Competitive and Cooperative Federalism in India

Introduction

Federalism in India is structured as a quasi-federal system, meaning it has both unitary and federal characteristics. Over the years, India has evolved into a model where competitive and cooperative federalism coexist to drive economic growth, policy innovation, and governance efficiency.

While competitive federalism fosters state-level competition to attract investment and improve governance, cooperative federalism ensures inter-governmental collaboration for balanced development. The 15th Finance Commission (FC) and other government policies have promoted both models, impacting Centre-State relations.

Understanding Competitive and Cooperative Federalism

Competitive Federalism

• Competitive federalism promotes state-to-state (horizontal) and Centre-to-state (vertical) competition to improve governance, investment, and policy effectiveness.
• States compete to attract foreign and domestic investments, enhance business environments, and develop infrastructure.
• Example: Karnataka, Tamil Nadu, and Telangana lead in Ease of Doing Business rankings by implementing industry-friendly policies and digital governance.

Key Features:

1.     Economic Efficiency – Encourages states to adopt investment-friendly policies.

2.     Policy Innovation – States experiment with governance models, leading to best practices.

3.     Fiscal Discipline – States maintain balanced budgets and manage resources effectively.

4.     Public Service Quality – Better governance leads to higher-quality education, healthcare, and infrastructure.

Examples:

• Vibrant Gujarat Summit (Gujarat)
• Rythu Bandhu Scheme (Telangana) – Direct income support for farmers.
• KALIA Scheme (Odisha) – Assistance to small and marginal farmers.
• Business Reform Action Plan (BRAP) – Measures for improving the Ease of Doing Business.

Cooperative Federalism

• Cooperative federalism focuses on Centre-state collaboration to ensure uniform policy implementation and equal development.
• Involves constitutional bodies like the Finance Commission, GST Council, and NITI Aayog.

Key Features:

1.     Balanced Regional Development – Helps weaker states catch up with industrialized ones.

2.     Resource Sharing – Ensures fair distribution of financial aid and technical assistance.

3.     Policy Coordination – Central schemes like Ayushman Bharat, MGNREGA, and PM-KISAN require state participation.

Examples:

• GST Council – Centre and states work together to decide tax rates and revenue sharing.
• Inter-State Council (ISC) – Resolves disputes related to taxation, governance, and resources.
• India Infrastructure Project Development Fund (IIPDF) – Ensures all states can contribute to national infrastructure projects.

Challenges in Competitive and Cooperative Federalism

Challenges in Competitive Federalism

1.     Quasi-Federalism: The Centre retains more legislative power, overriding state authority in some cases.

2.     Taxation Issues:

o    GST has weakened state financial autonomy, as states lost control over taxes like octroi, luxury tax, and entry tax.

o    Article 269A(1) (GST Council) vs. Article 270 (Finance Commission) creates conflicts in revenue-sharing models.

3.     Unregulated Competition:

o    States offer excessive tax incentives and subsidies, which burden public finances.

o    E.g., Tamil Nadu's tax exemptions for industries have increased the state's fiscal deficit.

4.     Inter-State Disparities:

o    Southern states outperform others in education, healthcare, and industrialization, leaving Bihar, Uttar Pradesh, and Odisha behind.

Challenges in Cooperative Federalism

1.     Unequal Revenue Distribution:

o    States like West Bengal, Bihar, and Odisha argue that the Finance Commission's allocation formula does not consider regional economic disparities.

o    Richer states like Maharashtra and Karnataka get more investments, widening the development gap.

2.     Central Overreach:

o    Finance Commission recommendations influence tax devolution, but political bias sometimes impacts fund allocations.

o    E.g., Special economic packages to some states while neglecting others.

3.     Slow Decision-Making:

o    The Inter-State Council (ISC), which should meet regularly, last met in 2016.

o    Many water disputes (e.g., Cauvery, Krishna-Godavari) remain unresolved due to delayed Centre-state negotiations.

Government Initiatives to Strengthen Federalism

The Union government has launched multiple schemes to promote both models of federalism:

For Competitive Federalism:

1.     Investment Friendliness Index (IFI) (2025) – A new index ranking states based on investment climate and governance reforms.

