Competitive Federalism refers to the concept in which states compete among themselves and also with the Centre for benefits. This idea gained significance in India after the 1990s economic reforms in a free-market economy when states were trying to woo private investment in their territory. 

Different states try to make their own policies in a competing spirit to 

• Attract more investment, 
• Provide more jobs to its residents.
• Increase the standard of life of people living in its territory. 

Competitive Federalism follows the bottom-up approach as it brings change from the states. 

• In India, the government replaced the Planning Commission by establishing NITI Aayog, with one of the mandates to develop Competitive Federalism in India.
• Indian states are making legal reforms for ease of doing business in their state and attract private companies. E.g., Labour Reforms
  • Gujarat: Making it more difficult for utility workers to go on strike 
  • Karnataka: Allows establishments to be open longer and allows women to work at night.
  • Rajasthan: Allow companies employing up to 300 staffers to lay off workers or close down without getting the government’s prior approval
• Different states are organizing their investment summits to woo investors to invest in their states. E.g., 
  • Gujarat’s – Vibrant Gujarat 
  • Punjab’s – Progressive Punjab 
• DIPP is releasing the Ease of Doing Business Report of States

The impact of competition for attracting investments to the states can be understood at two levels.

• On the one hand, states are under pressure to provide good governance and manage their finances prudently. 
• On the other hand, they are aware of the negative impact of many of these reform measures on their electoral popularity. 

The concept of federalism is where the governments at various levels, i.e., central, state, and local levels, work in synergy with each other for the larger public interest, bypassing the differences between them. 

1. Proclamation of Emergency under Article 356: Post-1977, the arbitrary use of Article 356 to impose President’s Rule in states has been a persistent issue. 
2. Union Dominance in Legislative Matters: The Union’s dominance in legislating over the concurrent list and its interference in the state list are also in special cases, such as while ratifying international agreements. 
3. Governor Appointments without State Consultation: States have no say in the appointment of the Governor.
4. Centrally Sponsored Schemes: The imposition of centrally sponsored schemes under the ‘One-Size-Fits-All’ approach has been a source of tension. States often find themselves obligated to implement schemes without considering regional variations, leading to inefficiencies. 
5.  Fiscal Responsibility and Budgetary Management (FRBM) Act: Forcing states to follow the dictates of the Fiscal Responsibility and Budgetary Management (FRBM) Act before the basic public services of ordinary citizens in States are met.
6. Deployment of Paramilitary Forces without State Consent: Instances of deploying paramilitary forces in states without their consent, such as the use of central forces in Jammu and Kashmir
7. Enquiries against Chief Ministers for Personal Reasons: The initiation of inquiries against Chief Ministers for personal or political reasons has been a source of tension. 
8. Non-Devolution of Powers to Local Governments: The reluctance of states to devolve powers to local governments, particularly in matters under Schedule XI & XII, remains a hurdle. 

• Consensus Building: Encouraging dialogue and collaboration among states and the central government. For Example, The Goods and Services Tax (GST) was implemented after extensive deliberations and consensus-building among states.
• Reactivation of the Inter-State Council: Strengthening the constitutional body will facilitate cooperative decision-making between the Centre and the States.
• Protection of State Interests: Ensuring that on issues such as international treaties, World Trade Organisation obligations, or environmental concerns, the interests of affected states are safeguarded.
• Greater devolution of power to states: Ideally, the Union should have only those powers which the state can’t handle and require national unity in the form of matters like defence, communication, foreign policy, etc.  
• Formation of NITI Aayog after scrapping Planning Commission. NITI Aayog has increased the participation of states in its functioning & decision-making.  
• States’ Involvement in Governor Appointments: Allowing states to have a say in the appointment and removal of Governors to enhance mutual respect
• Reform of Schedule XI & XII: Abolish Schedule XI & XII & instead work towards a new local list outlining activities and sub-activities under Local Bodies within Schedule 7 itself. 

The idea of federalism as an organizing principle between different levels of a state is quite old. Greek city-states had it. Lichchhavi kingdom of northern India in the 6th century BCE is a celebrated example of a republican system.  European Union is a recent example of the idea of federalism being implemented at a trans-national level.  

