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Picture Courtesy: THE HINDU
Competitive federalism in India is a double-edged sword: it can spur growth through rivalry but risks regional imbalances and inconsistent policy without central oversight.
It is a framework in which the various states within a federal system compete with each other to attract businesses, investment, and a talented workforce by offering more favorable policies, infrastructure, and regulatory environments
It has shifted the governance model from a centralized, 'one-size-fits-all' approach to a more decentralized system where states innovate and vie for economic dominance.
This rivalry acts as a powerful engine for progress but also poses risks of widening regional inequality.
Replacing Central Planning with NITI Aayog
The substitution of the rigid Planning Commission with NITI Aayog fundamentally altered the central-state dynamic.
NITI Aayog now acts as a knowledge resource and facilitator, encouraging states to pursue innovation and adopt best practices rather than adhering to uniform central directives.
Enhanced Fiscal Devolution
The 15th Finance Commission set the states' share in the central taxes' divisible pool at 41% for 2021-26. This financial autonomy empowers states to prioritize and fund their development initiatives.
Impact of Post-1991 Economic Liberalisation
The dismantling of the 'Licence Raj' has empowered states to seek and attract both domestic and foreign private investment.
Goods and Services Tax (GST) Framework
The GST Council serves as an institutionalized platform for cooperative and competitive federalism, where states participate as equal stakeholders in determining national indirect tax policy.
The competition among states is visible across multiple domains, from attracting capital to enhancing governance and infrastructure.
High-Profile Investment Summits
States market themselves as prime investment hubs. For example, the Uttar Pradesh Global Investors' Summit in 2023 attracted investment proposals worth over ₹33.5 lakh crore. (Source: Invest India)
Race for Key Industries
States are competing for sunrise sectors. Gujarat securing Micron Technology's semiconductor assembly plant in 2023 has sparked competition, with states like Telangana, Tamil Nadu, and Karnataka enacting specialized policies to draw global electronics firms.
Competition in Governance Reforms
States are competing to improve their business environment, benchmarked by the Centre's rankings. The Department for Promotion of Industry and Internal Trade (DPIIT) releases the Business Reforms Action Plan (BRAP) rankings to assess states and union territories based on their ease of doing business reforms.
Positive Impacts (The Upside)
Enhanced Economic Productivity: Competition stimulates efficiency, investment, and job creation. States specialize in economic clusters (e.g., Tamil Nadu in electronics, Karnataka in IT), boosting national output.
Better Governance and Innovation: States act as "laboratories of democracy," pushing reforms. For example, Telangana's TS-iPASS single-window clearance system provides time-bound approvals, setting a national benchmark for ease of doing business.
Improved Investment Climate: Competition directly creates a more favorable environment for investment, successfully attracting substantial foreign capital.
Negative Consequences (The Downside)
Widening Regional Disparities: Investment concentrates heavily in a few developed states, worsening the gap between regions. Example: During 2024-25, Maharashtra received 39% of India's total FDI equity inflows, followed by Karnataka (13%) and Delhi (12%). (Source: PIB)
Risk of a 'Race to the Bottom': States offer unsustainable incentives (e.g., excessive tax waivers, cheap land, subsidized utilities), which strains state finances (flagged as a fiscal risk by the RBI).
Erosion of Cooperative Federalism: Intense rivalry hinders collaboration on critical national issues. This lack of cooperation is evident in inter-state water issues (e.g., the Cauvery dispute) and efforts toward comprehensive environmental protection.
Strengthening Central Institutions:
Targeted Support for Lagging Regions:
Performance-Based Incentives: The Centre should link financial grants to measurable outcomes in critical sectors like health, education, and renewable energy, as recommended by the 15th Finance Commission, to encourage a focus on results rather than just expenditure.
To achieve the vision of a developed India ('Viksit Bharat') by 2047, the goal must be to channel inter-state rivalry constructively by strengthening cooperative institutions, providing targeted support to lagging regions, and rewarding genuine performance to ensure growth is rapid, equitable, and sustainable for all states.
Source: THE HINDU
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PRACTICE QUESTION Q. Critically analyze the potential negative consequences of excessive inter-state rivalry on India's inclusive growth trajectory. 150 words |
Competitive federalism is a system where the central government and state governments, as well as states among themselves, compete to attract investment, talent, and resources. States vie with each other by offering better infrastructure, business-friendly policies, and governance efficiency, creating a market-like environment that promotes development.
NITI Aayog actively promotes competitive federalism by publishing various performance-based indices (e.g., SDG India Index, State Health Index). These transparent rankings encourage states to improve their performance across various sectors and learn from the best practices of leading states.
This is the proposed balanced approach for India's future. It means states should compete on parameters of good governance and economic efficiency while simultaneously cooperating on issues of national importance like environmental protection, internal security, and creating a single domestic market. This model aims to harness the benefits of competition while mitigating its negative effects.
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