Competitive federalism

1. Meaning and place in Indian federalism

Competitive federalism describes a situation in which constituent governments seek to perform better than one another in attracting investment, creating employment, improving infrastructure and delivering public services. Citizens and businesses can compare jurisdictions, while governments learn from successful policies elsewhere. Competition need not involve private investment alone: reductions in child mortality, better learning outcomes and improved access to drinking water are equally relevant measures.

Its economic rationale is that decentralised governments possess information about local preferences and conditions. Experimentation allows a successful State policy to become a model for others. However, this argument assumes meaningful autonomy, accountable institutions and credible information. Mobility is also unequal: large firms can relocate more easily than poor households, so policies designed primarily to attract mobile capital may neglect less mobile citizens.

Cooperative and competitive federalism are complementary rather than mutually exclusive. Governments cooperate to agree on common standards and comparable indicators, then compete to improve outcomes. Without cooperation, competition can produce inconsistent regulations and cross-border harm. Without competition or public scrutiny, cooperation can sometimes protect poor performance. India therefore needs both shared national commitments and room for State-level innovation.

• Horizontal competition: competition between States or between local governments.
• Vertical relations: Union-State interactions that shape autonomy, resources and incentives.
• Benchmark competition: comparison through published indicators, even when people or firms do not relocate.

2. Constitutional foundations and institutional limits

Article 1 describes India as a Union of States. Article 246 and the Seventh Schedule distribute legislative subjects through the Union, State and Concurrent Lists. This creates policy spaces within which States can innovate, although the distribution is not symmetrical in power. Public health, agriculture and local government are important State subjects; education is in the Concurrent List. Article 254 governs repugnancy between Union and State laws on Concurrent List matters, subject to its constitutional qualifications.

Economic competition must remain within constitutional boundaries. Article 301 protects freedom of trade, commerce and intercourse throughout India, subject to the other provisions of Part XIII. Articles 302–304 regulate permissible restrictions and related safeguards. States therefore cannot treat their territory as an unrestricted protectionist market. Fundamental rights, environmental obligations and applicable labour legislation also constrain the instruments used to attract enterprises.

Fiscal capacity shapes actual autonomy. Article 270 concerns the distribution of specified Union taxes, while Article 280 provides for the Finance Commission. Article 275 provides for grants-in-aid, and Article 282 permits grants for public purposes beyond the grant-making government's legislative competence. Article 293 regulates State borrowing, including circumstances requiring Union consent. These arrangements influence whether poorer States possess the resources needed to compete.

The Constitution (101st Amendment) Act, 2016 introduced the GST framework. Article 246A confers GST-related legislative powers, while Article 279A establishes the GST Council. GST constrains competition through unilateral changes to taxes subsumed within it, increasing the importance of infrastructure, skills and administrative quality. In Union of India v. Mohit Minerals (2022), the Supreme Court held that GST Council recommendations are not binding on Union and State legislatures, emphasising dialogue within cooperative federalism. In S. R. Bommai v. Union of India (1994), federalism was recognised as a basic feature of the Constitution.

3. Instruments of competitive federalism in India

Established by a Union Cabinet resolution in 2015, NITI Aayog promotes policy learning, State engagement and performance comparison. Its SDG India Index compares progress towards Sustainable Development Goals. Sectoral assessments, such as the State Health Index produced with partner institutions, make differences in outcomes visible. Such instruments can generate political and administrative pressure, but their conclusions must be read against the indicators, reference years and methodology used.

The Department for Promotion of Industry and Internal Trade conducts the Business Reforms Action Plan exercise with States and Union Territories. Its focus includes regulatory processes and the business environment. It should not be confused with the World Bank's discontinued global Doing Business report. Administrative reforms such as transparent approvals, predictable inspections and effective grievance redress can reduce transaction costs without necessarily reducing substantive protections.

The Aspirational Districts Programme, launched in 2018, combines convergence of schemes, collaboration and competition. Delta rankings highlight incremental progress across selected development indicators rather than only inherited advantages. Although districts are not constituent States, the programme illustrates how benchmarking can operate within a broader federal system. The Fifteenth Finance Commission also incorporated performance-related considerations into transfers, including tax and fiscal effort and demographic performance, while retaining equalisation through criteria such as income distance.

4. Benefits, risks and measurement problems

Well-designed competition can encourage faster administrative reform, policy experimentation and greater accountability. Public rankings make complex performance information easier to discuss. Successful approaches to procurement, digital services or primary healthcare can spread through demonstration rather than compulsory uniformity. Competition can also shift political debate towards measurable outcomes, provided citizens can verify the underlying evidence.

However, States begin with unequal infrastructure, geography, human capital and fiscal resources. Rankings based only on absolute achievement may repeatedly reward already prosperous States. Investment subsidies can create a bidding contest in which public expenditure rises without a comparable increase in national investment. Excessive concessions, opaque land allocation or weak enforcement of environmental and labour standards may generate a race to the bottom.

Measurement itself creates risks. Governments may prioritise easily measured activities, improve documentation without improving services, or neglect unranked sectors. Changes in methodology can make successive ranks incomparable. A State's average performance can conceal disparities affecting women, Scheduled Castes, Scheduled Tribes or remote districts. Therefore, achievement levels, improvement rates, distributional outcomes and independently verified data should be assessed together.

5. Designing fair and welfare-oriented competition

A sound approach combines minimum national standards with flexibility in implementation. Peer groups based on relevant structural conditions can improve comparability, while reporting both absolute outcomes and incremental progress avoids rewarding either inherited advantage or a low starting point alone. Stable methodologies, public datasets and independent checks improve credibility. The objective should be better lives, not merely a higher position in a league table.

Fiscal equalisation is not the opposite of competition: it can provide weaker States with the basic capacity to participate. Performance incentives should supplement adequate core funding rather than deprive vulnerable populations of essential services. Interstate forums should facilitate policy learning and address spillovers such as pollution and water stress. The Sarkaria and Punchhi Commissions' emphasis on balanced Centre-State relations provides relevant institutional context, although neither should be presented as having created competitive federalism.

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