Competitive federalism

Polity & Governance glossary

Topic: Federalism and Centre-State Relations · NCERT: Beyond NCERT

Meaning

Competitive federalism is a model where states compete with each other, and sometimes with the Union, for investment, funds and better development results. Public rankings and rewards push them to govern better.

It matters because India now uses many state rankings and performance-based rewards to drive reform. But the same competition can widen the gap between rich and poor states.

Explanation

How it works

  • Rankings:
  • A national body scores every state on a set of indicators and publishes the results.

  • A low rank brings bad press and political pressure, so states try to improve.

  • Rewards:

  • Some money from the Union depends on how well a state performs.

  • Example: the Finance Commission (Article 280) uses some tax-sharing criteria that reward good performance.

  • Investment:

  • States compete to attract private industry.

  • They do this by making it easier to start and run a business, which is called "ease of doing business".

  • What states compete over:

  • investment;
  • funds;
  • results in health, schools, exports, governance and state finances.

The main rankings

Index Body Since What it ranks
Business Reform Action Plan (BRAP) DPIIT (formerly DIPP), with the World Bank at first 2015 Ease of doing business reforms
SDG India Index NITI Aayog 2018 Progress on the UN Sustainable Development Goals
State Health Index NITI Aayog (with the Health Ministry and World Bank) 2018 Health outcomes and governance
School Education Quality Index (SEQI) NITI Aayog 2019 School learning, access and equity
Good Governance Index DARPG 2019 Governance in sectors such as farming, health and justice
Export Preparedness Index NITI Aayog 2020 How ready states are to export
Fiscal Health Index NITI Aayog 2025 Health of state finances
  • Fiscal Health Index 2025:
  • It ranks 18 major states on five sub-indices: quality of expenditure, revenue mobilisation, fiscal prudence, debt index and debt sustainability [1].
  • Odisha came first with 67.8, followed by Chhattisgarh (55.2) and Goa (53.6) [1].

Mixing competition with cooperation

  • Aspirational Districts Programme (January 2018):
  • It covers 112 of the most backward districts.
  • It follows the "3Cs": Convergence of schemes, Collaboration between Union, state and district officers, and Competition among districts through monthly ranks.
  • So it mixes cooperative and competitive federalism. Officers cooperate on resources, and districts compete on results.

Limits and risks

  • Race to the bottom:
  • States offer tax holidays (years without tax), cheap land and cheap power to attract industry.
  • Before elections, they also compete with freebies (free goods and services).

  • Both weaken state finances.

  • Wider regional gaps:

  • Rich, coastal and industrial states win most of the investment.

  • Poorer states fall further behind, so competition is not between equals.

  • The Union stays strong:

  • States must accept Union conditions and pay a share to get money for centrally sponsored schemes (CSS). These are schemes that the Union designs and part-funds, and the states carry out.
  • This limits how freely states can compete.

In the Constitution and practice

  • No article names it. Competitive federalism is a way of working, not a constitutional term. It works inside the federal set-up of the Constitution.
  • Article 280 (Finance Commission):
  • The 15th Finance Commission (2021–26) gave weight to demographic performance (lower fertility) and tax effort when sharing Union taxes with states.

  • This rewards states that perform better.

  • NITI Aayog (2015):

  • It replaced the Planning Commission and runs most of the state rankings.

  • Unlike the Planning Commission, it has no power to give grants. So it can push states through rankings, but it cannot reward them with money.

  • DPIIT runs BRAP (since 2015), and DARPG runs the Good Governance Index (since 2019).

  • Courts:
  • In Union of India v. Mohit Minerals (2022), the Supreme Court held that GST Council recommendations are persuasive, not binding.
  • It called federalism a "dialogue" that includes both cooperative and uncooperative forms.
  • So states may disagree and bargain. They are not just junior partners.

Don't confuse with

  • Cooperative federalism: the Union and states work as partners toward shared goals, for example through the Inter-State Council (Art. 263) or the GST Council (Art. 279A). Competitive federalism makes states rivals for investment and rank.
  • Pooled sovereignty (GST Council): the Union and states give up part of their separate tax powers and decide GST rates together. This is cooperation, not competition.
  • Bargaining federalism: states negotiate with the Union for money and powers. In competitive federalism, states mainly race against each other.
  • Confrontational federalism: open conflict between the Union and states over Governors, central agencies and funds. This is not rule-based competition on outcomes.

Prelims Hooks

  • BRAP, the ease of doing business ranking, is run by DPIIT (since 2015). It is not run by NITI Aayog, which is a common trap.
  • The Good Governance Index is run by DARPG (since 2019). The SDG India Index is run by NITI Aayog (since 2018).
  • Fiscal Health Index 2025 (NITI Aayog) covers 18 major states with five sub-indices. Odisha ranked first with 67.8 [1].
  • The Aspirational Districts Programme (2018) covers 112 districts. Its "3Cs" are Convergence, Collaboration and Competition, so it mixes both models.
  • The 15th Finance Commission (Art. 280) rewarded demographic performance and tax effort. This is a competitive element in tax sharing.
  • Mohit Minerals (2022): GST Council recommendations are not binding, and federalism is a "dialogue" that includes both cooperative and uncooperative forms.

Mains Points

  • Balancing competition and cooperation:
  • Rankings such as BRAP, the SDG India Index and the Fiscal Health Index push states to improve.
  • But they can start a race to the bottom on tax breaks and freebies.

  • The better path is to compete on outcomes and cooperate on resources, as the Aspirational Districts model does.

  • An unequal contest:

  • Rich, coastal and industrial states win most of the investment, so regional gaps grow.
  • Rankings should measure improvement over time, not just the final score.

  • Performance rewards (Art. 280) should be weighed against the needs of backward states.

  • Rhetoric versus practice:

  • States cannot compete freely when CSS money comes with conditions and NITI Aayog has no power to give grants.
  • Reforms:
    • fewer and more flexible CSS;
    • a real role for NITI Aayog in sharing funds;
    • regular Inter-State Council meetings, as the Sarkaria and Punchhi Commissions recommended.

Related concepts

Read more

Sources

  1. 1NITI Aayog launches the "Fiscal Health Index 2025" (PIB)pib.gov.in · tier 1