2.     PPP Project Pipelines – Ministries and states must develop 3-year plans for private sector infrastructure investment.

3.     National Manufacturing Mission (NMM) – Aims to make India a global manufacturing hub, promoting state competition.

4.     Business Reform Action Plan (BRAP) – Encourages ease of doing business reforms, simplifying tax and compliance rules.

For Cooperative Federalism:

1.     Finance Commission (FC) Reforms – Incentivizes states for better fiscal management, social development, and SDG alignment.

2.     India Infrastructure Project Development Fund (IIPDF) – Provides financial and technical assistance to all states.

3.     Inter-State Water Disputes Mechanism – Proposes structured mediation for water-sharing conflicts.

4.     Strengthening Inter-State Council (ISC) – Encouraging more frequent meetings to resolve governance issues.

Way Forward

1. Strengthening Institutional Framework

• NITI Aayog should take a micro-level planning approach to support regional needs.
• States should establish their own policy think tanks to enhance governance.

2. Balancing Economic Disparities

• Incentivizing less-developed states through special economic zones (SEZs) and regional industrial corridors.
• Jharkhand and Odisha should focus on mining and heavy industries, while Kerala and Goa should build high-end service economies.

3. Fiscal Reforms

• The Finance Commission should introduce conditional grants to curb excessive freebies and promote sustainable development.
• Clearly define the role of the Finance Commission and GST Council to prevent tax conflicts.

4. Infrastructure and Connectivity

• Expand industrial corridors linking North-South and East-West economic hubs.
• Invest in Bharatmala Pariyojana and Smart Cities Mission to bridge the urban-rural development gap.

Conclusion

Competitive and cooperative federalism play a crucial role in India's economic and governance structure. While competition between states boosts innovation and investments, cooperation between the Centre and states ensures equitable development. However, challenges like taxation disputes, Centre-state imbalances, and regional disparities need structural reforms and institutional strengthening.

India’s approach should focus on balancing both models to create an inclusive and sustainable federal structure.

Examine the role of competitive and cooperative federalism in India’s governance model. How do they contribute to economic development and what challenges do they pose? Suggest measures to strengthen federalism in India. (15 Marks, 250 words)

Answer:

Introduction

India follows a quasi-federal system where competitive and cooperative federalism coexist. While competitive federalism fosters state-to-state competition for economic and governance improvements, cooperative federalism ensures Centre-State collaboration for balanced national development.

Role of Competitive and Cooperative Federalism in Governance

1. Competitive Federalism: Enhancing State Performance

• Encourages Innovation: States compete in Ease of Doing Business, industrial growth, and digital governance.
• Fiscal Discipline: Competition promotes better fiscal management by states.
• Investment Attraction: Initiatives like Vibrant Gujarat Summit, Rythu Bandhu (Telangana), and KALIA (Odisha) enhance state competitiveness.

2. Cooperative Federalism: Ensuring Equitable Growth

• Shared Resources: Programs like GST, Finance Commission fund allocation, and Ayushman Bharat depend on Centre-State cooperation.
• Balanced Development: Reduces regional disparities through Inter-State Council, Zonal Councils, and Centrally Sponsored Schemes (CSS).
• Infrastructure Growth: Joint initiatives like Bharatmala Pariyojana, Smart Cities Mission, and PM Awas Yojana enhance connectivity and urbanization.

Challenges in Federalism

1. Challenges in Competitive Federalism

• Revenue Dependency: States lost taxation powers under GST, increasing their financial dependence on the Centre.
• Unchecked Subsidies: Competitive freebie politics burdens state finances (e.g., Tamil Nadu’s industry tax cuts).
• Inter-State Imbalances: States with better infrastructure and resources (e.g., Karnataka, Maharashtra) attract more investment, widening disparities.

2. Challenges in Cooperative Federalism

• Fiscal Inequality: Finance Commission allocations do not always consider regional economic differences, affecting states like Bihar, Odisha.
• Centre’s Overreach: Article 282 grants allow the Centre to override state fiscal autonomy.
• Slow Decision-Making: The Inter-State Council (ISC) has not met since 2016, delaying conflict resolution.

