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In recent times the Fourteenth Finance Commission of India has undertaken a major shift towards fiscal autonomy of the states by recommending a substantial increase in tax devolution from 32% to 42% of the divisible pool of union taxes to the states. The union government has reacted by lowering its grants to the states. The question arises: would the step taken by the Finance Commission ultimately reduce the provision of local public goods at the states, a possibility that would need additional policy intervention for controlling the behavior of the union government. The paper discusses the issue theoretically and defines the conditions under which the increase in autonomous transfer to the states would actually increase in provision of local public goods at the states.

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