Dependence of States on Central Transfers: Aggregate and State-wise Analysis

This paper examines the dependence of states on central fiscal transfers. It particularly focuses on the role of transfers through tax devolution under the recommendation of the Finance Commissions. The analysis of dependence is then extended to total transfers that are given in the form of share in central taxes, Finance Commission grants, plan grants and other grants. The analysis with respect to states covers the period 1950-51 to 2007-08. In addition, pattern of dependence of states on central transfers is also studied with respect to five groups of states, namely, high, middle and low income general category states and two groups of special category states. The analysis covers the period from 1990-91 to 2007-08. We find that the dependence of the states on their share in central taxes has increased both because of high buoyancy of total central taxes and a progressive increase in their share recommended by successive Finance Commissions. In terms of groups of states, the extent of dependence is relatively quite high for the special category states.