Synopsis The Finance Commission is the key institutional arrangement that has guided the functioning of fiscal federalism in India. Given the large differences in fiscal capacities and service standards across states, Rangarajan and Srivastava discuss the theoretical foundations and practical relevance of the design of fiscal transfers.

Focusing on the evolution of fiscal federalism in India, the essays engage with a wide array of inter-related issues including: Guiding principles determining fiscal transfers from the centre to the states; Distribution of these transfers among the states that differ in size, economic development, population, and geographical features; Management of central and state finances relating to sustainability of debt and fiscal deficit. The volume traces how the methodology used by successive Finance Commissions—including the Thirteenth Finance Commission—to resolve both vertical and horizontal imbalances, has changed over time. Comparing the design of fiscal transfers in two of the oldest federations, Australia and Canada, with the system of transfers in India, the book emphasizes the need for an institutional arrangement to keep the growth of central and state debts within prudent limits.