Over the past decade it has been observed that state governments are being drawn towards externally aided projects. The lure seems to be of additional funds to supplement state financial resources. This study looks at the impact of 11 such externally aided projects in Rajasthan. On the point of additional financial resources it is found that the state had little to gain from such projects since during the period 1974-81, the state spent Rs. 153.62 crores on such projects whereas it received only Rs. 22 crores as additional assistance. A portion of the aid is retained by the central government and the terms on which it is passed on to the state government are more severe as compared to the terms on which aid is received by the central government. Therefore, the debt burden of the state is considerable. The pre-emption of funds for aided projects has also resulted in drastic cuts in outlays of other sectors thus slowing down activities therein. It has also increased regional disparities by increasing the gap between districts where such projects existed and those which have not been amongst the fortunate few. In sum, externally aided projects have brought little financial benefit to the state. In fact, by reducing the pace of development in non-aided sectors and by increasing, instead of reducing, regional disparities they are creating more problems for the future.