BTL 876 - Financial Devolution

 

The Banking Tutor’s Lessons

BTL 876                                                                                06-03-2026

Financial Devolution

In public finance, devolution is the statutory transfer of powers, responsibilities, and financial resources from a central government to subnational (state, regional, or local) authorities. 

Devolution is often summarized as the transfer of "Funds, Functions, and Functionaries": 

Funds: The allocation of financial resources, including tax-sharing and grants. 

Functions: The legal authority to manage specific sectors like education, health, or local infrastructure. 

Functionaries: The transfer of administrative personnel to carry out these duties at the local level. 

Types of Fiscal Devolution - In federal systems like India, the Finance Commission (a constitutional body under Article 280) recommends how central taxes are shared: 

Vertical Devolution: The distribution of tax proceeds (income tax, GST, corporation tax) from the Union to the States, set at 41% by the 15th and 16th Finance Commissions. 

Horizontal Devolution: The allocation of this 41% pool among different states based on criteria like income distance, population, forest cover, and area.

Criteria: Factors include Income Distance (weighting poorer states higher), Population, Forest and Ecology, and Demographic Performance (rewarding population control).

Sekhar Pariti

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