HYDERABAD: Economist and former deputy chairman of Planning Commission Montek Singh Ahluwalia has suggested that the states impose a tax on agriculture.
He said: “Agriculture cannot be taxed by the Centre, but the states can. Now, why is there this assumption that agriculture must forever not pay any income tax irrespective of the size of the holding? It’s very difficult to defend that. I mean, if you have holdings which are of a modest size and you are diversifying, you are certainly generating reasonably high income to come into the bottom of the income tax category. That tax would go 100 percent to the states; it wouldn’t be taken away by the Centre.”
On Wednesday, delivering a keynote address on the 16th Finance Commission Report at a conference organised by the Finance Department in collaboration with the Centre for Economic and Social Studies in Hyderabad, Ahluwalia said that the state governments should empower the local bodies to tax.
He said: “Property tax rates are not fixed by the municipality. They are decided by the state, but the revenues accrue to the municipality. It is never in the interest of a state government to do an unpopular thing like raising property tax rates.”
He said: “There is a problem with the growth of cesses. The Finance Commission should have addressed this matter. Because nothing stops a government from levying all kinds of cesses saying, ‘well, these are not taxes, these are cesses for specific purpose’. For example, you could have an adaptation cess to deal with climate change, mitigation cess to deal with climate change, none of which would be shareable. So I think one of the things that needs to be addressed, even in a narrow context, is this issue of cess.”
‘Smaller states better’
He also pitched for smaller states in the country. Not a bad idea to split up large states, he added. He explained: “Should we seriously think about creating a framework in which large states are automatically re-bundled into smaller states? In my view, they should be. It makes no sense that some states in the country have 2 and 3 million people and some have 250 million people.
I think in the 1970s, Romesh Thapar had once suggested to Indira Gandhi that you know, the United States has 52 states or whatever it is they had then, and in his view, India should have 52 states. And he had sent her a map, dividing up Maharashtra, divided with Vidarbha separate, Karnataka also. Not a bad idea to split up the larger states.”
Regarding delimitation of seats, he explained: “One of the economists from JNU, Santosh Mehrotra, has produced a paper where he has drawn upon the flexibility that exists in the Constitution itself, which says that when it comes to delimitation, it should reflect the population as far as is practical.
What he is suggesting is that, he is accepting that the number of seats must increase, but what he’s saying is that the present number of seats should be frozen on the basis of the present criterion and the additional seats should be distributed on the basis of a mixed criteria.”
‘Salary hikes unsustainable’
Meanwhile, during a panel discussion on “Grants-in-Aid to the State Governments”, Chief Secretary K Ramakrishna Rao said increasing salaries to employees through PRCs was becoming unsustainable due to the revenue expenditures.
He said: “In Telangana, two PRCs were implemented and this has totally become unsustainable. There’s always an enormous pressure from these organised groups, so therefore there’s always enormous pressure on the political establishment to increase these salaries. Therefore, I think doing away with the revenue deficit grants would force the states to look up internally to ensure that they get their act together.”
Telangana is one of the states with own high resources, he said and pointed out that there is no need for a revenue deficit grant. He said: “Telangana salaries continue to be extremely high. In fact, some of you might be surprised to know that in Telangana, a sweeper in a power utility, after putting in 20 years of service, gets a salary of Rs 2 lakh. Chief engineers in a state utility get much higher salaries than a Cabinet Secretary or RBI Governor.
They get about Rs 7 lakh. That’s the kind of unsustainable levels the state salaries have become. And this is not just state utilities; even amongst the regular government employees also. Because states have their own Pay Revision Commissions -many states have their own PRC - and every five years they revise the pay scales. In Telangana, I remember very clearly in June 2014, when I paid the first month’s salary to my state’s employees, salary plus pension put together was Rs 1,500 crore. And last year, April 2025-26, when we paid the salaries, it was Rs 6,000 crore.”
“In a period of 12 years, it has gone up by four times. It is not because of the increase in the number of employees; it’s because of an increase in the kind of scales that we have. Two PRCs were implemented, and this has totally become unsustainable.
There’s always an enormous pressure from these organised groups, so therefore there’s always enormous pressure on the political establishment to increase these salaries. Therefore, I think this is a welcome move, definitely doing away with the revenue deficit grants — that would force the states to get their act together,” he said.
Former RBI governor Duvvuri Subba Rao, economist GR Reddy, former IAS officer Jayaprakash Narayan, former member of 15th Finance Commission AN Jha, CESS Director E Revathi and others participated in the conference.