Competitive Federalism

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.