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The introduction of a theocratic regime is a natural consequence of developing a truly pious society. It is, after all, God who governs, and it is only natural that His intermediaries hold the secular power. Thus even the country's economy starts concentrating in religious venues, and Temples and Holy Sites become relevant to your commerce.
Theocracy is great for increasing your empire's Gold output during all stages of the game. However, you should consider when exactly to adopt it - its effect depends on the presence of Temples in your cities, and the establishment of Holy Sites in your lands. Since these both become more common a little later in the game, you may want to wait until after you've constructed some before adopting this Policy.
In a theocratic state, the religious leaders hold ultimate power in the country. Actually, the religion's god is in power, and he or she rules through divine guidance of the religious leaders. Theocracies are often militaristic, as the religious leaders see the country's army as a tool to spread the religion to other heathen states. Modern theocracies seem to often fear and hate progress, seeing modern luxuries and advancements as threats to the nation's piety (and perhaps to their power).