The main objective of the paper is to verify whether central transfers to north-eastern states have a significant impact on their economic growth and social sector development. To analyze the state of social development, a Social Sector Development Index (SDI) is first developed using Principal Component Analysis. The interdependencies between economic growth, the development of the social sector, and federal fiscal transfers are then examined using two-stage least-squares regression (2SLS) in a simultaneous equation framework after accounting for the presence of endogeneity. A strong and conclusive link between these important indicators is revealed by the primary findings of the study. Notably, increased federal fiscal transfers have significant and positive impact on both economic growth and social sector development in the Northeast Indian states. Besides, another important finding is that the negative shocks of transfers have a significant adverse impact on growth. In addition to highlighting the crucial role of federal fiscal transfers in strengthening fiscal capacity, this also sheds light on the implications of transfers for equitable growth and development.