Explanation – VFI refers to the situation where there is a mismatch between the revenue-raising powers and expenditure responsibilities of different levels of government, such as central and subnational governments. Typically, central governments have greater revenue-raising capabilities, while subnational governments (like states or provinces) have more expenditure responsibilities but limited revenue sources. This imbalance necessitates financial transfers from the central government to the subnational governments to enable them to meet their expenditure obligations.

Source: The Hindu