India is the second most populous country in the world characterized by regional imbalances like a large north–south divide in health and development. The National Population Policy, 2000 focuses on ‘Decentralised Planning and Programme Implementation’. The 73rd Constitutional Amendment Act, 1992, made health, family welfare, and education a responsibility of village panchayats. The panchayati raj institutions are an important means of furthering decentralized planning and programme implementation. The National Rural Health Mission (NRHM) also clearly spells out this by recognizing the importance of decentralization and district management of health programmes. In this direction, the concepts of Village Health Plan and Fund, Village Health and Sanitation Committees and Rogi Kalyan Samities are inbuilt in this programme to decentralize the powers, functions and funds to the local frontline health functionaries and to empower them to take decision and utilize the funds for the welfare of the patients. The present study focuses on the decentralization of healthcare systems in Indian context and its relationship with improvement in healthcare service delivery, utilization and outcomes in rural areas. This study was carried out in two districts of Vadodara and Khurdha in the states of Gujarat and Odisha respectively. The data includes both primary and secondary sources. The primary quantitative survey includes data collected through a questionnaire for 480 women (15–49 years of age) and 480 men (15–54 years of age) from 480 households. The primary qualitative data includes data collected from in-depth interviews, focus group discussions and case studies. The secondary source includes the data from the health facility survey of the DLHS-3. The study was carried out during 2009–2010. In this paper, an attempt has also been made to construct an index of health systems decentralization using secondary data with inputs from the field from the primary study in the two states of Gujarat and Odisha, which revealed that Gujarat fared higher in terms of health system decentralization compared to its counterpart.