Cooperative and Competitive Federalism in India Introduction

• India’s federal system is unique, operating on two core principles—Cooperative Federalism and Competitive Federalism—both of which play a crucial role in shaping the country’s governance, economy, and fiscal discipline.
•  While cooperative federalism relies on collaboration between the Centre and states, competitive federalism encourages states to compete for investments and policy efficiency. However, a growing reliance on freebies-based competition has raised concerns about fiscal sustainability and the long-term impact on governance.

What is Federalism? 

• Federalism is a system of government in which the power is divided between a central authority and various constituent units of the country.
• In a unitary system, the central government holds full control over administration and lawmaking, while regional units have little autonomy. In a federal system, regions or ethnic groups are given some level of self-governance with administrative and legislative powers.
• Federalism in India: 
  • India’s states are diverse in ethnicity, religion, language, politics, and socio-economic conditions. At independence, a quasi-federal system was adopted to balance regional identities with national unity under a strong central government.
  •  In India, Parliament can create, merge, or alter states and Union Territories without state approval.
  • The Centre has overriding powers over states in several areas.
  • India has a Concurrent List where both the Centre and states can legislate.
  • Residuary legislative powers rest with Parliament, whereas in the U.S., they belong to the states.
  • States have limited power to raise resources and depend heavily on the Centre for financial assistance.

What is Cooperative Federalism?

• Cooperative Federalism: Joint Efforts for National Progress

• Cooperative Federalism signifies a horizontal relationship between the Centre and the State. It emphasizes collaboration between the Union and state governments. Both levels share responsibilities and work together to achieve common goals in areas such as infrastructure, health, education, and tax policy. This approach ensures policy alignment and strengthens national unity.
• Examples of Cooperative Federalism:
  • GST Council: A platform for joint decision-making by the Centre and states on tax-related matters.
  • Ayushman Bharat and PM-KISAN: Require active coordination for effective implementation.
  • Zonal Councils: Established under the States Reorganization Act, 1956, to promote regional cooperation and resolve disputes between states.

What is Competitive Federalism? 

• Competitive Federalism, on the other hand, profess a vertical relationship between the States and the Central government while states compete among themselves.
• When our Constitution was first created, it only comprised the notion of cooperative federalism through mechanisms like the Inter-state council, Zonal council and 7Th schedule. 
• But in the course of time, as States competed to attract capital and Investment to facilitate and stimulate economic activity and improve administrative efficiency, the need for Competitive capitalism was founded. It ensures minimum waste and maximum resource usage by stimulating healthy competition among states. 
• States compete by enhancing their business environments, launching innovative welfare schemes, and improving public services.
• Examples of Competitive Federalism:
  • Ease of Doing Business Rankings (NITI Aayog): Encourage states to reform policies and attract investments.
  • Vibrant Gujarat Summit: Promotes Gujarat as a key investment destination.
  • Rythu Bandhu (Telangana) and KALIA (Odisha): Regional welfare schemes that address state-specific needs while complementing central programs like PM-KISAN.

What are Constitutional Provisions Supporting Federalism? 

• Seventh Schedule: Divides legislative powers into the Union, State, and Concurrent Lists to ensure a balance of power.
• Article 261: Promotes legal uniformity across states by ensuring that public acts and judicial proceedings are recognized nationwide.
• Article 263 (Inter-State Council): Fosters cooperation by facilitating discussions on inter-state matters.
• Article 312 (All India Services): Provides for centrally-recruited officers to serve in both the Centre and states, ensuring administrative efficiency.
• Article 279A (GST Council): A constitutional body for cooperative decision-making on taxation policies.
• Additionally, NITI Aayog, which replaced the Planning Commission, plays a significant role in promoting competitive federalism through performance-based rankings and incentives.

List of Famous Reports And Committees on Federalism in India

• Sarkaria Commission (1983)
  • Focus: Centre-State relations
  • Key Recommendations: Strengthening state autonomy, limiting central interventions, equitable tax distribution, and enhancing the role of the Inter-State Council.
• Punchhi Commission (2007)
  • Focus: Re-examining Centre-State relations
  • Key Recommendations: Redefining the Governor’s role, clear guidelines for emergency provisions, and balanced tax devolution for fiscal federalism.
• NITI Aayog Reports (2015 onward)
  • Focus: Promoting Competitive and Cooperative Federalism
  • Key Initiatives: Performance-based incentives, monitoring of centrally sponsored schemes, and promoting best practices among states.
• Rajamannar Committee (1969)
  • Focus: Centre-State Relations
  • Key Recommendations: Setting up an Inter-State Council as a constitutional body, reducing discretionary powers of the Governor.
• Administrative Reforms Commission (ARC) (1966–1970)
  • Focus: Administrative reforms for improving Centre-State coordination.

