Competitive Federalism refers to a system where States and the Centre compete to attract investment, deliver better governance, and improve service outcomes, fostering efficiency and innovation in governance.
Changing nature of federalism towards competition:
- Pre-1991: Federalism was largely patronage-driven, with the Centre controlling industrial licences, fiscal transfers, and project approvals.
- Post-1991 (Liberalisation): Economic reforms dismantled the licence-permit system, allowing States greater autonomy to attract private investment.
- Post-2014: Institutionalised competitive federalism emerged through NITI Aayog indices, Finance Commission incentives, and Ease of Doing Business rankings.
Competitive Federalism transforming Centre–State Dynamics:
· Economic Competition: States are now competing for global capital rather than central allocations. For example, Google’s AI Data Centre in Andhra Pradesh (2025) over Tamil Nadu and Karnataka and Vedanta–Foxconn Semiconductor Project race between Gujarat and Maharashtra.
· Performance-Based Resource Allocation:
- The 15th Finance Commission linked devolution of funds to States’ performance in tax effort, power sector reforms, forest cover, and demographic management, shifting focus from entitlement to achievement-based transfers.
- The Aspirational Districts Programme ranks districts on governance outcomes, incentivising competition even within States.
- Reform-Driven Governance:
- States compete on Ease of Doing Business, Startup, and Health Indices published by NITI Aayog.
- For example, Karnataka, Telangana, and Tamil Nadu lead in innovation ecosystems while Kerala and Himachal Pradesh top the SDG India Index, driving others to emulate their models.
- Para-Diplomacy: States proactively market themselves globally. For example, Vibrant Gujarat Global Summit, Magnetic Maharashtra, Invest Rajasthan etc show how States directly engage foreign investors, bypassing central mediation.
- Diversification of Growth: States are now the engines of India’s global competitiveness. For example, Investors no longer come to “India” abstractly, they choose Bengaluru, Visakhapatnam, or Ahmedabad.
However, Structural Constraints and Patronage systems persist:
- Fiscal Dependence:
- Nearly 42% of State revenue comes from central transfers.
- Delay in GST compensation and shrinking divisible tax pool create vertical fiscal imbalance.
- Centrally Sponsored Schemes (CSS): Over 65 CSS continue, with design and funding decided largely by the Centre, restricting States’ flexibility.
- Political Centralisation: Use of agencies like ED/CBI, and Governor’s powers, often perceived as tools of political leverage, undermining cooperative balance.
- Uneven Competition: States like Gujarat and Tamil Nadu benefit while weaker States like Bihar and Odisha struggle to attract investment leading to unbalanced regional development.
- Policy Overlap: States often constrained by centrally set standards and guidelines, leaving limited room for innovation in implementation.
Strengthening Federalism for Present Times:
- Empower Fiscal Autonomy: Broaden tax devolution, ensure timely transfers, and rationalise centrally sponsored schemes to enhance fiscal space.
- Institutionalise the Inter-State Council (Article 263): Make it a regular platform for dialogue, coordination, and sharing best practices.
- Enhance State Capacity: Strengthen governance, digital systems, and human resources to help lagging States compete effectively.
Conclusion:
In an era where the world invests in “States of India” rather than “India” alone, a balanced model of competitive and cooperative federalism is essential for inclusive and sustainable national growth.
‘+1’ Value Addition:
- 15th Finance Commission linked Performance-linked transfers to States for power reforms and forest management.
- Vibrant Gujarat Summit (2024) attracted ₹20 lakh crore worth of investment commitments.
- As per NITI Aayog’s SDG Index, Kerala, Tamil Nadu, and Himachal Pradesh as top performers.
- Andhra Pradesh often tops DPIIT’s Ease of Doing Business Ranking.
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