Way Forward

1. Strengthening Institutional Framework

• Regular ISC Meetings: Increase inter-state dialogue for governance coordination.
• Clear Finance Commission & GST Roles: Define taxation responsibilities to prevent Centre-State disputes.

2. Balancing Economic Disparities

• Special Economic Packages: Provide targeted financial aid to weaker states.
• Investment Diversification: Promote mining and industries in Jharkhand, Odisha and IT in Kerala, Karnataka.

3. Fiscal and Policy Reforms

• Conditional Grants for Welfare Programs: Avoid reckless subsidies while ensuring inclusive growth.
• Encourage Private Investments: Expand PPP models to reduce reliance on government funding.

Conclusion

Both competitive and cooperative federalism are vital for India’s governance and economic growth. While competition boosts efficiency and investment, cooperation ensures national development. Strengthening fiscal autonomy, institutional mechanisms, and state participation in policy-making will create a balanced federal structure.

1. Which of the following statements regarding Competitive Federalism is correct?

1.     It encourages healthy competition among states to improve governance and attract investment.

2.     It is mandated by the Indian Constitution under Article 280.

3.     It requires cooperation between the Centre and states in decision-making.

Select the correct answer using the codes given below:
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2, and 3

Answer: (a) 1 only

Explanation: Competitive federalism is about state-to-state competition to improve governance and attract investment. It is not mandated under Article 280 (which deals with the Finance Commission). Statement 3 describes cooperative federalism, not competitive federalism.

2. Which of the following constitutional provisions promote cooperative federalism in India?

1.     Article 246 (Seventh Schedule)

2.     Article 261 (Full Faith and Credit Clause)

3.     Article 263 (Inter-State Council)

4.     Article 280 (Finance Commission)

Select the correct answer using the codes given below:
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1, 3, and 4 only
(d) 1, 2, 3, and 4

Answer: (d) 1, 2, 3, and 4

Explanation:

• Article 246 (Seventh Schedule) distributes powers between Centre and States.
• Article 261 ensures that acts and records of one state are recognized in another, ensuring legal uniformity.
• Article 263 establishes the Inter-State Council for Centre-State coordination.
• Article 280 establishes the Finance Commission, which determines revenue-sharing between the Centre and States.

3. The Inter-State Council (ISC) was recommended by which of the following commissions?

(a) Rajamannar Committee
(b) Sarkaria Commission
(c) Punchhi Commission
(d) Balwant Rai Mehta Committee

Answer: (b) Sarkaria Commission

Explanation: The Sarkaria Commission (1983) recommended the Inter-State Council (ISC) under Article 263 to improve Centre-State relations. It was made a permanent body in 1990.

4. Consider the following statements regarding the Finance Commission (FC) and the Goods and Services Tax (GST) Council:

1.     The Finance Commission decides the distribution of tax revenue between the Centre and States under Article 280.

2.     The GST Council has the sole authority to recommend the devolution of revenue from GST collection.

3.     The Finance Commission’s recommendations are binding on the Centre and States.

Which of the statements given above is/are correct?
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2, and 3

Answer: (a) 1 only

Explanation:

• Statement 1 is correct: The Finance Commission recommends tax devolution between the Centre and States under Article 280.
• Statement 2 is incorrect: The GST Council only makes recommendations on GST-related matters, but it does not decide tax devolution.
• Statement 3 is incorrect: The Finance Commission’s recommendations are advisory, not binding.

5. Which of the following initiatives promote Competitive Federalism in India?

1.     Business Reform Action Plan (BRAP)

2.     State Investment Potential Index

3.     Goods and Services Tax (GST)

4.     Smart Cities Mission

Select the correct answer using the codes given below:
(a) 1 and 2 only
(b) 1, 2, and 3 only
(c) 1, 2, and 4 only
(d) 1, 2, 3, and 4

Answer: (c) 1, 2, and 4 only

Explanation:

• Business Reform Action Plan (BRAP) ranks states based on ease of doing business.
• State Investment Potential Index ranks states based on business environment.
• Smart Cities Mission encourages states to compete in urban development.
• GST is an example of cooperative federalism, not competitive federalism.