India's Parliament in New Delhi. Photo: iStock

Cooperation and alliances among the Indian states and also with the federal government have been crucial in the implementation of various policies – from the formation of the GST Council, which gave equal weight to the states to form a national fiscal policy, to the high-powered committee of chief ministers to recommend reforms in the Indian agricultural markets. India’s economic history is characterized by the focus on cooperation among the states – a necessary but not sufficient condition for boosting the economy.

Although cooperation among the states is imperative for the functioning of India’s federal setup, the competition among them cannot be ignored. It cannot be denied that investment in both economic and social capital is necessary to enhance competitiveness within and across nations. As the Indian economy leaps into the new decade, a renewed sense of competition among the sub-national economies is looked upon as a method to enhance efficiency, allow for greater accountability and independence, and induce corrective actions in the states.

But the question remains as to how “cooperative federalism” and “competitive federalism” will function as complementary ideas that will define India’s growth story in the 21st century. Given the economy’s abominable growth rate currently, how can the states function with their operational autonomy devoid of the central government’s aggressive interference, in order to return to a flourishing economy? As widely acknowledged, economic growth is not automatic and has to fueled from time to time, the need of the hour is to allow greater expenditure flexibility in favor of the states so that local developmental needs are catered to in a more efficient fashion.

India’s progress toward achievement of the Sustainable Development Goals, equitable public financing, allocation of green subsidies, and nurturing the growth of businesses are subject to the type of federalism that exists in the country and its impacts on governance. In theory, a competitive economy produces outcomes that are superior and efficient; in a federal system, competition among states is likely to produce policy outcomes that will benefit the entire nation.

The fact that the best and worst states are named in the public domain in terms of their achievements has led to a competitive spirit that may be a way forward for connecting good governance with good politics. It establishes that the concepts of regional competitiveness are gaining importance equal to national competitiveness.

In fact, the policies of competitive federalism have already been adopted for the achievement of the developmental goals in India. The government’s flagship “Make in India” initiative is guided by the principles of competitive federalism. Different states have also launched their own campaigns, such as “Vibrant Gujarat,” “Happening Haryana” and “Magnetic Maharashtra.”

These initiatives began in December 2014, when the Prime Minister’s Office issued a set of 98 reform measures mostly based on the 10 business topics monitored by the World Bank’s “Doing Business” report. The list was later expanded to 340 points encompassing a Business Reform Action Plan for the states, which formed the basis for the Ease of Doing Business rankings of the Indian states. More recently, India’s rank jumped up by 14 places to become 63rd out of 190 countries in the World Bank’s Ease of Doing Business rankings.

It must also be noted that the potential conflict among equity, efficiency and sustainability is perhaps one of the most crucial dilemmas in regional economics and politics in contemporary times. In India too, there has been extensive research in policy and academic circles on the convergence hypothesis – whether the states are converging in terms of income, development indicators and quality of life.

The convergence issue is quite relevant for India, where robust growth over the last several decades has left an increasingly wide gap between its richest and poorest states. Unfortunately, lack of convergence and huge regional disparities have often stalled the process of holistic development in India.

In this context, competitive federalism will have to stand the test of time to prove whether it will be able to ameliorate regional disparities and subsequently avoid a situation of conflictual federalism leading to center-state and state-state clashes. In India’s growth story, competitive federalism must be in alignment with harnessing the nation’s demographic dividend, rising middle class and resource diversity across the states – and these opportunities are constrained by time, which makes faster and effective implementation of economic policies crucial.

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Soumya Bhowmick

Soumya Bhowmick is a junior fellow at the Observer Research Foundation, Kolkata Chapter, India. His research focuses on the Indian economy and governance, sustainability and globalization.