May 27, 2024June 8, 2024 Competitive Cooperative Federalism in India: Balancing Growth and Inclusion By Satyam Prakash (CNLU Patna – 2025 Batch) Introduction On India’s 75th Independence Day, Prime Minister Narendra Modi highlighted the need for collective efforts to achieve inclusive development. He stressed the role of states in this journey and introduced the concept of “Competitive Cooperative Federalism,” which combines cooperation and competition among states to drive economic growth and improve people’s lives. Competitive Cooperative Federalism involves two important aspects. First, it’s about states working together in cooperation. They collaborate with the central government and local authorities to address common issues and improve overall well-being. Second, it’s about states competing with each other. They strive to attract investments and funds by showcasing their strengths and capabilities. Initially, India’s Constitution emphasized cooperation among different levels of government. It set up councils and schedules for this purpose. However, the idea of competition among states wasn’t a part of the original Constitution. It developed over time as an approach to give states more control over their finances. Niti Aayog ranks states based on their performance, and those doing well receive more funds. Other government initiatives, like the Goods and Services Tax (GST) and rankings for ease of doing business, also contribute to the competitive aspect. Competitive Cooperative Federalism faces some challenges. It can worsen economic disparities among states when richer ones outshine the less developed ones. States vary in their ability to raise funds, with poorer ones struggling to offer incentives for businesses. Trying to attract investments can sometimes lead to losses in tax revenue. Some states rely heavily on financial help from the central government, which can make it harder for them to compete. This competition can also have downsides. It might lead to issues like tribal communities losing their land to businesses. States might relax environmental rules to attract industries, causing more pollution. Flexible labor laws can lead to job insecurity and worker exploitation. To address these challenges, India needs a comprehensive approach. There should be a system for making sure all states have a fair chance to compete. The government should allocate funds based on clear rules rather than personal decisions. States should diversify their economies based on their strengths to reduce inequalities. Environmental standards should be strict and applied consistently. And it’s crucial to involve marginalized communities in decision-making. Competitive Cooperative Federalism has the potential to bring positive change to India. However, it must be applied thoughtfully, considering its impact on democracy, fairness, and the environment. Striking the right balance between cooperation and competition is essential to ensure the well-being of all states and their people on the path to inclusive development. The project explores the impact of competitive federalism in India, examining how it influences economic development, resource allocation, and governance while addressing concerns of regional disparities and social and environmental responsibility. It aims to provide policy recommendations for a balanced approach to competitive federalism. Cooperative Competitive Federalism On our 75th day of independence, Prime Minister Narendra Modi while addressing the nation, mentions “Sabka Prayas”[1] (collective effort) is needed to achieve all-inclusive development. The states, as a significant legislative pillar, have a significant role to play in this. The prime minister advocated for “Competitive Cooperative Federalism,”[2] in which states compete with one another to advance to higher levels of development. In cooperative federalism, there is a horizontal relationship between the center and states. Here, National, state, and local governments interact cooperatively and collectively to tackle their issues to achieve maximum welfare. Competitive federalism entails a vertical relationship between the center and competing states. In this, the federal components fight among themselves for economic interest in fine fettle. The competition is generally confined to trade, investment, and commerce. Here states compete with each other to attract funds and investment which facilitates efficiency in administration and enhances development cell activities. The investors prefer more developed states for investing their money union government devolves more funds to the states on the basis of usage of previously allocated funds and those states that have good infrastructure facilities can utilize those previously allocated funds. thus investments wood flow in a greater amount from both central government and private investors to those states that have shown optimum use of previously allocated funds While both the terms cooperative and competitive for the prism seem to be at loggerheads debt both try to achieve the same objective of economic growth and welfare of the nation. Initially, our constitution only had the notion of cooperative federalism where there were articles that provided for “Interstate Council zonal councils”[3], “7th schedules”[4] but there were no articles originally that promoted any competition between the states it is purely an executive action and it’s not a part of the basic structure of India Constitution Our constitution makers gave more power to the center than states to check any further division of India however, this resulted In the concentration of power in centre. Time and again states have been constantly demanding more Autonomy despite this none of the demands of states were accepted. Competitive federalism ensures more financial autonomy to the states so that the responsibility of providing services that are local in nature should be properly fulfilled by local governments. Search division of power is purely economic and not political. The concept of competitive federalism is not new to India it has been followed in the USA and many European unions in the European Union it is also known as the principle of subsidiarity.