The minister for IT also reminded the Centre to deliver on its legal commitments and ensure that the GST compensation is paid.
The reduction in devolution to 41 per cent from 42 per cent earlier will lead to an up to Rs 4,000 crore hit to Telangana, Rao told reporters on the sidelines of the NTLF here.
"Why do you want to penalise a performing state and bring down our devolution from 42 per cent to 41 per cent? This is disincentivising and demotivating,” he said.
Rao added that all the southern states have "suffered" despite delivering well on human development indicators like literacy and healthcare.
When asked about the options before the state to tide over the difficulties, he declined to comment on the strategy forward but added that the recommendations have happened despite several consultations with the Commission.
On the GST compensation payment, he said the 14 per cent revenue compensation is embodied in the Act and is a commitment made by the Union while passing the law.
“We didn't go to a court of law, but we demanded the GST compensation be paid. Hopefully, Government of India will pay in the second tranche because the first tranche has been paid. We demanded and protested in Parliament. Hopefully they will pay," he said.
Rao, whose father K Chandrashekhar Rao is the chief minister of the state, also pitched for a leeway in fiscal responsibility targets for well performing states.
"We should be given more leeway. Right now it (fiscal deficit) is about 3.5 per cent for Telangana, it should be 5 per cent,” he said.
“We want it to be increased and we be allowed to borrow more. you can stipulate a condition that whatever you borrow, you have to put it in the productive sector. Don't spend it on freebies, we are ready to do that,” he said.
He also alleged that the Union Finance Ministry's Department of Economic Affairs does not allow the states to borrow directly from foreign investors, and underlined that the Union government should be playing the role of “enabler” for states.
He also claimed that the Centre did not support Telangana's scheme for having two parks dedicated for the pharmaceutical and the textile sectors.
Rao rued that the “congruence” between states and the Centre is missing and warned that goals like USD 5 trillion economy will be difficult to achieve sans that.
He also questioned the need to have sectors like education, healthcare and agriculture in the concurrent list, demanding that states should be given the leeway to decide for themselves on such aspects where local factors play an important role.
The minister said we need to focus on infrastructure, innovation and inclusive growth to achieve economic growth, and urged the Centre to emulate efforts undertaken Telangana in these areas.
He also sought for regulatory changes to ensure that Indian pension money needs to be invested to create infrastructure, just like how overseas money from Canadian pensioners gets invested here.
Rao urged the tech world to develop solutions for the real sector, making it clear that innovations have no use if they can't be used for changing local peoples' lives.
He also said that the state wants to create two varsities dedicated for pharmaceuticals and aerospace.