Giving a Boost to Healthy Economic Competition Between India’s States

Indian PM Narendra Modi, after taking over in 2014, has repeatedly underscored the need not just for ‘cooperative federalism’ but also ‘competitive federalism’ – healthy competition between states on economic policy issues — especially regarding drawing Foreign Direct Investment (one of the important steps taken in this direction was the introduction of the state wise Ease of Doing Business Rankings, by the Department for Promotion of Industry and International Trade). More attention has begun to be paid to these terms over the past decade, with several high-level state delegations going overseas to attract investments and several state governments hosting Investors Summits (the phenomena of sub-national actors – provinces, states, sub-regions becoming stakeholders in foreign policy is a global phenomenon now referred to as ‘para-diplomacy’).

The first phase of competitive federalism, pertaining to FDI, was in the early 2000’s when Chandrababu Naidu, then CM of United Andhra – now CM of Andhra Pradesh carved out of the bifurcation – and SM Krishna, then CM of Karnataka competed to make their respective states IT hubs. This has been highlighted by Rudolph and Rudolph in an article titled ‘Iconisation of Chandrababu: Sharing Sovereignty in India’s Federal Market Economy’ for the Economic and Political Weekly (2001). 

In the past decade, as mentioned earlier, states have been holding Investors Summits with an eye on drawing FDI. Apart from wooing potential investors from western countries, India’s state governments have begun to focus on East Asia (Japan, South Korea), South-East Asia and United Arab Emirates. While ‘competitive federalism’ is very much alive, some changes are likely to take place. First, states had begun to actively reach out to China, with high level delegations visiting (Chandrababu Naidu had visited China in 2015 and 2016 in his earlier stint as CM of the newly created state of AP). After tensions between both ever since 2020, due to the Galwan clashes, there is no scope for engagement between India’s state governments and China (while bilateral trade between both countries has remained high, investments from Chinese companies into India is being restricted).

Second, with improvement of ties between India and UAE, more states are trying to foster economic linkages with the Gulf nation. The Comprehensive Economic Partnership Agreement (CEPA) has given a fillip to ties between both countries and several states are trying to leverage the same. States like Maharashtra have already begun to benefit from the CEPA. 

Third, the methods of states reaching out to various countries has begun to change. While earlier, high level state delegations held roadshows overseas now investors summits held by state governments, in partnership with other countries, as well as visits by envoys to state capitals have also emerged as important tools.

Competitive Federalism in the South 

With Chandrababu Naidu back in the saddle as Andhra Pradesh CM, ‘competitive federalism’ is likely to gain momentum. In his previous tenure (2014-2019) he had reached out pro-actively to China, Singapore and Japan. Japan and Singapore are involved in the development of Amaravati as the capital of AP. Karnataka is also trying to aggressively draw more investments. Karnataka’s Minister MB Patil sought support for the state’s Semi-conductor policy. He also led a delegation to South Korea and Japan (June 24-July 5) and met with several investors. While the previous TRS Government led by K Chandrashekhar Rao (CM), in Telangana, was pro-active in reaching out to investors, the current state government led by Revanth Reddy has also been engaging with several countries for strengthening economic linkages. 

Competitive Federalism in other regions 

In western India too, states are beginning to compete with each other for FDI. It would be pertinent to point out, that several investments made in Maharashtra were shifted to Gujarat this included – Foxconn-Vedanta, Air-bus. Several finance companies have also begun to show interest in the Gujarat International Finance Tec-City (GIFT city) as opposed to Mumbai. 

Apart from the above states, states in the Eastern and North-Eastern region have also been pro-actively reaching out to potential domestic and overseas investors. West Bengal has been highlighting its geographical location as a gateway between the rest of India and the North-East. States in the North-East have also been seeking to leverage their geographical location and have tried to emerge as stakeholders in India’s Act East Policy. 

Here it would be pertinent to point out, that there have also been proposals for setting up representative offices of states in embassies overseas. 

In conclusion, competitive federalism is a healthy trend, but state governments should also seek to learn from each other’s experiences. It is also important, that healthy competition between states is de-hyphenated from politics.

[Abu Dhabi-based firm, M42, has expressed an interest in investment in Andhra Pradesh’s healthcare sector, said Health Minister Y. Satya Kumar. Image credit: Twitter]

The views and opinions expressed in this article are those of the author.