[5] The underlying principle of this competition is the reduction of waste fraud corruption and abuse of resources and money by few individuals so that it can be efficiently utilized for fulfilling community interest Although the competition looks like a positive approach by the union executives To enhance the efficiencies of the country as a whole however it may lead to undersupply of welfare benefits to the states which lie at the bottom of this competition. This could lead to inequality among the states by the center. Executive Initiatives and The Financial Divide Between States Niti Aayog plays a pivotal role in promoting competitive federalism in India. Niti aayog has been established with the objective of adopting and monitoring SDGs and promoting competitive federalism within the cooperative framework among States and union territories. The ayog developed various indexes on which different states are ranked, and based on their performance the funds are allocated to the states which perform better. Under this setup Central government has promised decentralization of power and minimum interference in State affairs. States have been given the freedom to plan their expenditures based on their priorities and make decisions for uprooting the socio-economic issues the center promises decentralization in this sphere. 3.1. Goods and Services Tax (GST) “GST aims to create a unified tax regime across India, simplifying taxation and enhancing ease of doing business”[6]. GST can impact states differently based on their economic structure. States that were traditionally manufacturing and business hubs have sometimes experienced a revenue decrease due to the shift to a consumption-based tax system. This has created revenue disparities among states. 3.2. Ease of Doing Business Rankings States are ranked based on their business-friendly policies and reforms. The central government has been ranking states based on their ease of doing business to encourage reforms at the state level. States have undertaken various reforms to improve their rankings. This has led to the streamlining of processes, reduction in bureaucratic red tape, and an increase in business-friendly policies. States with more resources and better infrastructure are often better positioned to implement business-friendly reforms. As a result, they tend to rank higher, while less developed states may struggle to improve their rankings, perpetuating existing inequalities. 3.3. Make in India Make in India is an initiative to encourage manufacturing and promote India as a global manufacturing hub.This initiative has attracted foreign direct investment (FDI) and led to the setting up of manufacturing units in various states. For example, several mobile phone manufacturing units have been established in states like Uttar Pradesh and Andhra Pradesh States with better infrastructure, a skilled workforce, and established industrial bases are more attractive to investors. Less developed states often find it challenging to compete for investments, which can further widen the economic gap. 3.4. Start-up India Startup India promotes entrepreneurship and supports startups through various incentives and schemes. Startup India has led to the growth of the startup ecosystem in various states, creating jobs and fostering innovation. States with established tech hubs, educational institutions, and access to venture capital tend to attract more startups. This concentration of startups in certain states can perpetuate regional economic disparities. Inherent Issues in Implementing the Present Model Firstly, India is characterized by significant economic and social disparities among states. States with greater resources, infrastructure, and human capital are better positioned to compete, while less developed states may struggle to catch up. This can lead to a perpetuation of regional disparities rather than narrowing them. Secondly, States have varying capacities to mobilize resources, including tax revenue. Less affluent states may find it challenging to compete with richer states in terms of offering incentives to attract investment or implement developmental projects. Thirdly, In the pursuit of attracting investment and businesses, states may offer tax incentives, exemptions, and subsidies. While these measures can be beneficial for economic growth, they can also lead to revenue losses for states leading to a “race to the bottom” [7]. As a result, less affluent states may be compelled to compete by offering generous incentives, further reducing their revenue base. Fourthly, States in India have varying fiscal capacities. Some states have a robust revenue base, while others rely heavily on transfers from the central government. States with weaker fiscal capacity may find it challenging to compete effectively and may become increasingly dependent on central grants and allocations. Lastly, The central government has the discretion to provide grants to states for various purposes. The allocation of these grants may not always be based on objective criteria, potentially favoring some states over others. Moreover, Political factors can also influence the allocation of central resources and grants, leading to unequal distribution based on political priorities. Many times ranking framework of the central government has also been put into question by some over the alleged bias towards some states. The Broader Picture A race motivated by competition among states may not always be in the best interests of the states when it comes to issues like tribal displacement and increased pollution. 5.1- Tribal rights – In the pursuit of attracting industrial investments and infrastructure projects, states might compete by offering land and resources to businesses. This can result in the displacement of tribal communities and indigenous populations from their ancestral lands. Often, these communities rely on these lands for their livelihoods and cultural identity. A competitive environment may not adequately protect their rights and interests, leading to social unrest and human rights concerns. For instance, the proposed Posco steel plant in Odisha faced controversy due to the potential displacement of local tribal communities.