Competitive and Cooperative Federalism | 12 Feb 2025

Source: BL 

Why in News? 

The government has emphasized various initiatives to foster competitive and cooperative federalism and its benefits. 

What is Competitive and Cooperative Federalism? 

• Competitive Federalism: 
  • About: It is a system of horizontal (state-state) and vertical (Centre-state) competition to attract investment, improve governance, and enhance services. 
  • Implementation: The 15th Finance Commission (FC) has introduced indicators like tax & fiscal efforts to evaluate state performance, that determines fund allocation. 
  • State-Level Reforms: Examples of state-specific welfare schemes that operate alongside central schemes include: 
    • Rythu Bandhu (Telangana): A direct income support scheme for farmers. 
    • KALIA (Odisha): A farmer assistance scheme complementing the central PM Kisan Yojana. 
    • Vibrant Gujarat Summit: Focused on attracting global investment. 
• Cooperative Federalism: 
  • About: It fosters Centre-state collaboration for effective governance, balanced development, and shared best practices. 
  • Implementation: FC’s performance-based fund allocation encourages states to work in alignment with national SDGs.  
    • Key examples include the Goods and Services Tax (GST), Ayushman Bharat, and PM-KISAN, that require Centre-state cooperation. 
    • The All India Services (IAS and IPS) enable a uniform governance structure across states. 
    • The States Reorganization Act, 1956 established five Zonal Councils for regional cooperation, facilitating discussions on inter-state issues. 
• Constitutional Provisions: 
  • 7^th Schedule: The Seventh Schedule of the Indian Constitution divides legislative powers between the Centre and states for effective governance. 
  • Full Faith and Credit Clause (Article 261): It ensures recognition of public acts, records, and judicial proceedings across states, promoting legal and administrative uniformity. 
  • Inter-State Council (ISC): The ISC, established under Article 263, resolves intergovernmental disputes and became a permanent body on 28th May 1990, per Sarkaria Commission recommendations. 
  • Inter-State Water Disputes (Article 262): Parliament has the power to adjudicate inter-state water disputes.

What are the Benefits of Competitive and Cooperative Federalism? 

• Competitive Federalism: 
  • Economic Efficiency: It allows states to design policies tailored to their local needs, leading to increased investment, job creation, and overall economic growth. 
  • Policy Innovation: States compete by experimenting with governance models, regulatory frameworks, and public service delivery systems, leading to innovative policy solutions and best practices. 
  • Fiscal Discipline: It strengthens fiscal discipline, as states must balance revenue generation with expenditure management to attract businesses and investors, ensuring responsible fiscal policies. 
  • Public Service Quality: Competition among states pushes them to improve public service quality like infrastructure, education, healthcare, and other essential services to retain skilled workers and businesses. 
• Cooperative Federalism: 
  • Balanced Regional Development: It helps in reducing regional disparities and ensuring equitable development across states by fostering collaboration between central and state governments. 
  • Facilitates Resource Sharing: Joint initiatives in areas such as infrastructure, disaster management, and environmental protection ensure efficient resource utilization and prevent unnecessary duplication of efforts. 

What are Various Initiatives to Promote Competitive and Cooperative Federalism? 

• Competitive Federalism: 
  • Investment Friendliness Index (IFI): IFI will be launched in 2025 to provide a transparent benchmark to assess states' investment attractiveness. 
    • Public rankings and tying rankings to financial access will create reputational incentives, electoral and economic pressure to enhance governance. 
  • PPP Project Pipelines: Budget 2025-26 requires ministries and states to plan three-year PPP projects, boosting competition to attract private sector investment efficiently for infrastructure. 
  • Business Reform Action Plan (BRAP): BRAP drives state-level business reforms through rankings and implementation.  
    • The 2024 BRAP will emphasize compliance reduction, decriminalization, and alignment with the World Bank’s B-READY program. 
  • Finance Commission (FC): FC promotes cooperative and competitive federalism by ensuring equitable financial distribution while incentivizing governance, fiscal discipline, and economic performance. 
• Cooperative Federalism: 
  • National Manufacturing Mission (NMM): NMM offers a unified policy framework, execution roadmaps, and governance mechanisms to drive state competition in ease of doing business, infrastructure, and investment attraction. 
  • India Infrastructure Project Development Fund (IIPDF): The IIPDF promotes cooperative federalism by offering financial and technical support, ensuring states of all fiscal capacities can equitably contribute to national infrastructure development. 

What are the Challenges in Competitive and Cooperative Federalism in India? 

• Competitive Federalism: 
  • Quasi-Federalism: The Union holds superior legislative powers through residuary list and precedence in the concurrent list, often overriding state authority and creating conflicting federalism. 
  • Taxation Disputes: Most taxation disputes have been resolved in favor of the Centre due to constitutional provisions that grant it more control over revenue distribution. 
    • GST reduced state taxation powers, surrendering octroi, entry, luxury, and entertainment taxes. 
  • Unchecked Competition: In India, competition often takes a Tughlakian turn,  States undercut each other with reckless subsidies while bureaucratic hurdles remain firmly intact that negates reforms benefits. 
    • Unchecked competition can lead to excessive tax breaks, fiscal mismanagement, and subsidy dependence, risking stability.  
  • Conflict Between FC and GST Council: Article 269A(1) empowers the GST Council to recommend tax-sharing for inter-state trade, but Articles 270(1A) and 270(2) states that the taxes levied under the GST laws will be shared as per recommendation of the FC, not the GST Council. 
    • This imbalances both cooperative federalism (GST) and competitive federalism (FC). 
• Cooperative Federalism: 
  • Inequitable Distribution of Central Tax Revenue: States like West Bengal, Assam, Bihar, and Odisha argue that uniform funding ignores economic disparities and seek special financial aid for growth and investment. 
    • Wealthier states attract more investment due to better infrastructure, skilled labor, and capital, while weaker states lag behind. 

Way Forward

• Enhancing the Role of NITI Aayog: NITI Aayog should prioritize micro-level planning and collaborate with states to tailor policies, addressing regional economic disparities effectively. 
  • States can establish their own NITI Aayog-style institutions to design and implement policies suited to local needs. 
• Strengthening ISC: ISC should be a permanent body for resolving disputes on taxation, resource-sharing, and governance. States must have a voice in WTO obligations, treaties, and inter-state trade. 
• Addressing Economic Disparities: Policies should be framed in a way that considers the specific economic strengths and weaknesses of states.  
  • E.g., Jharkhand should attract mining and manufacturing investment, while Kerala must build a high-end service industry. 
• Strengthening Councils: FC and GST Council need clear roles to avoid tax-sharing conflicts, while the judiciary should ensure fairness in Centre-State relations. 
  • FC can curb excessive freebies by implementing a conditional grants framework.