OPINION | India’s states hold the key to Viksit Bharat

Urbanisation, which will shape India’s economic future, is fundamentally a state and local governance challenge.

India’s development debate has long carried a quiet illusion. We speak of economic reform as if it were designed and delivered from Delhi, measured in national budgets and announced in central policy documents. Yet the India that grows, builds and competes does so elsewhere — in state capitals negotiating investment, in districts clearing projects, and in cities struggling to translate ambition into functioning infrastructure. The next phase of India’s economic rise will depend less on national declarations and far more on the competence of its federal system.

As India moves toward the ambition of becoming a developed economy by 2047, this distinction becomes critical. The next phase of growth will depend less on central announcements and more on the capacity of states to execute reforms, attract investment and build institutions that deliver predictable governance. In a country of India’s scale and diversity, national transformation cannot be centrally administered. It must be constructed through the accumulated successes of states and regions that convert opportunity into productivity.

The scale of this reality is often underestimated. State governments together account for nearly two-thirds of India’s public expenditure and carry primary responsibility for sectors that shape everyday economic outcomes, including health, education, agriculture, policing, and much of infrastructure implementation. The centre may design policy frameworks and mobilise national resources, but the quality of delivery depends overwhelmingly on state-level administrative capability.

India therefore speaks of itself as one economy, but in truth it is many economies stitched together through a common constitutional and market framework. The differences across these regional economies are striking. Some states have built diversified industrial bases and global supply chain linkages. Others remain dependent on agriculture or low-productivity services. These disparities reflect geography, policy choices, institutional capacity and historical investment patterns that have compounded over decades.

Unequal Capabilities, Shared National Ambition

The economic geography of India reveals a federation of distinct development models. States such as Tamil Nadu and Gujarat have built strong manufacturing ecosystems anchored in industrial corridors and export linkages. Karnataka has leveraged technological capabilities to emerge as the country’s innovation hub. Maharashtra combines financial depth with industrial capacity. Telangana has used administrative agility to attract large technology investments.

These successes are not accidental. They reflect differences in policy continuity, infrastructure quality, regulatory clarity and administrative responsiveness. Investors evaluating India today frequently examine states as much as the country itself. Industrial projects are negotiated with state governments, logistics corridors are built across state territories, and labour and land administration often fall within state jurisdictions.

This competitive federalism has become one of India’s most powerful engines of growth. When states compete to improve governance and investment climates, the national economy benefits from experimentation and policy diffusion. Successful models are replicated, administrative practices evolve and reform momentum spreads across regions.

Yet this potential remains constrained by structural tensions within India’s federal architecture.

Fiscal Federalism Under Strain

Fiscal relations between the Union and the states have become a recurring source of debate. The Constitution provides for a sharing of central tax revenues, and the current Finance Commission framework allocates 41 percent of the divisible pool of taxes to states. However, the growing use of cesses and surcharges by the Union government has effectively reduced the shareable revenue base, since these levies fall outside the divisible pool.

At the same time, the introduction of the Goods and Services Tax created a unified national market but also centralised significant fiscal authority within a joint council where the centre retains substantial influence. For many states, the end of GST compensation has intensified concerns about revenue stability and fiscal autonomy.

These issues are not abstract accounting disputes. They directly affect the ability of states to finance infrastructure, strengthen public health systems, expand urban capacity and invest in human capital. Development requires predictable fiscal space. When states face uncertainty over revenue flows, long-term planning becomes difficult.

Institutional coordination presents a second challenge. National policies often interact unevenly with the administrative capacities of different states. Implementation outcomes vary widely, not necessarily because policies are flawed but because governance capability differs significantly across regions.

Harmonising Without Homogenising

India’s federal challenge therefore lies in reconciling two realities. The country requires a coherent national economic framework that ensures macroeconomic stability, regulatory consistency and a unified market. At the same time, development outcomes depend on regional initiative and local administrative strength.

The solution does not lie in weakening the Union or fragmenting policy authority. Rather, it lies in strengthening the capacity of states within a cooperative framework where the centre provides strategic direction while states retain the flexibility to design context-specific solutions.

Industrial policy offers a useful illustration. The Union government can define national priorities such as semiconductor manufacturing, green energy or advanced electronics. Yet the success of these initiatives depends on states that provide land, infrastructure, skilled labour and efficient approvals. A central blueprint without capable state execution remains only a declaration of intent.

Similarly, urbanisation, which will shape India’s economic future, is fundamentally a state and local governance challenge. Cities generate the majority of economic output, yet municipal institutions remain financially and administratively constrained. Strengthening state and city governance may ultimately matter more for India’s productivity than any single national reform.

India’s diversity therefore needs to be treated as an economic asset rather than an administrative complication. Different regions possess different capabilities. Some specialise in manufacturing, others in services, agriculture, logistics or technology. A mature federal system allows these capabilities to flourish while integrating them within a common national framework.

India may eventually need a deeper institutional mechanism for centre–state economic coordination. The GST Council demonstrated that cooperative decision-making across governments is possible. Similar institutional forums for infrastructure planning, industrial policy coordination and urban development could transform federal competition into structured collaboration.

The ambition of Viksit Bharat by 2047 cannot be realised through central direction alone. It will emerge from a federation where states are empowered to compete, innovate and build institutions that inspire confidence among citizens and investors alike.

India remains one economy. But it is also a combination of regional engines whose combined momentum determines the nation’s walk ahead. India will succeed not when every state looks the same, but when every state becomes strong enough to contribute its distinct strengths to the national project.

The task before policymakers is not to erase these differences but to harmonise them into a coherent national strategy. In that balance between unity and diversity lies the true test of India’s federal future.

(Srinath Sridharan is Author, Policy Researcher & Corporate Advisor, Twitter: @ssmumbai.)

Views are personal, and do not represent the stand of this publication.