[8] 5.2- Greater Pollution – To attract industries and promote economic growth, states may relax environmental regulations or offer lax enforcement. This can lead to a race where states compete to attract polluting industries, causing a greater level of pollution and environmental degradation. The competition may result in states compromising on environmental protection standards in exchange for short-term economic gains. 5.3- Labor Laws: States might compete by offering more flexible labor laws, making it easier for businesses to hire and fire workers. For example, several states in India have introduced labor law reforms to attract industries. Uttar Pradesh, for instance, introduced significant changes in labor laws to attract investments.[9] Flexible labor laws can lead to job insecurity and exploitation of workers, as they may have limited job protection and social security benefits Competitive federalism should be coupled with responsible governance that safeguards the rights of marginalized communities, protects the environment, and ensures fair labor practices. Way Forward Addressing the issues related to competitive federalism and its impact on revenue distribution in India requires a combination of policy measures, institutional reforms, and collaborative efforts among the central and state governments. This would require implementing a mechanism for equalization of fiscal capacity among states involving transferring funds from better-off states to those with lower fiscal capacity, ensuring that all states have a reasonable level of resources to compete effectively. To minimize discretionary allocations based on political considerations and ensure that funds are distributed equitably a transparent and objective criteria for the allocation of central funds, grants, and incentives to states is the need of the hour. Further, the center should encourage states to diversify their economic activities and develop sector-specific strategies based on their unique strengths and resources so that this can help reduce overreliance on certain sectors and mitigate regional disparities. The concept of “competitive sub-federalism” [10]can be introduced into states to further this objective. The cities, with their concentrated economic activity, innovation, and infrastructure, can act as dynamos of growth within a federal system characterized by competition among sub-national entities (such as states or provinces). Striking a balance between competition and social and environmental responsibility is crucial for the overall well-being of the states and their citizens. Balancing their pursuit of economic growth with the protection of vulnerable communities and the environment is essential. Hence, sustainable development practices with environmental standards should be stringent and uniformly enforced across states to prevent pollution and environmental degradation. In a democracy, the Centre represents the aspiration of all al its citizens and not those who pay higher revenues to the Centre. Therefore, including marginalized communities of less developed states in the decision-making processes should be essential. The center should stive to achieve a balance between competition and cooperation, recognizing that some issues require a collective effort among states and the central government. Ultimately, competitive federalism can be a force for positive change in India, but it should be implemented with careful consideration of its potential impact on democratic values and the well-being of all citizens. REFERENCES: The constitution of India From Competitive Federalism to Competitive Sub-Federalism: Cities as Dynamos, avaliable at : https://www.indiabudget.gov.in/budget2017-2018/es2016-17/echap14.pdf Surojit Gupta, Three states ease labour laws to boost investment, jobs, available at: , https://timesofindia.indiatimes.com/india/three-states-ease-labour-laws-to-boost-investment-jobs/articleshow/75638527.cms Amaresh Bagchi, Rethinking Federalism’: Overview of Current Debates with Some Reflections in Indian Context, Economic and Political Weekly, Vol. 35, No. 34, 2000. Available at: file:///E:/CNLU/CNLU/[1]%20SEMESTERS/7th%20sem/fedralism/project/Bagchi-RethinkingFederalismOverview-2000.pdf Amit Kapoor and Ayushi Pundir, Cooperative competitive federalism, Amit Kapoor and Ayushi Pundir, THE Economic Times, Aug 26, 2022 avalaible at: https://economictimes.indiatimes.com/news/politics-and-nation/view-cooperative-competitive-federalism/articleshow/93806020.cms?from=mdr Gupta, Aakshi & Bahuguna, Dr Rajesh. (2022). COOPERATIVE AND COMPETITIVE FEDERALISM IN INDIA: AN ANALYSIS. Volden, Craig. “The Politics of Competitive Federalism: A Race to the Bottom in Welfare Benefits?” American Journal of Political Science 46, no. 2 (2002): 352–63 Dr. Benny Joseph, THE EFFICACY OF COMPETITIVE AND COOPERATIVE FEDERALISM IN INDIA AND ITS IMPLICATIONS, 6 , IJCRT,2018. [1] Amit Kapoor and Ayushi Pundir, Cooperative competitive federalism, Amit Kapoor and Ayushi Pundir, THE Economic Times, Aug 26, 2022 avalaible at: https://economictimes.indiatimes.com/news/politics-and-nation/view-cooperative-competitive-federalism/articleshow/93806020.cms?from=mdr [2] Ibid. [3] Constitution of India, Art. 263. [4] Ibid 246. [5] Amaresh Bagchi, Rethinking Federalism’: Overview of Current Debates with Some Reflections in Indian Context, Economic and Political Weekly, Vol. 35, No. 34, 2000. Available at: file:///E:/CNLU/CNLU/[1]%20SEMESTERS/7th%20sem/fedralism/project/Bagchi-RethinkingFederalismOverview-2000.pdf [6] Goods and Servise Tax Council, about us, available at: https://gstcouncil.gov.in/about-us#:~:text=The%20idea%20of%20a%20nationwide,cascading%2C%20and%20promote%20economic%20integration. [7] Volden, Craig. “The Politics of Competitive Federalism: A Race to the Bottom in Welfare Benefits?” American Journal of Political Science 46, no. 2 (2002): 352–63. [8] Dr Samantha Balaton-Chrimes, POSCO s Odisha Project, available at: ,https://www.oecdwatch.org/wp-content/uploads/sites/8/2017/05/Poscos-Odisha-Project-2.pdf [9] Surojit Gupta, Three states ease labour laws to boost investment, jobs, available at: , https://timesofindia.indiatimes.com/india/three-states-ease-labour-laws-to-boost-investment-jobs/articleshow/75638527.cms [10] From Competitive Federalism to Competitive Sub-Federalism: Cities as Dynamos, avaliable at : https://www.indiabudget.gov.in/budget2017-2018/es2016-17/echap14.pdf Post Views: 987 Related Constitutional Law