What is The Freebies Dilemma in Competitive Federalism? 

• The concept of competitive federalism has gradually shifted from improving governance and efficiency to a race for populist policies, where states focus on cash transfers and subsidies to gain political mileage. While short-term political gains are achieved, the long-term consequences for fiscal health are worrying. Current Trends in Freebies-Based Competitive Federalism:
• From Governance to Populism: The initial intent of competitive federalism was to create a healthy environment where states competed to enhance governance, attract investments, and improve public services. However, this competition has taken an unfortunate turn towards populism, where states are now focusing on short-term electoral gains rather than sustainable development. The emphasis has shifted from improving governance and policy innovation to offering cash transfers and free services to secure votes. This “race to the bottom” often leads to a significant burden on state finances.
  • Examples: Monthly cash transfers for women announced by Karnataka and Rajasthan despite significant fiscal constraints.
• Impact on Fiscal Health:   The trend of providing excessive subsidies and cash handouts has strained the fiscal health of several states, pushing them into debt traps. This approach not only reduces the resources available for long-term development projects like infrastructure and healthcare but also creates fiscal imbalances that are hard to correct.
  • Punjab and Delhi face rising debts due to populist measures. Punjab provides free electricity to farmers for agricultural purposes, which has been a long-standing policy to win political support in rural areas. Punjab’s annual power subsidy bill has exceeded ₹18,000 crore, draining state finances. Delhi offers 20,000 liters of free water per month to each household with a functional water meter. While this scheme aims to ensure access to clean water, it has led to significant financial pressure on the Delhi Jal Board (DJB). In 2021, the Delhi Jal Board reported a revenue deficit of ₹650 crore, largely due to unpaid water bills and the burden of providing free water. Delhi provides free electricity up to 200 units per month for domestic consumers and a 50% subsidy for consumption between 200 and 400 units. This has increased expenditure on subsidies year after year. 
  • Fiscal mismanagement in some states has widened the gap in Ease of Doing Business rankings.  In the Ease of Doing Business Ranking 2019 (released in 2020), Punjab slipped to 19th, compared to Gujarat (1st) and Karnataka (17th). 
  • The long-term viability of such policies remains a concern for financial institutions and policy experts. RBI Report 2022 had warned that the combined debt of several states could exceed 35% of their GDP by 2026, primarily due to growing expenditure on freebies. Andhra Pradesh’ focus on direct benefit transfers (DBT) and generous subsidies has led to high revenue deficits. The CAG Report (2021-22) flagged concerns about the state’s rising debt burden and reduced allocation for critical infrastructure projects.

Significance of Cooperative and Competitive Federalism

• Why Competitive Federalism Matters:

• • • Boosts Economic Efficiency: Encourages states to align policies with regional needs, attracting investments and generating jobs.
      • Tamil Nadu has aggressively pursued sector-specific policies in automobile manufacturing, turning Chennai into an automobile hub known as the “Detroit of Asia,” generating thousands of jobs and attracting global companies like Hyundai, Ford, and BMW.
      •  Uttar Pradesh, through its One District One Product (ODOP) initiative, has successfully boosted local industries such as leather in Kanpur and brassware in Moradabad, increasing exports and employment.
    • Promotes Policy Innovation: Allows states to experiment with new governance models and regulatory frameworks.
      • Telangana’s TS-iPASS (Telangana State Industrial Project Approval and Self-Certification System) offers time-bound clearances for businesses, setting an example for other states in simplifying bureaucratic processes.
      • Kerala’s participatory budgeting at the local government level allows citizens to have a direct say in budget priorities, enhancing public accountability and service delivery.
    • Enhances Fiscal Discipline: When linked to responsible governance, it ensures a balance between spending and revenue generation.
      • Gujarat’s fiscal discipline is often cited as a model for other states. The state has maintained a revenue surplus for several years by focusing on improving its tax base and optimizing expenditures, allowing it to invest heavily in infrastructure without running into excessive debt.
      • Karnataka, through its efficient tax collection and targeted expenditure policies, has maintained a healthy fiscal position, ensuring funds are available for long-term capital investments.
    • Improves Public Services: States invest in better education, healthcare, and infrastructure to attract businesses and skilled professionals.
      • Delhi’s Mohalla Clinics have been recognized as a model for primary healthcare delivery, offering free and accessible healthcare to urban populations.
      • Himachal Pradesh has consistently outperformed in education indicators due to its focus on teacher training and infrastructure development, resulting in high literacy rates and better school outcomes.

