For decades, the blueprint for economic growth in emerging markets has been defined by a fierce, often zero-sum competition. In India, this manifests as a “race to the bottom,” where state governments vie for foreign direct investment by offering increasingly aggressive tax breaks and land concessions, often at the expense of long-term fiscal health.
Arvind Panagariya, the former Vice Chairman of NITI Aayog and a seasoned economist, argues that this model has reached its limit. In recent assessments of India’s economic trajectory, Panagariya suggests that the current frameworks for cooperation—both between India’s internal states and between nations in the Global South—are outdated and insufficient for the complexities of a post-pandemic, digitally driven global economy.
The core of the issue is the distinction between competitive federalism and cooperative federalism. While competition can spur efficiency, Panagariya contends that when states compete merely on incentives rather than on the quality of governance or infrastructure, the national economy stagnates. The goal, he argues, should be a shift toward a framework where states collaborate to raise the baseline of productivity for the entire region.
Beyond the ‘Race to the Bottom’
In the current Indian landscape, states often operate as silos. When a multinational corporation looks to set up a manufacturing hub, states frequently compete by slashing regulatory requirements or offering subsidies that erode the tax base. This creates a fragmented investment landscape where the “winner” is not necessarily the state with the best workforce or most efficient logistics, but the one willing to offer the deepest discount.
Panagariya posits that a cooperative framework would instead focus on shared infrastructure and synchronized policy. Rather than fighting over a single factory, states could collaborate on regional “industrial corridors” that benefit multiple jurisdictions. By aligning land-use policies and labor regulations across state lines, India could create larger, more attractive economic zones that mimic the seamlessness of a single market, reducing the friction for global investors.
This shift is not merely an administrative preference but a fiscal necessity. As India aims for higher GDP growth targets, the burden on state exchequers to fund these incentives is becoming unsustainable. A cooperative model shifts the value proposition from “what can we give you for free” to “how can we provide a superior ecosystem for your business to grow.”
The Blueprint for Cooperative Federalism
To transition from competition to cooperation, Panagariya and other policy experts suggest a few critical pivots in how the central and state governments interact:
- Knowledge Transfer Networks: Establishing formal mechanisms where high-performing states in specific sectors (e.g., Tamil Nadu in automotive or Karnataka in tech) mentor lagging states through policy blueprints and personnel exchange.
- Joint Infrastructure Funding: Moving toward more co-funded projects that span multiple states, reducing the risk for any single entity and ensuring connectivity.
- Standardized Digital Public Infrastructure (DPI): Leveraging India’s success with UPI and Aadhaar to create uniform digital governance frameworks across all states, eliminating the “digital divide” between different provincial administrations.
| Feature | Competitive Federalism | Cooperative Federalism |
|---|---|---|
| Primary Driver | Incentives and tax breaks | Systemic efficiency and shared goals |
| Investment Goal | Attracting a specific project | Building a regional economic ecosystem |
| Policy Approach | Divergent, state-specific rules | Harmonized, predictable regulations |
| Outcome | Short-term gains / Fiscal strain | Long-term stability / Scalable growth |
Scaling the Model to the Global South
Panagariya’s critique extends beyond India’s borders. He argues that the traditional framework of international cooperation—largely a “North-to-South” model where developed nations provide aid or prescriptions to developing ones—is obsolete. The Global South, comprising nations across Africa, Asia, and Latin America, requires a new framework of “South-South” cooperation.
The argument here is that developing nations face similar structural hurdles: inadequate infrastructure, volatile currency markets, and a need for rapid digitalization. By sharing “leapfrog” technologies—such as India’s Digital Public Infrastructure—developing nations can bypass the expensive, legacy systems used in the West.
This international cooperation is not about charity, but about creating new markets. When one nation in the Global South stabilizes its trade framework or digitizes its land records, it creates a blueprint that others can adopt, collectively raising the creditworthiness and attractiveness of the entire region for global capital.
Stakeholders and Constraints
The transition to this cooperative model faces significant headwinds. For state leaders, the political incentive is often the “ribbon-cutting” ceremony of a new factory, regardless of whether that factory was won through unsustainable subsidies. Moving to a cooperative model requires a shift in political capital, where leaders are rewarded for systemic improvements rather than isolated wins.
the central government must balance its role as a coordinator without infringing on the constitutional autonomy of the states. The tension between the Union and the States remains a primary constraint in implementing a truly harmonized framework.
Note: This analysis is based on economic policy frameworks and should be viewed as informational. It does not constitute financial or investment advice.
The next major checkpoint for these policy shifts will be the upcoming quarterly reviews by NITI Aayog, where the government is expected to refine its state-level indices to reward cooperative outcomes over purely competitive metrics. These updates will provide a clearer picture of whether India is moving toward a synchronized economic engine or remaining a collection of competing entities.
Do you believe state-level competition drives innovation, or does it hinder national growth? Share your thoughts in the comments below.
