Based on the relationship between the central and state government–the concept of federalism is divided into- Co-operative federalism and Competitive federalism.

• In Cooperative federalismthe Centre and states share a horizontal relationship, where they “cooperate” in the larger public interest.
  • It is an important tool to enable states’ participation in the formulation and implementation of national policies.
  • Union and the states are constitutionally obliged to cooperate with each other on the matters specified in Schedule VII of the constitution.
• In Competitive federalismthe relationship between the Central and state governments is vertical and between state governments is horizontal.
  • This idea of Competitive federalism gained significance in India post 1990s economic reforms.
  • In a free-market economy, the endowments of states, available resource base and their comparative advantages all foster a spirit of competition. Increasing globalisation, however, increased the existing inequalities and imbalances between states.
  • In Competitive federalism States need to compete among themselves and also with the Centre for benefits.
  • States compete with each other to attract funds and investment, which facilitates efficiency in administration and enhances developmental activities.
  • The investors prefer more developed states for investing their money. Union government devolves funds to the states on the basis of usage of previously allocated funds.
  • Healthy competition strives to improve physical and social infrastructure within the state.
• Competitive federalism is not part of the basic structure of Indian constitution. It is the decision of executives.

Towards Competitive Federalism

• The acceptance of the 14th Finance Commission’s recommendations, apart from significantly enhanced devolution ( devolution of 42% of the divisible pool to states during 20015-16 to 2019-20, against 32% suggested by the previous commission), enables states to design and implement programmes better suited to their needs.
• Competitive federalism is not yet embraced by all the states. But a handful of states are clearly taking steps to strengthen their business environments, including initiating difficult reforms on land acquisition and labour flexibility.
• Federalism is no longer the fault line of Centre-State relations but the definition of a new partnership of team India.
• The Central government has promised decentralisation of power and minimum interference in the State affairs.
  • With the roll out of the GST, this federal structure is further cemented.
  • Government has abolished Planning Commission and replaced it with NITI Aayog. One of the mandates of the NITI Aayog is to develop competitive federalism. Under it;
  • State governments would not look towards centre for policy guidelines and fiscal resources.
  • Share of states in central tax revenue has been increased from 32% to 42% after the recommendation of the finance commission.
  • States have freedom to plan their expenditure based on their own priorities.
  • States would work with centre on a shared vision of national objectives.
  • Restructuring of centrally sponsored schemes.
  • Financial sector bailout programme under UDAY scheme.
  • Swachh Bharat Ranking system.
  • Most of the state now organizes investors meet to showcase facilities in their state to attract business and investment. This has lead to improvement in business environment in various states.
  • State wise Ease of Doing Business rankingto build a huge sense of competition.

Cooperative and competitive federalism are not mutually exclusive. They have the same basic principle underlying i.e. development of the nation as a whole. Cooperative and competitive federalism may be two sides of the same coin as the competition alone cannot give the best results, it is competition with cooperation that will drive the real change. Centre’s support would be required by some states to participate in competitive federalism. Strong states make strong nation and to realise this vision, it requires a “Team India” approach to work for India’s development.