Relevance: GS Paper II – Polity (Federalism); GS Paper III – Indian Economy
Source: The Hindu analysis and supplementary context

Introduction

India’s federal landscape is witnessing a shift from a Centre-driven, permission-based model to a state-led, competition-based growth model. States today actively pitch to global investors, offer policy incentives, and build sectoral strengths to attract capital — a trend popularly called competitive federalism. This represents a maturing economy where sub-national governments increasingly drive reforms, employment and innovation.

Constitutional Basis & Evolution

• India’s federal system — under Articles 1, 246 and the Seventh Schedule — provides states with law-making powers in key areas like industry, commerce, land and policing.
• Reforms since 1991 shifted economic control from the Centre to markets and states, reducing licence-raj bureaucratic control.
• Bodies like the GST Council and NITI Aayog further institutionalised cooperative and competitive federalism by enabling fiscal coordination and performance benchmarking.

What Drives Competitive Federalism Today?

States now compete to secure investment and employment by focusing on:

• Ease of Doing Business: Single-window clearances, time-bound permissions, stable regulatory environment.
• Fiscal Incentives & Land Access: Tailored subsidies, tax breaks, and industrial clusters.
• Sectoral Specialisation:
  • Tamil Nadu – electronics & automobiles
  • Karnataka – IT & innovation
  • Gujarat – manufacturing & ports
  • Andhra Pradesh – data centres, textiles
• Credible Governance: Predictable policy, skilled workforce, safe environment.

Such competition is increasingly healthy, creating a “federal marketplace” for investment.

Evolution and Illutrations

Benefits and Risks of Competitive Federalism

Institutional Framework Strengthening Competition

• GST Council – balances Centre-state fiscal needs.
• NITI Aayog’s State Performance Indexes – rank states on Health, Education, Agriculture, SDGs, fostering peer learning.
• Invest India & Industrial Corridors – help align state strategies with national priorities.

These mechanisms help maintain coordination, preventing competition from becoming chaotic or unequal.

Strengthening Federalism: Competition with Balance

• Set Guardrails:
  Avoid reckless subsidies and regulatory shortcuts — as cautioned by the 15th Finance Commission against fiscal adventurism.
• Support Lagging States:
  Improve capacity, infrastructure, and targeted support — in line with the Rangarajan Committee and NITI Aayog recommendations on balanced regional growth.
• Promote Cooperative Competition:
  Encourage interstate learning and model policies, reflecting the Punchhi Commission’s emphasis on cooperative yet competitive federalism.
• Link Incentives to Outcomes:
  Shift to outcome-based rewards — echoing the Second Administrative Reforms Commission’s push for performance metrics.
• Protect Labour & Environment:
  Ensure investments respect labour rights and ecology — consistent with the Shyam Sundar Committee (labour reforms) and expert panels on environmental safeguards.

One-line wrap: Competitive federalism is reshaping India’s economic future — states now compete through credibility, capability and reforms, not concessions alone.

UPSC Mains Question:
“Examine the rise of competitive federalism in India. How can India ensure that such competition complements cooperative federalism and promotes balanced development?”