• Why Cooperative Federalism is Essential:

• Ensures Balanced Regional Growth: Helps reduce disparities through joint efforts in economic and social development.  

• North Eastern Region Development Schemes focus on improving infrastructure, connectivity, and social services in the Northeast, addressing decades of economic neglect and bringing the region into the national growth fold. 
• Backward Regions Grant Fund (BRGF) has supported less-developed districts in states like Odisha, Jharkhand, and Chhattisgarh to improve infrastructure and social sector outcomes.

• Facilitates Resource Optimization: Joint initiatives in disaster management, infrastructure, and environmental protection prevent resource wastage.

• National Disaster Management Authority (NDMA) and its collaboration with state governments during the 2018 Kerala floods showcased how cooperative federalism can effectively mobilize resources for rescue, relief, and rehabilitation.
• Inter-State River Water Sharing Agreements, such as the Krishna Water Dispute Tribunal, ensure that water resources are shared equitably and efficiently among states.

• Enhances National Unity: Collaboration between different levels of government strengthens trust and cooperation.
  • The GST Council, despite differences between states, exemplifies cooperative federalism by bringing all stakeholders to the table for consensus-based decision-making on taxation policies.
  • Ayushman Bharat Scheme, implemented jointly by the Centre and states, provides health insurance to millions, enhancing public trust in both levels of government.

Recent Initiatives to Strengthen Federalism

• Competitive Federalism Initiatives:

• • Global Investors Meet (Tamil Nadu): Aims to attract domestic and foreign investment.
  • GIFT City (Gujarat): Established as a global financial hub.
  • TS-iPASS (Telangana): A single-window clearance system for business approvals.
  • Investment Friendliness Index (IFI): Set to launch in 2025, ranking states based on their investment potential.

• Cooperative Federalism Initiatives:

• • India Infrastructure Project Development Fund (IIPDF): Provides financial support for infrastructure development, enabling participation by fiscally weaker states.
  • Economic Survey 2022-23: Highlights the role of cooperative federalism in achieving Sustainable Development Goals (SDGs).
  • National Manufacturing Mission (NMM): Aligns central and state efforts to boost the manufacturing sector.

 

Challenges in Competitive Federalism

• Quasi-Federalism and Central Dominance: Centralized control over various sectors, such as environmental clearances, financial regulation, and resource allocation, restricts states’ autonomy, undermining the competitive spirit. The dominance of the Union in these areas delays state-specific initiatives and reduces efficiency. 

• • • Environmental Clearances: Central control over forest and mining clearances has caused significant delays in industrial projects in Jharkhand (coal and iron ore mining) and Chhattisgarh (steel and power projects), limiting industrial growth in these states.  The Amrapali Coal Block in Jharkhand, intended to supply coal to NTPC, was delayed for years due to central-level environmental approvals.

• Unchecked Competition and Race to the Bottom: In the absence of clear fiscal guidelines, states often provide excessive tax exemptions and unsustainable subsidies to attract industries, resulting in fiscal mismanagement without long-term benefits.

• • • Industrial Policy Incentives: Madhya Pradesh’s 2014 Industrial Promotion Policy offered tax holidays for up to 15 years, but the industries failed to generate expected employment, leaving the state with fiscal deficits.
    • Haryana’s Special Investment Package (SIP) provided heavy tax rebates to real estate projects, but many of these projects stalled, leading to non-performing assets (NPAs) and fiscal strain.
    • Tourism Sector Subsidies: In Goa, generous subsidies for tourism infrastructure led to a short-term boom but left the state struggling with high debt due to poor revenue recovery from these investments.

• Conflict Between Finance Commission and GST Council: The overlapping jurisdiction of the Finance Commission and GST Council has led to inconsistencies in revenue-sharing mechanisms, affecting both cooperative and competitive federalism.

• • • GST Compensation Cess Disputes: Several states, including Rajasthan and Tamil Nadu, raised concerns about delayed compensation payments under the GST (Compensation to States) Act, 2017, affecting their fiscal planning.
    • Vertical Devolution Conflict: Article 280’s mandate for the Finance Commission to recommend devolution percentages often conflicts with GST Council decisions, creating imbalances in resource allocation.

• Inter-State Rivalries and Resource Competition: States often compete for resources—such as river water, coal blocks, and investments—leading to conflicts and undermining cooperative mechanisms essential for national development.

• • • Cauvery Water Dispute: Tamil Nadu and Karnataka have been locked in a prolonged legal and political battle over the sharing of Cauvery River water, affecting agricultural productivity and industrial planning in both states.
    • Coal Block Allocation: Jharkhand and Odisha have repeatedly clashed over coal block allocations, affecting mining operations and revenue generation.

