending unemployment insurance will release $30 billion in spending. Postponing sequester cuts could cause $24 billion in spending to get stuck. Delay in scheduled Medicare payment cuts to doctors relates to $30 billion in spending. Extending various tax credits holding a share of $76 billion. Extending tax credits from the economic stimulus legislation constitute for $78 billion.
Also, the spending cuts those were agreed upon as part of debt ceiling deal of 2011 a total of $1.2 trillion over ten years were scheduled to go into effect. This spending cut had a projected size of a total of $1.2 trillion over ten years.
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How actually the deficit became a real problem for US
further increased the deficits and would have added to the hardships US already is facing. Another angle to this option was that US debt would have continued to grow which is not favourable at all. The other option could have been to take a middle path which would address the budget issues to a limited extent, but that would have a more modest impact on growth. This is ultimately the course lawmakers choice in the agreement reached on December 31, 2012.
The huge deficit in the fiscal budget of United States has many reasons to count for. The major five reasons are as follows: In 2011, almost 63% of the spending was made on past promises made for social security, Medicare, Medicaid, subsidies, debt interest. One out of four dollars goes to health care. In 1960, spending on health care was about 10% before Medicare and Medicaid was part of spending. In contrast to this, healthcare spending has increased to 25% in 2012 and is projected to touch 33% in future. Federal government employs an enormous number of four million people. This also constitute to a significant portion of US spending. US government spends approximately 700 billion dollars on defence. Tax paid by US citizens is falling significantly.
How the fiscal cliff deal was handled actually The important date that comes into picture when fiscal cliff is mentioned is 31st December, 2012. The fiscal cliff agreement that came into picture can be considered as good news to some extent. But this cannot be ignored that the US lawmakers had 507 days to come to a solution to this problem. (These 507 days are calculated from the August, 2011 debt ceiling agreement to 31st December, 2012.) But, in spite of this, US lawmakers came down to the final hours before they were able to reach a solution. This caused unnecessary burden on financial markets and the economy. Now, after this much turmoil, the agreement only addresses the revenue side i.e. the taxes paid by US citizens. But, the discussion of spending cuts which called as “sequester” is postponed until March 1. So, we can see that it is still a wait and watch game.
The Fiscal Cliff Debate The US lawmakers had three options to act upon the fiscal cliff. The first option was to let the policies come into effect as they were scheduled. The policy featured a number of tax rate increases and fiscal spending cuts. This would have cut the fiscal deficit significantly. But at the same time, the policies were speculated to affect the growth of economy and possibly push it back into recession. Another option was to cancel all or some of the scheduled tax increases and spending cuts. This measure would have
So, we can say that the problem is temporarily solved as the deadline of 31st December is passed. But still the portion of the deal needs to be addressed. On a longer term basis, the cliff deal still needs to address the US debt load which is as high as $16.4 trillion.
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Features of the bill passed by the Senate:
tax cuts; $125 billion from the expiration of the Obama payroll-tax holiday; $40 billion from the expiration of emergency unemployment benefits; and $98 billion from Budget Control Act spending cuts. In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that.�
Past its own New Year's deadline, the Senate agreed to a deal to avert the fiscal cliff. Democratic-led Senate passed the measure that seeks to maintain tax cuts for most of the Americans but increase rates on the wealthy. According to different estimates, this legislation would raise roughly $600 billion in new revenues over 10 years. Republicans stood for higher tax rates for the wealthiest Americans, while democrats suggested a higher threshold for the people who are wealthy enough to face higher taxes. According to President Barack Obama, the law would be signed that would raise taxes on the wealthiest two per cent of Americans while preventing tax hikes that could have sent the economy back into recession.
Brighter Side to This If we think on the issue of fiscal cliff, we can see some brighter side to it. If at all the fiscal cliff happens, it might not be that much bad as it is imagined.
The Worst Case Scenario If there would have been no change in the current policy chalked out to deal with the fiscal cliff, there wold have been a two way effect on economy. The step of spending cuts and raise in taxes would reduce the deficit by $560 billion approximately. But on the other hand, according to Congressional Budget Office, the policy would have slowed down the gross domestic product by four percentage points in 2013 which would have sent the economy into recession. Also, it was predicted that unemployment would rise by a per cent point which could have caused almost two million people to lose their job.
The other school of thoughts argues that the cliff would bring some long-term positive changes on the cost of some short term hardships. The argument says that U.S. has to tackle its deficits at some point, and this sort of "bitter medicine" would be a harsh, but definitive, step in that direction. Now, this short term effect could be severe and might cause recession in 2013. But, at the same time it can fetch long term benefits like lower deficits, better growth prospects, lower debt, etc. According to the projections of the Congressional Budget Office, by 2022, the budget deficit would fall to $200 billion from its current level of $1.1 trillion. To achieve this, nation might have to face some tough situations as mentioned earlier.
A May 16, 2012 Wall St. Journal article estimated the impact in dollar terms as: “In all, according to an analysis by J.P. Morgan economist Michael Feroli, $280 billion would be pulled out of the economy by the sun setting of the Bush 15
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