India Spooks Investors Instead of Calming Them

India’s annual budget has brought home to markets the unpleasant reality of fiscal dominance, in which the central bank ends up prioritizing deficit financing over its primary function of controlling inflation.

That’s a risky situation to be in. As a former central banker has described it, fiscal dominance is “A Theory of Everything in India” — or at least everything that goes bad eventually, like during the Federal Reserve’s 2013 “taper tantrum” when rupee-denominated assets were heavily sold.