‘Enlightened leadership needed to resolve north-south divide’

NEW DELHI: RBI former governor Duvvuri Subbarao has opined only enlightened leadership at Centre and state levels can resolve the complex north-south divide in deciding on the distribution of the tax pool among states, saying it is beyond the remit of the Finance Commission.

Subbarao, who wrote extensively on issues in fiscal federalism in his new book titled ‘Just A Mercenary?: Notes from My Life and Career’ further said horizontal sharing of the divisible pool of taxes has always been a contentious issue but will be even more so in this round.

“This (north-south divide in deciding on the distribution of the tax pool among states) is a complex political challenge beyond the remit of the Finance Commission.

“Resolving it will demand enlightened leadership at central and state levels that can look beyond politics and build a consensus around an optimal way forward, “he said. He pointed out that for every rupee they contribute to the centre’s taxes, richer states like Tamil Nadu and Maharashtra get back less than a rupee while poorer states like Bihar and Jharkhand receive more than a rupee. “Such cross subsidisation of poorer states by richer ones is inevitable in a large and diverse country like ours and has, in fact, been an accepted principle,” Subbarao said.

The 16th Finance Commission (16th FC) has been set up and the debate of economically and socially better-off southern and western states ‘subsidising’ the northern and eastern states has begun again

“As you say, there is already an emerging north-south divide on the economy front. The question is, are we hitting the limits of such cross subsidisation?,’’ he asked. Many headline numbers suggest the southern states are doing better in terms of infra, private investment, social indicators and rule of law which has put them on a virtuous cycle of growth and prosperity and widened the north-south gap.