Specific Purpose Grants:

These grants are transferred for specific purposes at local government level. Specific purpose transfers are intended to set the prices right to ensure optimal provision of sub-central services having spillovers. The specific purpose grants could have the  provision of matching contributions from the local governments to make them more responsive and make them involved in the programmes and schemes for which grants are transferred.

When the states perform agency functions of the central government grants are transferred for specific purposes and projects. The purpose-specific transfers could be with or without matching requirements from local government as mentioned above. The matching transfers could be close-ended with varying matching ratio.  The specific purpose non-matching transfers, however, can achieve the objective of ensuring a specified minimum expenditure outlay, only when the entire amount required for the particular projects is given as transfers. In developing countries large flow of resource to sub-national government tends to create problems of reducing accountability and efficiency at lower level.  The transfers should be designed properly with economic objectives to make  the fiscal decentralisation successful. The difference between constituent members, in terms of size, geography, population and economic potential may be so great that without equalization measures, fiscal federalism would result in such regional disparities which would be unacceptable.