New Delhi, Feb. 2 -- In India's federal set up, devolution of funds ensures proper transfer of resources, from the central government to the states, and further down to local bodies. Article 280 of the Indian constitution mandates that the President of India appoint a Finance Commission every five years to make recommendations on how to divide the net tax proceeds of the Union (divisible pool) with the states. The commission recommends both vertical devolution (what states as a whole get from Centre) and horizontal devolution (how states' share is distributed among each state). It also, among other things, allocates grants and resources for local governments.

The 16th Finance Commission, headed by economist Arvind Panagariya, recently su...