``Both the centre and states are on the erring side in the matter of populism. ``It has been in vogue in this country -- in disbursement of loans, in running loan melas, soft peddling of interest, subsidising undeserving non-target groups and undue subsidies in irrigation, transport and power sectors,'' he said.

Stating that the commission was yet to start functioning, he said, ``We will suggest structural reforms for the centre and states that will need hard thinking, analysis and action on part of governments.''

Underscoring the need for government to move away from the practice of soft pedalling on hard economic issues, he said that both the centre and states will have to move towards an `efficient pricing mechanism' for services.

``We know these issues (subsidiesand taxation) can become politically sensitive but economic statesmanship could find a way out of populism,'' he said.

Commenting on major problems confronting states in fiscal management, he said states were fixing `irrational prices for products sold by their undertakings' and giving excessive subsidies, while shying away from legitimate taxation where it is due.

The commission, which is to submit its report by December 1999, has been asked for the first time to work out formula for sharing tax revenue from states to local bodies and suggest ways for restructuring of finances of centre and state.

Asked if the commission could prove to be battleground between centre, states and local bodies in their efforts to garner greater share of revenue, he said ``battle and frictions will be a thing of the past. The country is learning to settle issues rationally''.

Ideally, the states should be independent of centre in federal system of financing, but it was a pity that india has deviated from this model, hesaid.

Pointing to commission's terms of reference relating to finance of local governments (panchayats and municipalities), Khusro said that unlike the advanced countries, the concept of three-tiers of governance had not yet crystallised in India.

He said one of the concerns of the commission was to address the issue of strengthening the state government's finances to enable them to help local governments.

Khusro, however, said the commission was given a short span of one-and-a-half years to complete its report for handling some routine issues of allocation of resources between centre and states besides addressing the issue of financial restructuring.