Why cooperative and competitive federalism is the secret to India's success

Competitiveness is an idea that has stood the test of time. From early macroeconomic ideas of comparative advantage and competitive advantage, our understanding of the determinants of competitiveness has evolved considerably. More recently, the concept of national competitiveness and regional competitiveness has come into the mainstream.

India can only achieve its ambitious growth targets by enhancing competitiveness at all levels of government. As the literature on competitiveness notes, there exists a powerful connection between economic and social development – improving competitiveness requires investment in both. This, in turn, requires coordination of our economic and social policies across various levels of government.

Consider India’s experience with the Goods and Services Tax (GST), for example. To implement this reform consensus among states had to be built. Now, we have the GST Council, with states as equal members who are part of national fiscal policy.

Agriculture, an area which remains unreformed in India, offers a similar picture. The Indian constitution has placed agriculture in the domain of state governments. Again, to institute reforms, coordination and consensus-building are required to unlock the agriculture market in India. NITI Aayog has played a vital role in bringing agriculture reform to the fore. This led to the Prime Minister establishing a “high-powered committee of chief ministers” to recommend reform in Indian agriculture markets.

While the coordination of policies across various levels of government requires cooperation, the role of fostering a sense of competition among sub-national governments cannot be ignored.

We have seen many success stories in this regard – take India’s improvement in the World Bank’s Ease of Doing Business (EoDB) Index. We have jumped 65 positions in the EoDB rankings. Given our federal structure, states have led the institution of many reforms. This was made possible through the creation of an EoDB Index for Indian States and the release annual rankings to indicate areas in which they are lagging. This sense of competition prompted corrective action and made India a much easier place in which to do business. It also speaks volumes that while the World Bank’s EoDB Index only considers Delhi and Mumbai when assigning India's scores, these states do not come top of India’s index.

Another major success story featuring collaboration between states is our Aspirational Districts Programme (ADP). We identified 115 laggard districts in terms of socio-economic outcomes and instituted a programme with convergence, collaboration and competition as the core tenets. Again, states are the main drivers behind this programme, working with central government officers to detect “low-hanging fruit” opportunities for immediate improvement.

As part of the programme, we set 49 key performance indicators covering sectors such as health and nutrition, education, agriculture and water resources, and financial inclusion and skill development. We consciously assigned a higher weighting to education, health and nutrition parameters to recognize that human capital development is of equal importance to physical capital in fostering competitiveness.

We publish delta rankings every quarter, showing the best and worst-performing districts and the results are encouraging. Several districts have managed to raise their health, education and nutrition outcomes since the programme was started almost 18 months ago. Similarly, in a push for sustainable development, NITI Aayog recently released the second rankings of states on the Composite Water Management Index (CWMI).

Only through working with states can India’s development goals be realized. While the policy model in the past five years has empowered states, we now need to take these reforms to the next level. Empowering our cities through implementing the 74th Constitutional Amendment is the next necessary step in building India’s national competitiveness as it will allow for greater accountability, transparency and independence in decision-making to local governments.

There are several lessons that emerge from India’s experience. Fostering a sense of competition among sub-national governments is perhaps the biggest discovery. By publishing rankings and rewarding top performers, several states and districts have driven reform at the ground level. The competitive spirit has been encouraged by naming the best performers and shaming the worst. Since these rankings are in the public domain, the accountability of both elected officials and administrators has risen. This has led to good governance being equated with good politics.

The importance of working towards a common goal is another crucial finding. For example, we have targets of reaching a $5 trillion economy, transforming the 115 aspirational districts and doubling our exports. These common goals are a prerequisite in the design of state-specific interventions. For example, many states will have to invest in physical infrastructure and undertake reforms in agriculture and labour.

The specificity of interventions and empowerment of officials to design innovative interventions are two further lessons. Through the ADP we have identified several best practices, which are shared with other districts for study and possible replication. These best practices can only emerge when young officers at the district level are encouraged to be bold and innovative with their ideas to achieve our national goals.

At a broader level, state-specific strategies for development are needed. Top-down planning has not produced the desired results and India’s system of developing five-year plans has ended. We now have a 15-year vision document, a seven-year strategy document and a three-year action agenda. Having published The Strategy for New India @ 75, with extensive input from state governments, NITI is working with several states to prepare state-specific development strategies. A guiding principle behind these strategies is that local strengths need to be employed.

The next finding is that real-time data is essential to unlock bottlenecks and achieve results. Robust monitoring and evaluation systems are needed so that blockages can be identified, potential solutions deliberated and the results monitored. India’s success stories in fostering competitive federalism have been backed by a robust data collection, validation, monitoring and evaluation framework. The ADP mentioned earlier is one such example of the use of real-time data. Through the Development Monitoring and Evaluation Office (DMEO), NITI Aayog has prepared a comprehensive Output-Outcome Monitoring Framework (OOMF) that defines, monitors and evaluates government schemes in terms of outcomes. It was recently adopted in the 2019-20 budget to strengthen outcome-based monitoring.

Instituting a system of cooperative and competitive federalism has been a hallmark of India’s policy-making in the past five years and has achieved considerable results. Cooperative and competitive federalism are complementary ideas that will drive India’s growth story in the coming decades.