Syllabus: issues and challenges pertaining to the federal structure
Context
- Google’s decision to build its largest AI data centre in Andhra Pradesh triggered political reactions across southern States.
- This reflects growing inter-State competition for global investments.
Shift from Patronage to Competitive Federalism
- Before 1991, investment decisions were centralised in New Delhi, guided by political patronage.
- Industrial geography depended on licences, permits, and quotas controlled by the Centre.
- States competed by courting political leaders, not investors.
- The 1991 economic reforms dismantled licensing and shifted power partly to States.
- Liberalisation encouraged States to attract investment through infrastructure, governance and policy stability.
- Competitive federalism became prominent in the last decade, transforming India’s economic landscape.
Evidence of Emerging Competition
- States compete using land, utilities, tax incentives, skilled labour and faster clearances.
- Andhra Pradesh, Tamil Nadu and Karnataka are aggressively pursuing global tech investments.
- Gujarat and Maharashtra competed to host the Vedanta–Foxconn semiconductor project.
- Tamil Nadu and Telangana engaged in rivalry for electric vehicle manufacturing hubs.
Global Parallels
- The U.S. witnessed strong competition when Amazon invited bids for a second headquarters.
- German Länder compete for high-tech industries, with Bavaria becoming an innovation hub.
- Australia and Canada show similar competition for mining, clean energy and technology investments.
Benefits of Inter-State Competition
- Creates a virtuous cycle of innovation, efficiency and reform.
- Best-performing States become magnets for capital and ideas, raising governance standards.
- Centre’s rankings on ease of doing business, startup promotion and export competitiveness encourage constructive competition.
- State strengths—such as Tamil Nadu’s skilled labour or Gujarat’s infrastructure—create multiple entry points for investors.
Risks and Safeguards
- Competition must not become a race to the bottom through reckless subsidies.
- States should compete through competence, credibility and governance, not excessive concessions.
Conclusion
- India has shifted from a permission-based to a persuasion-based economy.
- Each State-level investment strengthens national supply chains and industrial capacity.
- When a State wins investment, India wins collectively, deepening a maturing federal compact.
Q- What is meant by competitive federalism? How has it influenced Centre–State relations in India? (10 Marks)