Competitive Federalism in India

In a departure from the past, the present NDA government is stressing on the need to leverage the potential of cooperative and competitive federalism for achieving all round inclusive development in India. It is in this context we need to examine the concepts of cooperative and competitive federalism and the issues surrounded them.

Background

India opted for quasi-federal structure after independence. Although the term “federal” has not been mentioned in the constitution but the working of Indian democracy is essentially federal in structure. However, it is the practical working style of the federalism, which brought the concepts of centralised federalism, confrontational federalism, cooperative federalism and competitive federalism in India. After independence from 1947 to 1967, India experienced the centralised federalism. It is largely attributed to the single party domination at the central level. As the states were also ruled by same party, hardly there were any issues between centre and states. From 1967 to 1990, India witnessed confrontational federalism due to the emergence of other party governments at the state level. Since 1990, the state level political parties started becoming part of central governments and this has led to the development of cooperative federalism. The central government has to listen to the states problems and concerns. The present NDA government has been focussing on the new concept of competitive federalism along with cooperative federalism for higher growth of the country.

What is competitive federalism?

Competitive federalism is a concept where centre competes with states and vice-versa, and states compete with each other in their joint efforts to develop India.  As a concept, it is more suitable to the countries like US, where it is in-built in their constitution. In competitive federalism, states would compete with each other over a broad range issues to provide citizens various services in a hassle-free manner. The policy of one-size-fit-all is replaced with different policies of various states based on the own priorities with in the state. Each state will design their own policies for development of the state with self-fund. The concept also promotes discipline among the states.

Competitive federalism in India

To promote the concept of competitive federalism in India, the union government started taking several measures in that direction.

The union government has replaced the sixty-four year old Planning Commission by establishing NITI Aayog. The Planning Commission was created in 1951 as part of centralised planning. The Planning Commission’s one-size-fit-all concept never considered the diversities of different states in the country and there was one way flow of policy from union to states. The NITI Aayog is formed to empower and strength the state governments. The one way flow of policy is replaced with participation of the states in policy formulation. The state governments will not have to look towards centre for policy guidance and fiscal resources because now the share of fiscal resources for each state will be transferred to be spent by the state governments autonomously based on their own priorities and the priorities will also be decided by the state on their own. However states should work within the context of shared national objectives.

The NITI Aayog will also provide for the appointment of Regional Councils with specific mandates for specific time periods. These councils could help to create cooperation among two or more states facing a common set of problems or amicably settle disputes. These councils could catalyse joint projects involving travel, transportation and tourism across member states.

In February 2015, the union government in pursuit of competitive federalism has tabled in parliament the recommendation of the Fourteenth Finance Commission of India. The centre has increased the share of states in central tax revenue from the earlier 32% to 42%. The government also declared that the states will have freedom to plan their expenditure based on their own priorities and the states are free to change centrally sponsored schemes. This is a long-time demand from the states. But along with autonomy states should observe fiscal prudence and discipline. Competitive federalism follows the concept bottom-up approach as it will bring the change from the states.

The concept of competitive federalism is driving the Indian states to rush in for reforms to make processes easy for doing business in their state and expediting the pending project clearances. States are also encouraged to streamline the procedures to attract more investment and establishment of single window registration for obtaining licences.

Obstacles in the process of competitive federalism

While the competition between states, reflected in the World Bank’s Ease of Doing Business index, has generated a lot of enthusiasm, this must be a continuing exercise. There are only few well-off states like Maharashtra, Gujarat, and Tamil Nadu which are competing. The present inter-state competition in attracting investment is too early to determine whether it will really encourage competitive patterns of investment on a continuous basis.

There are varied economic patterns in different states. There are deficit states or the backward regions or the states under debt. Those states should not be treated on par with the well-off states. The states like West Bengal, Bihar, Orissa, and Assam have protested against the uniform approach in funding because of their special situations in which the central government has to provide special funds to these states. Without special funding these states cannot imagine their participation in competitive federalism.

Though the states are provided with financial independence, it is a fallacy to assume that all the states would perform uniformly in the process of development because while some states have favourable factors like skilled labour, capital and infrastructure, innovative service industries other states lagging behind. For that states with unfavourable climate still need the help from Centre.

The proposed GST law may help some of the less productive States to raise the revenue as the tax will be a destination-based levy. But t he opposition of few well-off states with respect to revenue loss in implementation of GST system points that there is lack of will in participating in the process of competitive federalism.

Presently, the union government is taking unilateral decisions on issues like international treaties, WTO obligations, environmental issues, and decisions on FDI liberalisation in various sectors of economy etc. To protect the interest of affected states, an institutional mechanism must be evolved where important decisions are appropriately discussed with states.

While appointing the governors at the state, the decisions must be politically unbiased and states should not view the governors as the spies from centre.

Cooperative Federalism and Competitive Federalism

The concepts of cooperation and competition federalism seem to be contradictory and cannot exist together. Cooperative and competitive federalism are two sides of the same coin. The competition alone cannot give the best results it is competition with cooperation that will drive the real change. To bring competition, the centre should cooperate with the states by providing necessary autonomy in their policy making and allocating them the required funds to spend based on their own priorities. The cooperation forms the ground base on which competition can begin. There has to be a balance between cooperative and competitive federalism.

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