Competitive Federalism

Syllabus: GS2/Governance; GS3/Economy

Context

• The recent announcement of Google’s largest AI data centre outside California being set up in Andhra Pradesh triggered India’s transition into a competitive federal economy, where States actively support global investment through policy, governance, and infrastructure advantages.

About Competitive Federalism

• It refers to a governance model where States compete with each other to attract investment, improve service delivery, and enhance development outcomes.
• It promotes healthy rivalry among States to outperform each other on key metrics, unlike cooperative federalism, which emphasizes collaboration between the Centre and States.

Past Landscapes: Reforms and Gradual Transformation

• Pre-1991 Landscape: For decades after Independence, investment allocation flowed top-down from New Delhi. States competed not on merit but on access to central power corridors. Capital formation was shaped by:
  • Licensing and quota systems;
  • Bureaucratic discretion;
  • Political patronage determining industrial geography;
• Liberalisation in 1991 dismantled licensing and partially decentralised economic power. However, meaningful competition took time because:
  • Public enterprises still dominated;
  • State bureaucracies were slow to modernise;
  • Investment decisions remained Union Centric;
• By the 2010s, States became the primary engines of investment mobilisation, aligning with trends highlighted in World Bank (2023) and OECD (2021) territorial competitiveness studies.

Rise of Competitive Federalism

• The Concept of Competitive Federalism gained momentum after the formation of NITI Aayog, which replaced the Planning Commission in 2015.
  • NITI Aayog’s mandate includes fostering competitive federalism through transparent rankings, performance indices, and policy parameters.
• States Competing on Competence: Today, investment rivalry centres on policy predictability, infrastructure quality, skilled labour pools, streamlined clearances, and governance credibility.
  • It aligns with NITI Aayog (2022) and IDFC Institute (2019) findings showing widening performance divergence among States in business climate metrics.

How States Are Competing?

• NITI Aayog has launched several indices to benchmark State performance:
  • School Education Quality Index;
  • State Health Index;
  • Composite Water Management Index;
  • Sustainable Development Goals Index;
  • India Innovation Index;
  • Export Competitiveness Index;
• These rankings are based on quantitative, objective criteria, encouraging States to improve governance and service delivery.
  • Even districts are ranked under the Aspirational Districts Programme, creating competition at sub-State levels.
• Examples of Competitive Federalism:
  • Google’s AI centre: Andhra Pradesh vs Tamil Nadu vs Karnataka;
  • Foxconn’s electronics hubs: bids from Maharashtra, Tamil Nadu, Karnataka;
  • Vedanta–Foxconn semiconductor venture: Maharashtra vs Gujarat;
  • EV manufacturing: Tamil Nadu vs Telangana;
• These contests indicate India’s entry into the model observed in OECD federations, as described in Brookings (2020) and UNESCAP (2022).

Benefits of Competitive Federalism

• Improved Governance and Service Delivery: States compete to enhance education, health, infrastructure, and digital services.
  • NITI Aayog’s performance indices incentivize reforms and transparency.
• Investment Attraction: States pitch themselves to global investors with tailored policies and branding.
• Policy Innovation: States experiment with localized solutions—like Telangana’s T-Hub for startups or Kerala’s health model—which can be scaled nationally.
• Empowerment and Accountability: Decentralized competition shifts power closer to citizens, making governments more responsive and accountable.
  • According to DPIIT (2024), such competition has accelerated policy harmonisation across States.

Risks of Competitive Federalism

• Widening Regional Inequality: Wealthier States with better infrastructure and human capital attract more investment, leaving poorer States behind.
  • It can exacerbate socio-economic divides.
• Policy Fragmentation: Excessive competition may lead to inconsistent regulations across States, complicating business operations and national coherence.
• Fiscal Imbalance: The Centre retains significant financial power, limiting States’ ability to compete effectively.
  • Demand to shift items from the Concurrent List to the State List reflect this concern.
  • Excessive subsidies can strain State finances (RBI 2023);
• Weakening of Cooperative Mechanisms: Overemphasis on competition can reduce cooperation in centrally coordinated programs — GST Council, disaster management, health surveillance, etc.
• Short-Termism: Political cycles may push States toward populist measures for quick wins rather than sustainable development.

Way Forward: India’s New Federal Compact

• From Permission to Persuasion: In three decades, India has moved from permission-based investment to persuasion-based competition.
  • It is possible because Delhi-driven industrial policy is shifted to State-centric investment strategy.
  • State leaders now pitch directly to CEOs rather than ministries, backed by data and clear value propositions.
• Why Every State’s Win Is a Win for India: When one State secures a major investment:
  • Skill ecosystems grow;
  • Industrial clusters deepen;
  • Supply chains expand beyond borders;
  • Overall national competitiveness rises;
• Examples like Andhra Pradesh’s EoDB performance, Tamil Nadu’s workforce, Gujarat’s infrastructure, Punjab’s enterprise culture, Uttar Pradesh’s scale, Jharkhand’s minerals — creates a federation of opportunities.

Source: TH