Since the 1991 LPG reforms, India’s economy shifted from centralised control to market-driven competition, redefining Centre–State relations and making states key drivers in attracting investment.

The Shift in Economic Policy

• Pre-1991 – Command Economy: India functioned under a Licence Raj marked by bureaucratic control and centralised decision-making. 
  • The Centre decided what, where, and how much to produce, while state leaders sought permissions and patronage, not investors.
• Post-1991 – Persuasion Economy: The LPG reforms shifted India from a permission-based to a persuasion-based economy, empowering states to compete for investment and drive growth through reforms and incentives.
• Centre as Facilitator: The Centre now acts as a facilitator, promoting cooperative federalism via NITI Aayog and indices like Ease of Doing Business and Export Readiness, encouraging competition and transparency.
• China Plus One Opportunity: With global firms diversifying under the “China Plus One” strategy, Indian states can leverage this moment by improving infrastructure, governance, and regulatory credibility to attract manufacturing investments.

Nature of Competition In Current Scenario

• Competence-Based Rivalry: The new economic federalism reflects Adam Smith’s concept of the “invisible hand,” where competition encourages efficiency, innovation, and better governance among states.
• Key Factors for Investors: Investment decisions are now based on good governance, policy predictability, efficient single-window clearance systems, and the availability of a skilled workforce, rather than just tax incentives.
• Examples: Google’s AI Data Centre in Andhra Pradesh sparked rivalry with Tamil Nadu and Karnataka.
  • Maharashtra and Gujarat competed for the Vedanta-Foxconn semiconductor plant, which went to Gujarat
  • Tamil Nadu and Telangana are in close contest to become India’s leading Electric Vehicle (EV) hubs

Benefits of Inter-State Competition

• Economic Growth and Innovation: Competition among states fosters innovation, policy experimentation, and infrastructure development, creating a virtuous cycle of investment and growth.
• Policy Diffusion: Successful state policies often inspire replication nationwide — as seen in Madhya Pradesh’s labour reforms, Odisha’s disaster management model, and Haryana’s sports promotion initiatives.
• Improved Governance: As states compete to attract investors, they are incentivised to improve governance, reduce red tape, and enhance transparency in public service delivery.
• Decentralisation of Economic Power: The reforms have reduced over-dependence on Centre, enabling states to shape their own economic destiny based on local strengths and resources.
• Enhanced National Competitiveness: Healthy inter-state competition strengthens India’s overall economic ecosystem, making the country more attractive for global investors.

Risks of Inter-State Competition

• Fiscal Stress: Intense rivalry can push states to offer excessive subsidies such as free land, power, or tax exemptions to lure investors, straining state finances.
• Unequal Development: Wealthier or industrially advanced states may continue to attract more investment, widening regional inequalities with poorer states.
• Short-Termism in Policy: To outcompete others, some states may prioritise quick gains or populist incentives over long-term sustainability and fiscal responsibility.
• Environmental Concerns: In the rush to attract industries, environmental norms and safeguards might be compromised, leading to ecological damage.
• Policy Volatility: Frequent changes in incentives or industrial policies to outbid rivals can create uncertainty for investors and discourage long-term commitments.

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Conclusion

While inter-state competition has intensified, it has made India’s economy more dynamic, decentralised, and globally competitive. The success of individual states in attracting investment ultimately fuels India’s collective growth and national development.

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