General Purpose Grants:

To resolve vertical and horizontal imbalances, general purpose transfers from the central to sub-central units are recommended. As the objective of these transfers is to enable the sub-central governments to provide a given level of public service at a given tax rate, the transfers should offset the fiscal disadvantages arising from lower revenue capacity and higher unit cost of providing public services.  This is achieved by giving unconditional transfers equivalent to the needs and revenue gap.

This gap measures the difference between what a state ought to spend to provide specific levels of public services and the revenue it can raise at a given standard level of tax effort.