Here a cliff

The global markets were poised to move into safe haven bonds and gold in the new year as the US confronted its fiscal cliff. The set of agreements reached early Tuesday, which combine a rollback of tax cuts for those with an annual income of over $4,00,000 with a promised reduction of $24 billion in government spending, essentially gives emerging market economies the hope of more investments from abroad. If it does not take a wrong step in its domestic policies, India can expect one of the key constraints to growth, investment from abroad, to flow in more easily. The long-term impact of the settlement could also mitigate short-term blips, like India's current account deficit rising to 5.4 per cent of the GDP for the second quarter of the fiscal, as demonstrated by the smart rally in the markets.

The approval by the US Senate, and hopefully by the House of Representatives, underscores how tightly knit the global economy has become in recent years. This is a key feature of the economic landscape that few politicians in India appear to appreciate. Else, there is no reason why they should still obstruct the resolution of India's own fiscal cliff the direct tax code and the goods and services tax. If the former is more of a bureaucratic minefield, the latter remains a political challenge. Certainty and a vision for the future in tax policies are essential now, more than ever before, to attract investment from domestic and global markets. India faces competition not just from China but also from other markets in Asia that have learned the advantage of a progressive tax policy and are aligning their markets at a faster pace than India.

Just as the progress on the US fiscal cliff was keenly tracked by the rest of the world, how India resolves its fiscal cliff will also be studied intently. This means it will be necessary to set a clear time-table. It will help if the Centre can, for instance, spell out for how many years it plans to postpone the rollout of GAAR, instead of making the markets wait for the news till the next budget. Similarly, an accepted date by which the GST will be set in motion is also something the economy needs to know soon.

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