Inter-State Competition as a Catalyst for India’s Economic Growth

Context:

• India is witnessing an intensification of inter-State rivalry as States compete to attract private investment, marking a decisive shift from centralized allocation to competitive federalism.

• This trend reflects deeper structural changes since the 1991 economic reforms, with States emerging as key drivers of growth, policy innovation, and industrial expansion.

Key Highlights:

Recent Investment Triggers

• Google announced plans to set up its largest Artificial Intelligence (AI) data centre outside California in Andhra Pradesh, intensifying competition among States.

• States such as Tamil Nadu, Karnataka, Maharashtra, and Gujarat are aggressively competing for investments in:

  • Electronics manufacturing

  • Electric Vehicles (EVs)

  • Semiconductors and data infrastructure

Shift from Central Patronage to State Competition

• Pre-1991 scenario:

  • Investment decisions were centralized in New Delhi

  • States relied on political lobbying and Central licenses

• Post-1991 liberalization:

  • Industrial licensing dismantled

  • States empowered to shape their own industrial and investment policies

Features of Competitive Federalism

• States now compete on:

  • Policy stability and predictability

  • Ease of doing business

  • Speed of clearances

  • Quality infrastructure

  • Availability of skilled labour

• Competition has moved beyond:

  • Mere land allocation and tax incentives

  • Towards institutional competence and credibility

Role of the Central Government

• The Centre promotes competition through:

  • Ease of Doing Business rankings

  • Startup ecosystem assessments

  • Export readiness and logistics indices

• These rankings incentivise States to improve governance standards without direct Central allocation.

Global & Comparative Perspective

• Federal economies like the United States, Germany, Australia, and Canada show that:

  • Healthy subnational competition boosts innovation and efficiency

• As firms pursue the China+1 strategy, Indian States must offer:

  • Scale

  • Predictable regulation

  • Reliable governance

Risks & Cautions

• Editorial warns against:

  • Reckless subsidies

  • A “race to the bottom” on fiscal incentives

• Sustainable competitiveness requires:

  • Fiscal prudence

  • Long-term capacity building

Policy Diffusion & Federal Vibrancy

• Successful State policies are increasingly replicated across States, encouraging:

  • Cross-State learning

  • Policy diffusion

• States now actively campaign with CEOs and investors, signalling a shift from:

  • Permission-based economy → Persuasion-based economy

National Impact

• State-level investment wins:

  • Strengthen supply chains

  • Build local skills

  • Deepen India’s industrial ecosystem

• Benefits extend beyond individual States to the entire national economy.

Key Concepts Involved:

• Competitive Federalism: Inter-State competition to attract investment through better governance.

• Liberalization (1991): Shift of economic power from Centre to States.

• China+1 Strategy: Global diversification of supply chains creating opportunities for Indian States.

UPSC Relevance (GS-wise):

GS 2 – Polity & Governance

• Evolution of Indian federalism

• Centre–State economic relations

GS 3 – Indian Economy

• Investment-led growth

• Industrial policy and supply chains

• Role of States in economic reforms

GS 1 – Post-Independence India

• Impact of 1991 reforms on political economy

• Structural transformation of Indian federalism

Prelims Focus:

• Competitive federalism

• China+1 strategy

• Role of States in investment promotion

Mains Enrichment:

• Examine how competitive federalism balances growth, equity, and fiscal responsibility.

• Discuss whether inter-State competition strengthens or fragments Indian federalism.