Journal Press India^®

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This study examines the evolution of vertical fiscal imbalance and inter-governmental transfers in India based the first to sixteenth Finance Commissions. The study reveal that India’s fiscal federal structure is characterized by a structural vertical imbalance, wherein the Union government commands stronger revenue-raising powers while states bear a larger share of expenditure responsibilities. There has been a gradual, but significant increase in vertical tax devolution, particularly following the recommendations of the 14th Commission, which raised the states’ share in the divisible pool to 42 percent. This reform marked a decisive shift toward fiscal decentralization, a trend largely sustained by the 15th Commission. The study indicates a transition from sharing specific central taxes to a comprehensive divisible pool since the 11th Commission. Tax devolution consistently constitutes the dominant component of total transfers, averaging 80-90 percent. But grants-in-aid fluctuate based on fiscal priorities and economic conditions. However, despite increasing recommended shares, effective devolution has been lower due to the rising share of cesses and surcharges excluded from the divisible pool, thereby constraining states’ fiscal space. It highlights a progressive strengthening of fiscal federalism in India yet confirms the persistence of structural vertical fiscal imbalance and the continuing tension between equity and efficiency in the design of inter-governmental transfers.

Keywords

Vertical share; Fiscal indicators; Tax sharing; Inter-governmental Transfer; Financial transfers

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