The Rise of Competitive Federalism in India

The shift towards competitive federalism in India has emerged as a significant transformation over the past decade, marking a departure from the centralized economic decision-making prevalent in the pre-1991 era.

Historical Context

• Prior to 1991, India's economy was heavily regulated by the central government, with state investment decisions driven by political considerations rather than market forces.
• The liberalization reforms of 1991 dismantled industrial licensing, opening up trade and investment, and partially shifting economic power to the states.
• Initially, the adaptation to this new economic freedom was slow, with public enterprises and bureaucracies maintaining dominance.

The Emergence of Competitive Federalism

• In recent years, states have actively competed for investments, offering better infrastructure, governance, and policy stability.
• States like Andhra Pradesh, Tamil Nadu, and Karnataka are vying for global tech investments, indicating a maturing federal economy.
• The competition is not unique to India; it mirrors practices in the United States, Germany, Australia, and Canada, where subnational competition has spurred innovation and reform.

Key Drivers of Competition

• States compete using various incentives such as land, utilities, tax breaks, and streamlined governance.
• Healthy competition leads to the imitation of best practices, policy diffusion, and a dynamic learning environment across states.
• The central government promotes healthy competition through rankings on ease of doing business, startup promotion, and export readiness.

Risks and Considerations

• While competition can drive growth, there is a risk of it devolving into reckless subsidies or land giveaways that threaten fiscal stability.
• States must focus on competence and credibility rather than concessions to attract sustainable investments.

Global Context and Future Outlook

• The global shift away from China offers opportunities for Indian states to attract multinational investments by providing scale, predictability, and credible governance.
• This transformation from a permission-based to a persuasion-based economy is evident as states directly engage with CEOs and investors.
• Successful investments in one state can have positive ripple effects across the country, strengthening supply chains and building skills.

In conclusion, the rise of competitive federalism signifies a strategic shift in India’s economic landscape, with states playing a pivotal role in attracting investments and contributing to national growth.