Competitive federalism can both help and distort industrial investment. Examine this with examples.

Competitive federalism means States compete with one another for capital, jobs and reforms within the Union framework. DPIIT's Business Reforms Action Plan (BRAP) builds this competition into policy by assessing States on regulatory reforms such as single-window clearances [1]. In the China+1 era, global firms choose a State, not "India". That makes the competition both a driver of investment and a source of distortion.

How competitive federalism helps

• Reform race: BRAP 2020 named Andhra Pradesh, Gujarat, Karnataka, Tamil Nadu, Telangana and others as "Top Achievers". This pushed lagging States to copy their land and approval reforms [1].
• Ecosystem bundle: Firms want land, power, quick approvals, skilled workers and suppliers together. Tamil Nadu's Sriperumbudur (Foxconn) and Hosur (Tata Electronics) clusters show how State capacity turns central incentives into factories.
• Multiplier for central schemes: PLI–LSEM drew about ₹20,587 crore of investment against a ₹7,000 crore target. Smartphones became India's top export item in FY 2025-26 [2]. These gains were concentrated in States that had prepared the ground.
• Policy laboratories: State electronics and industrial policies act as experiments, and other States copy the ones that succeed.

How it distorts

• Rich get richer: Capital follows existing clusters. Coastal, skill-rich States build on their lead while eastern and central States fall behind, which widens regional inequality.
• Race to the bottom: Competing tax holidays and cheap land and power drain State finances. They can also dilute labour and environmental safeguards.
• Shallow, assembly-led growth: Bidding with subsidies attracts assembly rather than deeper manufacturing. NITI Aayog puts domestic value addition in electronics at only about 15–18% [3]. ECMS (2025) now has to fill the component gap in PCBs and camera modules [4].
• Dependence on anchor firms: Vietnam's FDI-led model specialised in final assembly run by foreign firms with weak local linkages [5]. Indian clusters built around one or two anchor firms face the same risk.

Competitive federalism helps when States compete on governance and harms when they compete on giveaways. The way forward is to combine it with cooperative federalism. The Centre should link future incentives to value addition, as NITI Aayog's component-led strategy recommends [3]. It should also build supplier parks around anchor firms and use infrastructure support to help lagging States catch up. If States compete on the whole ecosystem rather than on subsidies, the result can be balanced regional growth in line with SDG 9.