India has witnessed impressive growth performance since the market based reforms were introduced in 1991. However, its regional spread has been uneven. Considering the fact that over 63 per cent of the population lives in economically lagging states and they have over 67 per cent of children in the age group 0-14 demographic dividends can be realised only when a system of intergovernmental transfers is designed to offset their fiscal disabilities. The present paper analyses the design and implementation of general and specific purpose transfers in India. While the general purpose transfers are given to enable the States to provide comparable levels of services at comparable tax rates. However, given the large differences in the revenue capacities of the states with the richest large state having five times the per capita income of the lowest, it is politically infeasible to offset the differences in revenue capacities completely. Therefore, the specific purpose which are meant to ensure minimum standards of meritorious services with high degree of externalities are extremely important. However, the analysis shows that there are too many specific purpose transfers, they are poorly targeted and inclusion of multiple objectives in each of the specific purpose transfers makes the compliance by the States difficult. The objective of inclusive development requires that the transfer system should be reformed.

 

Keywords: Government Expenditures on health, Government expenditures on education, State and local budget and expenditures, Intergovernmental relations

 

JEL Classification Codes: H51, H52, H72