What does a US shutdown mean, and how will it impact?

3 Oct 2025 , 03:30 PM

WHAT EXACTLY IS MEANT BY A US SHUTDOWN?

In recent years, a US shutdown has become quite common. In late 2024, the US almost came close to a total shutdown. The US had a prolonged shutdown between December 2018 and January 2019, although only 5 of the 12 services were impacted. The last prolonged total shutdown of the US government was in 2013. This time around, the US government is officially in a shutdown after the Congress failed to reach a funding deal. That means, the US government does not have sufficient funds or approval to run the show.

What does a government shutdown mean in the US and would there be larger repercussions? The current stalemate is over the extension of health insurance subsidies, which was something first conceived as part of Obamacare. Trump has been looking to cut government expenditure and healthcare benefits is one of the areas where the axe is likely to fall. That was the reason for failing to reach an agreement. What happens in a shutdown?

In a shutdown, the workers in non-essential services will be put on furlough. So, while services like air traffic control, medical aid, homeland security etc will continue, a host of other services will see workers on furlough. That means they continue to work, but would not be paid. That has not been a problem in the past as such furloughed workers have been paid later with retrospective effect.

WHAT WILL THE SHUTDOWN IMPACT?

In fact, the shutdown will impact a host of things. From data dissemination to visa issuances will be impacted by the shutdown, since these are classified as non-essential services. For example, the jobs data coming out this week could be delayed and if the shutdown continues, then even the consumer inflation data would be delayed. This is likely to put the Federal Open Market Committee (FOMC) in a spot, as it heavily relies on such data for its interest rate decisions. The FOMC is slated to meet on October 28-29 next, but it would be a blind shot, if they have to work without accurate data.

The bigger impact would be on GDP growth. It is estimated that a shutdown impacts the consumption of furloughed workers. Past experience shows a hit to GDP to the extent of 0.10% per week. So, in a month of shutdown, nearly 40 bps would be shaved off from GDP growth. The impact has been seen in the past, even when the furloughed workers have been paid with retrospective effect. That is something that would also create a conflict on whether the Fed should cut rates further or not.

WHY THIS SHUTDOWN COULD BE DIFFERENT?

Markets are apprehensive that this shutdown could be different for various reasons. Firstly, Trump has long wanted to cut down on the government staff and he may use a prolonged furlough as a simple way of forced reduction in the labour force. However, this would have larger legal implications and the government may not have a very strong hand.

The other aspect would be the delay in visa approvals, especially the H1-B types, which Trump has been trying to penalize. During the shutdown, many of these services are likely to come to a standstill and that would put several technology companies on tenterhooks about their staffing plans. These could the immediate implications.

WHAT DOES THE SHUTDOWN MEAN FOR INDIA?

For India, there are two concerns. Firstly, the shutdown means delay in taking routine decisions. The trade deal is likely to be put on the back-burner even as visa issues and other H1-B related subjects will be relegated to the background. The second concern is on the growth front. India has already been hit by tariffs, which is hitting goods exports. A prolonged shutdown is likely to hit the demand for services also, an area where the Indian IT industry and the GCC industry thrives. These could be real concern for India Inc!