Devolution:

Devolution is the granting of powers from central government to government at regional or local level. In federal systems the sub-national governments are guaranteed with the devolved power constitutionally.  In the unitary countries, on the other hand, the central government can devolve powers temporarily and can withhold the devolved powers. The devolution can be financial, e.g. giving regions budgetary support to manage their finances.  However, the power to make legislations relevant to the area may also be granted.

Functional Devolution

The main question for any federal structure is which task should be assigned to which government level and how it should be  financed.  Following the distinction of Musgrave (1959), the government has to perform three main tasks;

1) Allocation function: changing the allocation by providing public goods and correcting the external effects of the private sector

2) Redistribution function: redistributing income in order to equalize income distribution which is the result of market forces; and,

3) Stabilization function: stabilizing the economic process in order to reduce business cycle fluctuations.  This entails to maintain high employment, price level stability and appropriate level of economic growth.

Primary responsibility for macroeconomic stabilisation and redistribution of income and wealth (fair state of distribution) rests with the central government.  The local governments being small in size are not suitable to pursue independent stabilisation and  redistributive polices affecting the whole country. The local or state governments are better placed to undertake allocative functions through decentralised provision of public goods and services.  Decentralised provision of public goods and services cater to varying preferences of people better and thus enhances social welfare.

Devolution of various functions to different governmental units depends upon the benefit span of functions and goods provided. Public goods that have nation wide benefit span, like the national defence and foreign policy should be provided by the central  government.  Public goods those are local in nature like primary education, health services and so on should be primary  responsibility of local or state government.

However, a strict demarcation of functions and compartmentalizing them into central and local government level may not be  possible. There could be overlapping of provision of services by both central and state governments. The basic argument for decentralization in a federal structure - to provide public services corresponding to the diversified preferences remains the  guideline for functional assignment.

The functions undertaken by the central government can be classified as those required for maintaining macroeconomic stability, and those assigned for reasons of economies of scale and cost efficient provision of public services.  Issuing currency and coinage, dealing in foreign exchange, foreign loans, operation of Central bank of the country, international trade, banking, insurance and operation of stock exchange are some major functions assigned to the central government to maintain macro economic stability.

Functions like operation of railways, posts and telegraphs, national highways, shipping and navigation on inland waterways, air transport, atomic energy, space, regulation and development of oilfields and major minerals, inter-state trade and commerce and regulation and development of inter-state rivers are the major functions assigned to the centre for reasons of scale economies (national coverage).