• Fiscal Vulnerability Due to Borrowing Race: Competitive federalism sometimes pushes states into a borrowing race, where they take on excessive loans to fund large-scale infrastructure projects or welfare schemes. This worsens fiscal deficits and increases debt burdens.

• • • Punjab and West Bengal are among the most heavily indebted states in India, with debt-to-GSDP ratios crossing 40% and 38%, respectively, driven by their populist spending and infrastructure projects funded through loans.
    • Rajasthan’s increasing reliance on market borrowings to finance welfare programs has raised concerns about long-term fiscal sustainability.

• Overemphasis on Rankings and Short-Term Gains: The focus on performance rankings (such as Ease of Doing Business) sometimes pushes states toward short-term policy measures aimed at improving rankings rather than addressing structural problems.

• • • Several states prioritize cosmetic improvements—such as setting up single-window clearance systems—without adequately addressing the underlying issues in land acquisition or labor laws.
    • In Madhya Pradesh, the rapid push to improve business rankings led to a surge in industrial clearances but failed to address the state’s poor power supply infrastructure, deterring long-term investment.

• Uneven Access to Technology and Innovation: States with better access to technology and a higher-skilled workforce gain a competitive advantage, leaving other states behind. This digital divide impacts innovation and industrial development.

• • Karnataka and Telangana have emerged as hubs for the tech industry, while states like Odisha and Bihar struggle to attract IT investments due to limited digital infrastructure and skill gaps.
  • Startup Ecosystem 2022: Delhi, Maharashtra, and Karnataka dominate the startup space, while northeastern states are largely absent from India’s innovation map.

Challenges in Cooperative Federalism

• Inequitable Distribution of Central Tax Revenue: The allocation of central funds often does not account for the diverse needs and developmental status of states. Resource-rich states feel undercompensated, while economically weaker states argue that the current model ignores their unique challenges.

• • • Royalty on Natural Resources: States like Odisha, Jharkhand, and Chhattisgarh, which are rich in minerals, have repeatedly demanded a larger share of royalty from coal and iron ore mining. They argue that the current distribution formula does not compensate them adequately for environmental degradation and infrastructure stress.
    • Revenue Contribution vs. Return: Goa and Delhi, which contribute significantly to the central tax pool through tourism and business, receive relatively less in return, leading to resentment. Delhi has long demanded a greater share of central funds to support its growing urban infrastructure needs.
    • Backward Region Disparity: Despite receiving higher allocations under various backward area schemes, states like Bihar and Uttar Pradesh often fail to utilize funds effectively, leading to uneven development compared to states like Himachal Pradesh and Rajasthan, which have better fund absorption capacity.

• Implementation Gaps in Centrally Sponsored Schemes (CSS): Centrally Sponsored Schemes often face significant implementation challenges due to delays in fund disbursement, mismanagement, and a lack of adaptation to local conditions.

• • • Jal Jeevan Mission (Rural Water Supply): States like Rajasthan and Madhya Pradesh have faced delays in achieving coverage targets due to procurement issues and poor infrastructure, leaving many rural households without access to safe drinking water.
    • Saubhagya Scheme (Household Electrification): Jharkhand and Odisha struggled with electrification due to difficult terrain and poor last-mile connectivity, leading to delays in household connections.
    • Integrated Child Development Services (ICDS): In West Bengal and Bihar, the ICDS program faced challenges due to mismanagement and delayed fund disbursement, affecting nutritional outcomes for children and pregnant women.
    • Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA): States like Chhattisgarh and Uttar Pradesh have reported delays in wage payments, reducing trust in the program and resulting in lower participation rates.
    • National Health Protection Scheme (NHPS): Haryana and Punjab have seen slower enrollment due to administrative delays and lack of public awareness, limiting the scheme’s impact on rural healthcare access.

• Inflexibility in Scheme Design and Poor Local Adaptation: Many centrally sponsored schemes come with standardized guidelines, which do not account for regional diversity. This inflexibility reduces the efficiency of schemes and leads to suboptimal outcomes.

• • • Mid-Day Meal Scheme: In tribal areas of Odisha and Chhattisgarh, the scheme’s design has failed to incorporate local dietary preferences, leading to poor uptake among children.
    • Pradhan Mantri Krishi Sinchayee Yojana (PMKSY): In Karnataka, irrigation projects under this scheme were delayed due to rigid guidelines on fund allocation and poor adaptation to the state’s arid conditions.
    • Digital India Initiative: While Kerala and Tamil Nadu have successfully adopted the program, Assam and Meghalaya face challenges due to low digital literacy and inadequate internet connectivity.

