Enlightened leadership needed to solve north-south divide on distribution of tax pool: Ex-RBI Gov Subbarao

Ex-RBI governor Duvvuri Subbarao expressed that the resolution of the north-south divide over the distribution of the tax pool among states requires enlightened leadership at central and state levels. Subbarao, who has held various positions including finance secretary of Andhra Pradesh and Union finance secretary, highlighted that the contentious issue of horizontal sharing of the divisible pool of taxes will be more so in this round, in his new book ‘Just A Mercenary?: Notes from My Life and Career’.

"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 told news agency PTI.

Subbarao pointed out that for every rupee richer states like Tamil Nadu and Maharashtra contribute to the centre’s taxes, they receive less than a rupee, while poorer states like Bihar and Jharkhand receive more than a rupee.

"Such cross subsidization 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.

 "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 subsidization?," he asked, further suggesting that the southern states are doing better in terms of infrastructure, private investment, social indicators and rule of law which has put them on a virtuous cycle of growth and prosperity, thereby widening the north-south gap.

Subbarao, a former finance secretary (2007-08), served as the governor of the Reserve Bank of India (RBI) for five years starting September 5, 2008. His tenure began just before the Lehman Brothers crisis, the biggest corporate failure in history. Responding to criticism for not purchasing dollars amidst substantial inflows during 2010-11, Subbarao explained that it was a deliberate decision based on multiple factors. He highlighted that holding reserves is not costless and that RBI's intervention in the market shifts the economic burden.

The RBI's policy, he noted, is to intervene only to prevent exchange rate volatility. During his tenure, the rupee's value declined by 20 per cent. Subbarao, referencing Prime Minister Narendra Modi's speech, suggested that the RBI should be less interventionist to make the rupee more internationally acceptable.

Speaking on the subject of freebies, Subbarao stated that while transfer payments to vulnerable segments are necessary, it must be within limits as they are financed by borrowing. He warned against competitive populism, where political parties try to outdo each other with freebies, as it is fiscally dangerous. He proposed that the incoming central government should issue a white paper explaining the costs and benefits of freebies.