Public Finance› Taxation & Fiscal Federalism
Compositional shift from grants to tax devolution from Centre to State causes
Answer b.
The answer is (b). Shifting central transfers from grants to tax devolution raises the share of unconditional (untied) transfers to States. Tax devolution is a share of the divisible pool of central taxes that goes to States under Article 270, as recommended by the Finance Commission under Article 280. States can spend it as they choose, so it is an unconditional transfer. Grants, by contrast, are often tied to a scheme or purpose. The Fourteenth Finance Commission raised States' share of the divisible pool from 32% to 42%. When the mix moves from grants towards devolution, the untied share of total transfers rises. That is exactly option b.
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