India’s state finances have suffered from many difficulties and there is an adverse trend from the 1980s. The state government has been facing various budgetary hardship which affecting their developmental expenditure. Among the hardships, inadequate revenue sources, low central transfers are prominent. The Indian constitution sets three fold classifications for expenditure responsibility between the state and center. Constitution accordingly also sets forth the respective taxation powers of center and state governments. It is generally perceived that the state taxation powers are inadequate in relation to their expenditure responsibilities and that imbalances have been worsening over time. In addition to center state tax collection and sharing, the constitution has some other provision of resource transfers to the states through various mechanisms determined by the finance commissions. The finance commission plays a vital role in center state tax sharing and resource transfers. The planning commission and both five year and one-year plans which are not mandated in the constitution, have become a very important part of center-state financial relation. Transfer to support state plans have been determined by the ‘Gadgil formula’ and through other CSS’s. Various centrally sponsored schemes have become an increasingly important source of funding for state government budgets. But since they are time-bound and subsequent recurrent expenditure responsibilities devolve wholly on the states, the schemes are argued to worsen the long term fiscal situation of states. Central government employees pay structure also increase the pressure of various state governments from their employees. However, this factor will become less important in the future because almost all the states are coming into the line along with central government.