As the Modi government sets about implementing the key recommendations of the 14th Finance Commission’s report, the NITI Aayog, should get started on one of the first tasks set for it by Prime Minister Modi—to forge a model of ‘competitive and cooperative’ federalism for India.
With devolution of more economic power to the states, the stage is set for the Aayog to design an institutional mechanism—syncing the growth and governance agenda of the Centre with those of India’s 29 economically, culturally and linguistically diverse states. The task may be less daunting than it seems.
The economic geography of India can be mapped into ‘clusters’—with India’s bulk of minerals, agricultural produce, product/service markets being localised around specific geographies of the subcontinent. For example, coal and iron-ore deposits are concentrated in states of Chhattisgarh, Jharkhand and Odisha, cotton and sugar production in Gujarat and Maharashtra, tea production in Assam and West Bengal, technology markets in Karnataka and Andhra Pradesh. Economic clusters may even exist within a state—for example, the Mumbai and Pune regions of Maharashtra have developed into India’s premier financial and automobile hubs, respectively.
Such geographic localisation of economic activity (often across contiguous states) influence and facilitate the development of a network of firms, related economic actors and institutions on regional lines, allowing individual firms to benefit from ