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Competition between states to attract investment will boost India’s economy

For India to grow, a healthy balance between co-operation and competition between the states is the need of the hour 

September 20, 2022 / 10:43 AM IST
Representational Image.

Representational Image.

The debates surrounding the Vedanta-Foxconn deal have reignited the discussion around industrial development, the strategy of the state governments, and the role of the Centre. Since Independence, India has been accustomed to the State-directed developmental model, where the government decides the flow of investment through five-year plans. The use of license-permit raj, and planning decisions defying market logic led to severe misallocation of resources over the years. The resultant weakening of the economy, and inefficiency ultimately led to the Balance of Payment crisis which forced the economic reforms of 1991.

One of the main thrusts of the economic reforms was to move away from direct planning to indicative planning, and allow for greater play of market forces in the economy. The states were now free to attract private investments by offering incentives, and other support to the industry. With the scrapping of the planning commission by the Narendra Modi-led National Democratic Alliance (NDA) government, India buried a relic of the Soviet-inspired past that hindered economic growth with its market-distorting interventions.

The last decade has seen the rise of co-operative federalism in the realms of taxation reform, dispute resolution, and health and welfare. But it has also witnessed the emergence of competitive federalism regarding industrialization, and attracting private investment. With no central planning, either direct or indicative, to count upon, states increasingly realise that they must play a proactive role in encouraging economic development; and that it requires attracting more and more private investment in various sectors like manufacturing, tourism, financial services etc.

The state governments are compelled to improve their law and order, and administration to make frontline bureaucracy business-friendly, and reform rules and regulations to make legal framework compatible with economic and technological changes. They are also required to make their states an attractive destination for private investment by providing several incentives and concessions like land, subsidy etc., with the hope that resultant investment will raise the tax collection in future to a sufficient level.