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Competitive Federalism

Competitive Federalism in India

Competitive federalism is a concept where centre competes with states and vice-versa, and states compete with each other. It refers to relations between regional governments (horizontal competition) and between central and regional governments (vertical competition).

What is the need for competitive federalism in India? 

The notion of competitive federalism is a relatively newer concept in Indian Polity. The Constitution of India originally comprised implicit provisions of cooperative federalism only like the Inter-state council, Zonal council, and 7th schedule

  • But in the course of time, States started competing to attract capital and Investment post the LPG reforms.
  • Hence, the need for Competitive capitalism has arisen to facilitate and stimulate economic activity and improve administrative efficiency.
  • Competitive federalism ensures minimum waste and maximum resource usage by stimulating healthy competition among states in creating physical and social infrastructure.

Factors contributing to competitive federalism in India

  • Devolution of powers: The devolution of powers has allowed states to implement policies that suit their specific needs and aspirations, creating a competitive environment where states compete to attract investment.
  • Economic liberalization: Economic liberalization policies of the 1990s opened up the Indian economy, and states were given greater autonomy to attract investment. 
  • Technology: Technology has played a significant role in fostering competitive federalism by providing states with the means to showcase their strengths and attract investment. 
  • Education and Skill Development: Some states have invested in education and skill development and have a more skilled workforce, and are better positioned to attract knowledge-based industries.
  • Fiscal federalism: Fiscal federalism has contributed to competitive federalism by providing states with the necessary resources to implement policies that attract investment.
Competitive Federalism is a concept where centre competes with states and vice-versa, and states compete with each other. It refers to relations between regional governments (horizontal competition) and between central and regional governments (vertical competition).
Figure: Some measures undertaken by states to attract funds in recent times

Measures taken to promote competitive federalism in India

Role of Union government

  • States indices: The Centre also gives various indices that promote competition among the states. Some of them include
    • Good Governance Index: Prepared by the Department of Administrative Reforms and Public Grievances (DARPG), this index framework covers 10 sectors and 58 indicators.
    • State Ranking Index for NFSA: Prepared by the Ministry of Consumer Affairs, Food & Public Distribution to document the status and progress of implementing the National Food Security Act across the states and UTs.
  • Financial incentives: The central government has announced various financial incentives for states that perform well in different sectors. For example, the Ministry of Urban Development announced the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme to provide financial assistance to cities based on their performance in urban development.
  • One Nation One Ration Card: The scheme enables the portability of ration cards, which means that beneficiaries can access their entitlements anywhere in the country. This promotes competition among the states to improve their implementation of the scheme.

Finance Commission Role

  • The 15th Finance Commission used criteria like Demographic PerformanceTax and fiscal effortsForest and Ecology, etc, for the distribution of central taxes among states for the 2021-26 period.
  • FFC recommended extra annual borrowing worth 0.5% of GSDP to states for a four-year period from 2021-22 to 2024-25 upon undertaking power sector reforms such as reduction in operational losses.
  • FFC recommended performance incentives and grants to states for
    • Carrying out agricultural reforms.
    • Amending the land-related laws along the lines of NITI Aayog’s model law.
    • Growth in agricultural exports.
    • Maintaining and augmenting groundwater stock.

Role of NITI Aayog

NITI Aayog endeavors to promote competitive federalism by facilitating the improved performance of States/UTs. 

  • It encourages healthy competition among states through transparent rankings, in various sectors, along with a hand-holding approach. 
  • Some of the indices launched by NITI Aayog are-
    • School Education Quality Index
    • State Health Index
    • Composite Water Management Index
    • Sustainable Development Goals Index
    • India Innovation Index
    • Export Competitiveness Index
  • The ranking of States in various social sectors based on quantitative objective criteria encourages them, and even districts, to improve their performance. 
  • NITI Aayog also releases delta rankings for the performance of Aspirational Districts every month.

Challenges to Competitive Federalism 

  1. The states are receiving less money than they anticipated despite a rise in Central Tax collection. Funds for welfare services have diminished as a result.
  2. The difference between established and developing states is getting wider as a result of interstate competition.
  3. Because their economies are less robust than those of other states, governments like West Bengal, Assam, Bihar, and Orissa are opposed to a universal financing framework and are now asking for specific funds to boost their economic growth and draw in investors. 
  4. To increase their participation in competitive federalism, some states require assistance from the federal government.
  5.  India’s economic progress and growth are not reaches widely and equally. They differ from state to state.
  6. Giving states more financial autonomy does not ensure that they will function well. Drawing investors with skilled labor force, capital, and infrastructure. Leveraging well-developed resources for investment attraction. Falling behind in literacy and employment rate. Disparities in economic factors and development indicators.
  7. To put it another way, this results in uneven economic progress and national development.
  8. Given the aforementioned constraints, states with low levels of economic growth are unable to participate in competitive federalism.
  9. The Cooperative and Competitive Federalism: Strengthening Steps within India
  10. The central government has committed to decentralize power and to intervene minimally in domestic affairs.
  11. The federal structure is further strengthened with the introduction of the GST.
  12. The NITI Aayog organization has replaced the Planning Commission, which has been abolished. It is part of the NITI Aayog’s mandate to create competitive federalism. Below it:
    • The Finance Commission’s recommendation has resulted in an increase of the states’ share of central tax revenue from 32% to 42%.Governments have the freedom to prioritize their spending however they see fit.States and the center would work together to develop a common understanding of national objectives.The government-sponsored programs are being reorganized.
    • UDAY is a banking industry bailout plan. Swachh Bharat Ranking State-by-state Ease of Doing Business rankings will be utilized to foster a strong feeling of competition.
      • Not all states have adopted competitive federalism yet. Yet, a few states are undoubtedly improving their business climates, especially by launching challenging changes regarding land acquisition and labor flexibility.
      • Federalism is now the definition of a new team India connection rather than a source of conflict in interactions between the Centre and the States.

Role of Niti Aayog’s In India’s Cooperative And Competitive Federalism

  • In 2017, the NITI Aayog promotedcooperative federalism,” which it claimed would improve relations between the Center and the States.
  • During one of the meetings, the chief secretaries of states showcased the best practices utilized in their respective regions to promote the exchange of ideas.
  • The Aayog’s operation appears to have a positive outcome because it enables states to compete with one another to advance new forms of government in the spirit of “cooperative, competitive federalism.”
  • The creation of a dynamic institutional framework that allows “eminent individuals outside the government system” to engage in policy formation is one of NITI Aayog’s key objectives.
  • With the increased opportunity for states to collaborate and share knowledge. It is clear that for federalism to function effectively, these states must also play their part in advancing common national goals.

What is the need?

  • Competition alone cannot give the best results it is competition with cooperation that will drive the real change. There has to be a balance between cooperative and competitive federalism.
  • In this regard an institutional mechanism must be evolved where important decisions are appropriately discussed with states to ensure no states is left behind in the development paradigm.

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