Lessons for India from Grexit: States must have right to exit GST painlessly

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As Greece heads for a loan default by Tuesday (30 June), it is not clear how the situation will play out if the default does happen, and the referendum planned on 5 July in Greece endorses the government’s refusal to accept the final offer of the creditors.

The chances are still more than 50 percent that most Greeks will prefer to swallow the bitter pill and vote to stay in the European Union. The all-too-human fear of being left to fend for yourself outside the EU will surely be a major factor in their voting behaviour. If there is one thing human beings fear, it is being made an outcast and asked to live alone.

The purpose of this article is not the implications of a Grexit – Greece‘s possible exit from the European Union – but how economic and political groupings tend to have a one-way logic. You can enter freely, but you can’t exit without causing major damage to yourself.

If Greece exits, it will face enormous turbulence anf hardships as it seeks to re-establish its own currency and competitive strengths. Presumably, it would want to be like Britain, where it will continue to be part of a common market, but with its own currency. But Greece will get a lousier deal than Britain for the simple reason that it will have defaulted and bruised creditors will not be eager to help the country which left them holding the sack. Britain got a good deal because it opted to stay out of the eurozone.

The questions to ask are the following:

One, why is it that global arrangements largely are a one-way street? Isn’t the core purpose of a free union supposed to be two-way? Isn’t the right to separate part of the right to marry? Whether it is the UN, the WTO, the IMF, the EU or any global organisation, the post-WW-2 world has only seen additions, not exits.

Two, can global organisations run without giving the powerful too much power, with the rest getting merely crumbs? The UN effectively gives a veto to five powers – of whom only two are really big powers today (US and China). Russia, UK and France have veto powers that have nothing to do with their global standing. The EU is essentially run by Germany and France, and both of them have been allowed to breach fiscal protocols when it suited them. Just as you cannot run the UN without US and China, the EU will not work if France and Germany are forced to play by the rules they themselves set. It is only the minions like Greece that have to pay the price. There is no graceful and non-damaging exit for a Greece since it is a minor power in the EU. All global groupings thus have two sets of rules: one for the powerful, another for the rest. This is neither fair nor sustainable.

Three, as a corollary, we should also ask whether those proposing new cooperative organisations should also not have formal protocols for easy exit? This issue is relevant not only in global formations but also domestic. For example, we expect all Indian states to be a part of the goods and services tax regime, but we have not thought about what we will do if some state finds that it has got a dud deal. Should the terms of exit – with compensation – not be an option given to all states?

Consider what is at stake for states.

First, we are asking them to let go of fiscal sovereignty so that the overall tax pot is grown and all benefit. But as of now, this is unproven. Whether all states will benefit, or only some, or whether some will benefit much more than others will be known only after a couple of years down the line. How is it logical to ask states to give up the bird in hand for two in the bush? Who will guarantee two birds in the future as compensation for giving up what they already have?

Second, states are being wooed on GST because they have the power to block it, but the same wooing isn’t happening when it comes to asking cities abandoning their taxes. It is presumed that states need to be coaxed, but they can then behave undemocratically and confiscate the resources of cities, which earn from octroi and entry taxes. Why should cities be denied the opportunity to say no, when states have it?

Third, how will states that choose to exit if GST fails to deliver be compensated? The principle that states will be compensated for three to five years if revenue fails to meet expectations has been accepted. It follows that if a state chooses to exit GST at some point of time, it must be suitably compensated in the interim so that it can go back to the old system and rebuild its revenue base.

The Grexit crisis tells us that an exit clause must be integral to an entry invitation. States opting for GST must be guaranteed a generous exit so that they are not penalised for exercising their federal rights at some point. Just as spouses get alimony or other compensation on divorce, GST must have an exit option. Just as business will not hire without the right to fire, states must not be asked to sign away their rights without the freedom to withdraw from GST.

Without the right to exit, federal rights are not worth the paper they are printed on. Grexit has important lessons in federal principles and how GST is negotiated.

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