• The term “federation” is derived from the Latin word “foedus,” meaning treaty or agreement.
• A federation can be formed in two ways.
  • Integration, i.e. Coming Together Federation: When two or more weak states come together to form a strong union, e.g., USA.
  • Disintegration, i.e. Holding Together Federation: When a Big unitary state is converted to a federation by granting autonomy to provinces, e.g., Canada and India.
• Federal Polity is a system of governance in which sovereignty is constitutionally shared between the centre & states.

Federal system is adopted so that

The federal system is adopted so that 

• States & their diversity can flourish with autonomy. 
• For multicultural societies, federalism is an attractive option.  It enables minorities to become majorities in sub-national units  
• Political Motives
  • The Federal System provides security from external & internal threats.
  • Additional central assistance, when required, can be provided by the centre in the Federal System.
• Economic Motives
  • The Federal System provides access to the larger national market 
  • Transfer of resources from other states in case of an underdeveloped state. 
• India has a Federal system, but the term federation is mentioned nowhere in the constitution; instead, Article 1 describes India as a Union of states

Centralized administration often refuses to decentralize, thinking it will undermine its integrity. But the opposite is true. Decentralization leads to stability, and those who refuse to decentralize often crumble under their weight.

• India is holding together federation different from the USA, which is coming together. 
• The holding together model was adopted for the sake of the unity of the country & national integration – The constituent assembly prescribed the federalist model so that the country could face the challenges of Centrifugal forces effectively. 

Features of the Indian System of Federation

• Dual Polity: India follows the concept of a dual polity, with the Union at the Centre and the States at the Periphery.
• Division of Powers: There is a well-defined division of powers between the Union and the States, elucidated in the 7th Schedule of the Constitution. 
• Supremacy of the Constitution: The Indian Constitution establishes the supremacy of the Constitution itself. All laws must conform to its provisions, and any law inconsistent with the constitution is declared void. 
• Rigid Constitution: The constitution is rigid in its structure, and the method of amendment is also rigid. Provisions concerned with federal character can be amended by joint action of state and centre.
• Independent Judiciary: The judiciary in India is independent and not under the influence of the Union government. 
• Bicameralism: The Indian Parliament follows a bicameral system, where the Rajya Sabha represents the states of the Indian Federation, and the Lok Sabha represents the Indian people as a whole. 
• Asymmetric Federalism: India has Asymmetric Federalism in the sense that the rights and responsibilities of all the states are not the same. The special nature and needs of certain regions are defined constitutionally via various sub-clauses of Article 371

Architect of the Indian Constitution, Baba Saheb Ambedkar, believed that for a culturally, ethnically and linguistically diverse and heterogeneous country like India, federalism was the ‘chief mark’, although with a strong unitary bias. This understanding, which was shared by Pt. Jawaharlal Nehru, Sardar Patel and other national leaders, stood at sharp variance with Gandhi’s idea of federalism, who was a votary of decentralization and devolution of power to the lowest unit of Panchayat. 

All federal systems, including the American system, are placed in a tight mould of federalism. No matter the circumstances, it cannot change its form and shape. It can never be unitary. On the other hand, the Indian Constitution can be both unitary and federal according to the requirements of time and circumstances. In normal times, it is framed to work as a federal system. But in times of distress(e.g. National Emergency), it is designed to make it work as a unitary system.

India’s constitutional framework raises the intriguing question: Is India a federal or unitary state? The answer lies in the nuanced understanding of the features embedded in the Indian Constitution.

• Although there are large unfederal features that are essentially incorporated for the unity and integrity of the country, it is equally important to recognize that all the fundamental federal features are present in the Constitution. The presence of strong unitary elements has led some scholars to categorize India as a “Quasi-federal” state. 
• Although  Article 1 states that India is a Union of states, this doesn’t mean India isn’t a federation. No particular significance is to be attached to the word union because the word union is used in the Preamble of the USA, too, and citing this, BR Ambedkar said the description of India as a Union, although it is a Federation, does no violence to its usage. 
• At the time of Independence, traumatized by the partition and violence, the Constituent Assembly wanted to ensure the unity and integrity of the new nation. Hence, the framework departed significantly from all existing models of federalism.  

When India adopted this system, In the absence of any track record of India in federalism and the tendency to compare all federal states with the US model, jurists found it difficult to certify that the system was indeed federal. It was therefore declared ‘Quasi-Federal’. This description is no longer valid today because the federal principle has taken root and further developed on Indian soil.  

After the 73rd & 74th Amendments & formation of the Panchayati Raj, a new era was started in the chapter of Indian Federalism.