Reference Auto

Standard and Poor’s has downgraded the US economy’s long-term sovereign credit rating to AA+ from AAA with a negative outlook and this could lead to another bout of global slowdown in the medium term, the effects of which are already being felt on the Indian stock markets (though this could be for the short term, providing an opportunity to invest).

For instance, on Wednesday, the Sensex fell to a six-week low, sliding below the 18,000-mark on US debt woes. In fact, the US crisis has had a domino effect on almost all global markets.

The 30-stock Sensex of the Bombay Stock Exchange (BSE), which opened at 17,970.19 points, ended the day (Wednesday) at 17,940.55 points, a fall of 169.34 points or 0.94 per cent from its previous close at 18,109.89 points on Tuesday.

The 50-scrip Nifty of the National Stock Exchange was also down almost 1 per cent at 5,404.8 points.

Among the gainers on the Sensex pack were Reliance Infra, a rise of 2.76 per cent at Rs 560.55, ITC, which saw a rise of 0.9 per cent at Rs 206.65, Tata Power, up 0.71 per cent at Rs 1,286.60, and Hindalco Industries, which went up 0.52 per cent at Rs 165.70.

The losers (among Sensex stocks) were L&T, which slid 4.33 per cent at Rs 1,658.70. Tata Motors fell 3 per cent to Rs 927.75, DLF tanked 2.15 per cent to Rs 222.95 and Bajaj Auto fell 2.03 per cent to Rs 1,455.40.

Capital goods, healthcare, IT, auto and consumer durables were among the worst hit, owing to the selling. On the other hand, the BSE Mid-cap index closed 0.33 per cent lower while the BSE Small-cap index ended 0.66 per cent below.

The market breadth on the BSE was negative with only 1,160 stocks rising. About 1,706 scrips fell while 111 were unchanged.

As per data of the Securities and Exchange Board of India (Sebi), foreign institutional investors or FIIs sold stocks worth $18.7 million on Wednesday.

The US crisis, which it is believed will turn serious, could see FIIs exit big time from the bourses in the short term and this could take a toll on Indian (as well as global) bourses. But for how long will be difficult to tell. This is likely to stymie the rise of the benchmark index, the Sensex for the short to medium term.

India may withstand the US crisis partly but will definitely be affected by it.

On the other hand, many are putting forward the argument that after the US was hit by the downgrade, emerging markets like India, Brazil and China could turn out to be attractive destinations for FIIs.

If this happens, it could be time to invest in some attractive stocks now. During the 2008 meltdown, a gloom gripped investors, most of who stayed away from the stock markets.

But very few saw an opportunity amid the subdued sentiment and picked up some attractive stocks at very low prices.

So, even with Obama clearing the ceiling, it won’t be hunky dory for the US. For now, raising the debt limit will pave the way for the US to pay its lenders and government employees. The funds will also take care of social security and insurance benefits along with defence spending, among others.

What does this debt trap mean? The situation only indicates that the total tax the US government has been able to mop up is less than what it spends. Among the biggest chunk of its expenditure is the amount the US spends on defence.

The US government’s habit of meddling in world affairs has cost it dear. The US attacked Iraq, charging its erstwhile President late Saddam Hussain with possessing nuclear and chemical weapons. Iraq was conquered, Saddam was hanged but no nuclear or chemical weapon was found.

The end result: Billions of taxpayers money washed away.

The US then demolished the Taliban and stationed its soldiers in Afghanistan (and also in Iraq). It also spent millions to track down the world’s most-wanted man Osama bin Laden and managed to kill him.

The US also regularly sends its drones (automated aircraft) to destroy terror hideouts in Pakistan. It also grants millions of dollars to Pakistan to fight terrorists, which Pakistan conveniently uses against India.

Unless the US curbs its role as the world’s Big Daddy, it will fall into the pitfalls of a larger debt trap in the near future. It also has to try and judiciously rethink before giving defence grants to Pakistan and many other countries, which are known to divert these funds.

So, what lies ahead? The US needs to prune its defence spending substantially and may have to raise tax rates (which could be avoided by the government as it would see Obama’s popularity rating plummet to an unprecedented low).

This debt crisis could also prompt the US government to postpone pension and other payouts.

In the US, the two main parties, the Republicans and the Democrats have their view on government spending.

While the Republicans are conservative and want a cut in government expenditure by discontinuing certain schemes, the liberal Democrats want to continue welfare policies and raise the money through higher taxes.

So, unless the US government takes steps to raise income and trim expenses, like defence, it could create a situation similar to the 2008 global meltdown (in a much larger scale).

The US government will have to fill its kitty so that it finds a permanent solution (rather than just a breather) and the public may have to bear the brunt of higher taxes, an increase in the ambit of taxes which may lead to a fall in demand (as there will be little money left for other expenses), leading to a domino effect on the entire world.