Dr Rangarajan was inaugurating a workshop on Fiscal Management in Disadvantaged States organised by the National Institute of Public Finance and Policy, the Delhi-based think-tank. Five states Orissa, UP, Bihar, Jharkhand and West Bengal have been identified by NIPFP as disadvantaged.
Differences between federating units are commonplace. But what makes the Indian situation more problematic is that the difference between the federating units is much wider than in most other federal countries. In Canada, for instance, the per capita income in the richest state is just 1.5 times more than in the poorest. In India, in contrast, the per capita income in Goa is nine times that in the poorest, Bihar. Even if Goa is taken as an outlier and a state like Maharashtra is taken instead, the per capita income is about four times higher than in Bihar. The challenge of bringing about some kind of horizontal equity is, therefore, much more, he said.
The effort of successive Finance Commissions has been to ensure reasonably comparable levels of service delivery at reasonably comparable levels of taxation. Here, inter-government transfers from the Centre to states and between the states can help. But only up to a point. Beyond that, states must do more to raise resources.
In all the five states in question, the ratio of own tax revenue to gross state domestic product is well below the national average, implying that they are not doing enough to raise resources. Its much the same story when it comes to non-tax revenues as well, with these states lagging behind the national average.
As a result, these states suffer from a number of infirmities a low tax/GSDP ratio, a low ratio of own resources to total resources and a low share of development expenditure to total expenditure relative to the national average.
Even if we accept that they are handicapped by their low income level, these states are not doing enough to exploit the available fiscal space, he said.
The three-day workshop is being attended by fiscal experts and government representatives from the states in question.