Globalization has distinct effect on the structure of public finance and the size of government as it influences the expenditure and revenue side of the budget. In India all layers of government centre, state and local bodies are simultaneously interacting with foreign government and corporation in the global economy. Broadly, effect of globalization on the federal fiscal structure can be two ways. First, affecting Central, State and local government independently -economic reform will bring changes in the size and structure of public expenditure and taxes at central,state and local bodies. Second, globalization can deteriorate fiscal federalism by disconcerting interaction among the central, state and local government. In this context the transfer system should address the growing inequality in public expenditure, especially the inequality in developmental expenditure and own revenue collections, across the states while making devolution. Also there is a need to have policies to address the growing spatial inequality during the post-reform period.