Intergovernmental Transfers in India: Emerging Challenges

Abstract

Intergovernmental transfers are the bedrock of India’s fiscal federalism. They balance the fundamental asymmetry between the centre and states regarding the authority to raise money and the responsibility to spend it. These transfers go to the states through two main avenues in India: the executive-led centrally sponsored schemes (CSS) and central sector grants and the constitutional Finance Commission (FC), which recommends tax devolution and grants-in-aid. This article highlights the increasing centralisation of authority, where the significant rise in non-shareable cesses and surcharges has effectively diminished the divisible tax pool. Article 282 of the Indian Constitution was meant to act as a backup plan for unforeseen emerging public needs. However, it has now become the primary mechanism for CSSs, sidelining the formula-driven transfers proposed by the FC. In India, intergovernmental transfers have not succeeded in addressing the regional economic disparities, highlighting the need for explicit equalisation transfers to ensure uniform public service standards nationwide. The ongoing institutional neglect of State Finance Commissions (SFC) remains a major hurdle at the sub-national level. Nevertheless, initiatives such as the Haryana Municipal Bill, 2025, and the Seventh SFC in Haryana, which uses real-time data to monitor migration, present a framework for enhancing state-local transfers through legislative unification and increased digital transparency.