Over the last two decades, many countries around the world have been enthusiastically embarking on the path of decentralization. Decentralization has been advocated as a powerful means to improve the provision of health care services and health outcomes in developing countries. However, due to a preconceived idea that decentralization will result in efficient allocation of public resources and lack of an analytical framework to systematically analyze its impact on health outcomes, very little empirical works have been done in this area. Scant attention has also been given to analyze factors enabling or constraining its outcomes. In this paper, we develop a theoretical model and use it to test empirically the impact of fiscal decentralization on rural infant mortality rates in India between 1990 and 1997. The random effect regression results show that fiscal decentralization plays a statistically significant role in reducing rural infant mortality rate in India and the results are robust to the way the decentralization variable is measured and to different model specifications. The results also show that the effectiveness of fiscal decentralization can be affected by other complementary factors such as the level of political decentralization. States who have good fiscal and political decentralization index are twice more effective in reducing infant mortality rates than states with high fiscal but low political decentralization index.