• Lack of Coordination Between State and Local Bodies: Centrally sponsored schemes often require coordination between multiple levels of government—state, district, and municipal bodies. Poor coordination leads to delays and mismanagement of funds.

• • • Swachh Bharat Mission (SBM): In Bihar and Uttar Pradesh, several sanitation projects have stalled due to conflicting responsibilities between local bodies and state authorities, leading to a backlog in toilet construction.
    • National Urban Livelihoods Mission (NULM): Gujarat and Maharashtra faced delays in project execution due to lack of synchronization between urban development departments and municipal corporations.
    • AMRUT (Atal Mission for Rejuvenation and Urban Transformation): In Nagpur and Indore, infrastructure projects such as sewage treatment plants were delayed because of disputes between state-level and city-level authorities on fund utilization.

• Insufficient Monitoring and Evaluation Mechanisms: Centrally sponsored schemes often lack robust monitoring frameworks, leading to leakages, poor implementation, and lack of accountability.

• • • Rashtriya Uchchatar Shiksha Abhiyan (RUSA): In Himachal Pradesh and Assam, funds for higher education institutions were not properly monitored, resulting in incomplete infrastructure projects.
    • Pradhan Mantri Gramin Sadak Yojana (PMGSY): Poor monitoring in states like Jharkhand and Uttarakhand led to substandard road construction, which later required costly repairs.
    • National Rural Drinking Water Program: In states like Tamil Nadu and Maharashtra, a lack of proper evaluation resulted in several projects being declared complete despite failing to meet quality standards for drinking water.

• Delays in Fund Transfers and Utilization Issues: States frequently complain about delays in the release of central funds, affecting the timely execution of projects and causing cost overruns.

• • Sarva Shiksha Abhiyan (SSA): States like Rajasthan and Assam reported significant delays in receiving funds, affecting school infrastructure projects and teacher training programs.
  • Ayushman Bharat (Health and Wellness Centres): Chhattisgarh and Madhya Pradesh faced delays in fund transfers, resulting in incomplete health center upgrades.
  • Skill India Mission: Jharkhand and Odisha experienced challenges in fund utilization, leading to low enrollment in skill development programs.

Recommendations for Reform

• Conditional Grants Framework: The Finance Commission should link central grants to measurable outcomes and performance indicators to ensure accountability and reduce fiscal imprudence.

• • • Tamil Nadu’s solid waste management initiative could serve as a model for performance-linked grants, where funds are released based on improvements in urban cleanliness indices.
    • Haryana’s water conservation programs can be rewarded based on reductions in groundwater extraction.

• Policy Innovation: The National Manufacturing Commission should promote innovative policy frameworks instead of replicating existing schemes. Encouraging region-specific industrial policies can lead to more sustainable growth.

• • • Andhra Pradesh’s drone manufacturing policy and Gujarat’s focus on green energy projects reflect the kind of innovation that should be promoted through knowledge-sharing platforms.

• Yardstick Competition: Creating public rankings for various sectors can provide reputational incentives for states to improve governance. Yardstick competition, used in many European countries, encourages states to outperform their peers while maintaining fiscal discipline.

• • • India Justice Report evaluates state performance in judicial efficiency, prompting states like Maharashtra and Kerala to reform their legal infrastructure.
    • Public Health Index rankings could encourage competition among states to improve healthcare outcomes.

• Accountability Mechanisms: Introducing independent audits and annual assessments for large-scale welfare programs can help monitor efficiency and avoid misuse of funds. States should publish outcome-based performance reports for transparency.

• • • Karnataka’s Right to Services Act ensures timely delivery of government services, with penalties for delays, creating an effective accountability model.

• Market-Preserving Federalism: Encouraging subnational competition within a structured framework ensures innovation while avoiding coordination failures. This model allows states to compete while ensuring that no region is left behind.

• • • Australia’s fiscal equalization model balances competitive incentives with shared development goals, ensuring that weaker states receive adequate support without stifling competition.
    • Germany’s federal financial structure promotes competition in public service delivery while maintaining national-level economic stability.

• Balanced Competitive and Cooperative Federalism: A well-balanced approach to federalism is crucial for ensuring that states compete responsibly while collaborating on critical areas like disaster management, climate change, and national security.

• • Aspirational Districts Program, where states collaborate with the Centre to improve social indicators, can serve as a model for blending competition with cooperation.
  • Joint efforts in national logistics policy ensure better coordination between states to improve trade and reduce logistics costs.