The paper examines the fiscal decentralization in rural water supply sector in MP (Madhya Pradesh), covering the period from 2001-02 to 2017-18. Three types of examinations have been made in the study. The first is to find out devolvable funds in rural water supply sector, and its percentage in total rural

water supply expenditure in the state. The second is to find out devolved funds in rural water supply sector and its percentage in total rural water supply expenditure, devolvable funds and plan rural water supply expenditure in the state. Finding indicates that share of devolvable funds in rural water supply expenditure is increasing continuously. All devolvable funds are revenue expenditure; it means that state government is decreasing their funds for capital expenditure and not increasing its assets in rural water supply sector. On an average during 2001-02 to 2017-18 share of devolved funds into rural water supply expenditure is just 9.5 percent. Planning Commission suggested 30-40 percent of a state’s plan can be devolved to local bodies. However, on an average during 2001-02 through 2016-17, only 9.5 percent of total rural water supply budget, and only 12 percent of total planned funds of rural water supply was devolved. It has been seen in the analysis that rural water supply, despite being an important area of functional devolution; managed a financial devolution of barely one third of the lower limit of devolution prescribed by the planning commission. In the last five years during 2013-14 to 2017-18 annual growth rate of devolved funds in total rural water supply expenditure is negative (-30 percent per anum).