What India's Budget means to Europe

India has seldom been a role model in Europe. India doesn't rank high in the lists and minds of economists and political scientists. It hasn't been a dazzling example of anything good. The European Union (EU) and the European Parliament look towards their west. Their east has neither role models nor rivals. The US has, for a century, been both a role model and a rival.

India has been neither. Its miserable struggles to feed and clothe its people had become the grungy news. India's heroic struggles to keep the Union of States in one piece never made the headlines in Europe.

However, India has changed for the better. It has succeeded admirably. Its Budgets have been the serious and logical enablers of this triumph in the modern realm. India has built a purposeful practice around the Budget. The ‘union' in the Union Budget is from the first sentence of the Constitution of India. The first sentence proclaims and acknowledges that India is a Union of States.

INDIA'S GOALS

India had to accomplish multiple goals. It had to keep its Union intact. It had to promote growth across a vast and populous landscape. It had to boost aggregate output, incomes and taxes. It had to fight poverty and insurgency in the other parts. Hence, it had to manage the fiscal affairs of each of its States. It had to play an even and transparent hand. India had to promote even and diffuse growth. It had to make each locale as good as any other. It had to preserve the internal mobility of savings and capital. It had to simultaneously discourage the opportunistic transfers of wealth within. Hence, it had to evolve a common set of taxation policies.

The tax rates faced by businesses had to be identical, regardless of where they sited their activities. The tax rates for individuals had to be identical, regardless of where they lived and worked. Factor costs and revenues, but not tax rates, had to drive the economy.

Simultaneously, desperately and chronically poor locales had to be allocated funds to improve their chances of surviving and succeeding.

Hence, the low-hanging fruits had to be plucked. India had to orchestrate the internal transfers of wealth with the consent of the States.

It had to do both — the selective plucking and the selective allocation — without causing any internal alienation. India has accomplished all of these goals most admirably.

EUROPE'S STRUCTURE

The EU comprises 27 fiscally autonomous countries. Fiscal autonomy and sovereignty are inseparable. All 27 EU members retain fiscal control on their economies. Each member sets its taxation policies. Their citizens vote independently on government spending. They vote independently on welfare and pension benefits. Seventeen members of the EU have one common currency, the euro. Thus, there are 17 Euro Zone countries. Each of the remaining ten, including the wary and the savvy Britain, has its own currencies. The EU has 11 currencies.

The Euro Zone has ceded monetary control to the European Central Bank (ECB). The ECB determines monetary policy, money supply and the short-term bank rates. Hence, 17 of the EU's 27 members have 17 different fiscal policies and structures in place. However, they are bound by one common set of monetary policies. Each of the remaining ten non-Euro Zone nations has its own fiscal policy and structure. Each has its own set of monetary policies.

EGREGIOUS EXTERNALITY

Every government may be likened to a business or a firm. The taxation side of fiscal policy earns revenues for this firm and the spending side imposes the costs. The firm earns a profit when revenues exceed costs. The owners of the firm become rich.

The firm incurs a loss when costs exceed revenues. The owners of the firm have to become poor. That is the first result. There is an inevitable second part. Costs have to be paid for. Money has to be found because revenues are insufficient. Hence, fiscal policies have monetary outcomes. They affect monetary policies.

Many, but not all, loss-making countries have a choice. Consider India. It could borrow from the sovereign bond markets. Or, it could ask the Reserve Bank of India (RBI) to create money. The RBI then lends in order to fund the spending. The creation of money causes a decline in value. Some of the loss-making countries don't have this choice. Consider Greece. It could borrow. The creation of the euro by the ECB is ruled out. This would cause a decline in the euro's value all across the Euro Zone. However, Greece would capture all the benefits.

So, Greece will have to borrow. It has enthusiastically borrowed billions of euros from any lender in the Euro Zone and elsewhere that chose to lend. It then spent what it borrowed. The big debts now remain unpaid. Greece has wilfully and vilely orchestrated a transfer of wealth to its citizens at the cost of its gullible external lenders. This, however, couldn't have happened in India.

A QUADRILEMMA

Each of the remaining 16 Euro Zone countries could emulate what Greece has infamously accomplished. Given that Greece has gone unpunished, the rest would be very keen. The Keynesians and the opponents of fiscal austerity would goad each of them to spend and spend and then to borrow and borrow. There would be a race within the Euro Zone to transfer wealth from the outside to their citizens. This would be ludicrous.

Hence, the Euro Zone has to reconsider and reconcile the four sides of an unsustainable economic quadrilateral. It is a quadrilemma. Fiscal autonomy, internal capital mobility, a common currency, and the unhindered access to borrowed funds won't exist for long in the EU. One of them has to go. The Euro Zone countries will soon have to surrender their fiscal autonomy to a fiscal authority. They would have to create a fiscal authority and learn to work on budgets the way India does.

(The author is a financial analyst.)