States with more economic activity should get more from Centre: C Rangarajan

Former RBI governor says he has his reservation on horizontal distribution

The level of economic activity of a particular state and the generation of taxes has to be taken into account and should be provided for when it comes to the distribution of money to the states, said C Rangarajan, former chairman of Economic Advisory Council to the Prime Minister and former Reserve Bank of India governor.

Speaking about the horizontal devolution of taxes, which is the allocation between the states of the net proceeds of tax, he said, “Whether the population should get the higher weight or not, I really have a view the generation of economic activity of a particular state and the generation of taxes has to be taken into account and that should be provided for.”

For example, in the days when income tax alone had been distributed amongst the states, collection was one of the important criteria. It is because of the income contribution of the economic activity of that particular state or unit, and it should get it, he said.

Rangarajan was here delivering his presidential address yesterday at the Madras School of Economics.

“Maybe the horizontal division is not the way to do it. If supposing a state doesn’t confirm a roadmap that you had given, then where is the way out? Then it becomes a purely political question whether the Centre will accommodate or not. We need to send out some signal that fiscal prudence is important. States need to raise money on their own and therefore it is critically important,” he added.

He added while the equity-and-need criteria followed in horizontal devolution might be correct when the devolution was 25 per cent, but it may not be the right criteria when the horizontal devolution is 42 per cent.

He added the Centre should focus on a few centrally-sponsored schemes rather than just adding new schemes.

The 12th Finance Commission, which was headed by him, took out the equalisation principle and was applied in two sectors, which, he said had led to a difference.

He also said the 14th Finance Commission had done a commendable job taking bold view on the division of divisible pool, which the previous Commissions made only marginal changes in the division.