Cooperative and Competitive Federalism

Notice how much of the real machinery is executive rather than constitutional. That is the standing criticism of Indian cooperative federalism: the forum the Constitution provided was left unused for forty years, and the forums that did the work were created by Cabinet resolution and could be abolished the same way, as the Planning Commission was.

The GST Council as the working model

The Council under article 279A is the clearest instance of cooperative federalism written into the Constitution rather than improvised, and it is worth using as the worked example.

Both levels hold the same taxing power under article 246A; neither can carry a decision in the Council alone, because the Union's third and the States' collective two-thirds are each less than the three-fourths a decision requires; and the machinery is constitutional, not executive, so neither side can dissolve it. That is cooperation made structurally necessary rather than merely encouraged.

Facts. Union of India v. Mohit Minerals Pvt Ltd, decided 19 May 2022. Among the questions was whether the recommendations of the GST Council bind the Union and the States.

Held. They do not. The deletion of the proposed article 279B and the inclusion of article 279A(1) indicate that Parliament intended the recommendations to have persuasive value only, read with the objective of fostering cooperative federalism. Article 279A has no non obstante clause and article 246A is not subject to it; both legislatures have simultaneous power and article 246A envisages no repugnancy provision, so treating recommendations as binding edicts would disrupt fiscal federalism. It is not imperative that one federal unit must always possess a higher share in the power for the units to make decisions. The Government is nevertheless bound by the recommendations when exercising its rule-making power under the CGST and IGST Acts.

And the sentence to quote:

Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation.

Why it matters. It is the most important modern statement of what cooperative federalism means in India, and it corrects the usual misuse of the phrase. Cooperative federalism is not a duty to agree, and a State that refuses is not acting unconstitutionally. The Court gave contestation the same standing as collaboration.

Competitive federalism

The second phrase, and the one that has grown in official use.

The idea. States compete for private investment, for skilled people and for a reputation for good administration. The Union encourages this by publishing rankings and indices: ease of doing business, health, education, water management, and the aggregate development indices NITI Aayog produces.

The case for it. Comparison creates pressure to improve where central direction cannot reach, because the subjects are the States' own. A State that improves its administration attracts investment and is rewarded politically. It respects the division of powers, since nobody is being told what to do.

The case against it. Competition between unequal units entrenches inequality: a State that begins with better infrastructure attracts more investment and so improves faster. Competition for investment invites a race to the bottom in taxation, labour standards and environmental regulation. And a ranking published by the Union is a form of central influence over State subjects that is not accountable in the way legislation is.

How the two fit together. They are not opposites. Cooperative federalism concerns the relationship between the Union and the States, vertically. Competitive federalism concerns the relationship among the States, horizontally. A federation can be, and India is, both at once.

The new challenges, which is where the topic is going

The paper is called "New Challenges", and the following are the live ones for this topic. An answer that names them is answering the question that was set rather than the question that was set thirty years ago.

Delimitation and the southern States. Article 82 requires readjustment of the allocation of seats in the House of the People after each census, and the allocation has been frozen since 1976, most recently until the first census after 2026. When it is unfrozen, States whose population grew slowly, largely in the south, will lose relative weight to States whose population grew faster. Those States argue that they are being penalised for succeeding at a national policy. This is the most serious federal question India now faces, and it interacts with the 106th Amendment, whose commencement under article 334A waits on the same delimitation. See [The 106th Amendment, and Why It Has Not Started].

The narrowing of independent State revenue. After GST the States' own tax base is small, and the growth of surcharges and cesses outside the divisible pool reduces the share of what remains.

Central agencies operating within States. The Punchhi Commission recommended that a State's consent be required before central investigating agencies act within it, and the withdrawal of general consent by several States has made this a live constitutional dispute rather than a recommendation.

The Governor. Dealt with in [The Governor], and now the subject of two decisions in eight months.

Union territories with legislatures. The long litigation over the control of services in Delhi under article 239AA has produced a body of law about what a Union territory with a legislature actually is, and the question is not confined to Delhi.

A worked example

A commentator writes: "Cooperative federalism means the States must fall in line with national policy; a State that refuses is acting against the constitutional spirit." Assess that statement.

The description of the machinery is roughly right. Cooperative federalism does describe joint institutions and shared work: the Inter-State Council under article 263, the Finance Commission under article 280, the GST Council under article 279A, legislation by consent under article 252, entrustment under articles 258 and 258A, and, outside the Constitution, NITI Aayog and the centrally sponsored schemes funded under article 282.

The normative claim is wrong, and there is authority for saying so. In Mohit Minerals the Supreme Court held that the recommendations of the GST Council do not bind, precisely because treating them as binding edicts would disrupt fiscal federalism, and said that Indian federalism is a dialogue between cooperative and uncooperative federalism in which the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation.

So refusal is not unconstitutional. Contestation is given the same standing as collaboration. A State that declines a scheme, withholds consent under article 252, or votes against a recommendation in the Council is exercising a constitutional freedom, not breaching a duty.

Where the commentator has a point. Article 279A does make agreement structurally necessary: neither the Union's one-third nor the States' collective two-thirds reaches the three-fourths a decision needs. Cooperation is compelled by arithmetic, not by duty.

The distinction to draw. Cooperative federalism is vertical, between the Union and the States. Competitive federalism is horizontal, among the States. A federation can be both, and India is.

Quick revision

• Cooperative federalism is a description of practice, not a rule in the text: joint institutions, shared finance, consultation.
• Its constitutional instruments are articles 263, 280, 279A, 252 and 258; much of the real machinery has been executive and therefore abolishable.
• The GST Council is cooperation made structurally necessary: neither side can decide alone.
• Mohit Minerals: recommendations are persuasive, not binding, and Indian federalism is a dialogue between cooperative and uncooperative federalism, with contestation as legitimate as collaboration.
• Competitive federalism is horizontal, between States; the objection is that it entrenches inequality and invites a race to the bottom.
• The live challenges: delimitation, the shrinking State tax base, central agencies within States, the Governor, and Union territories with legislatures.

Test yourself

1. Why is dual federalism impossible in a modern State? Give three reasons.

2. List the constitutional instruments of cooperative federalism with their articles, and say why so much of the real machinery has been executive instead.

3. Why is the GST Council the clearest structural example, and what does the voting arithmetic compel?

4. Quote and explain what Mohit Minerals says Indian federalism is.

5. What is competitive federalism, and what are the two standard objections to it?

6. Name four live federal challenges and say why delimitation is the most serious.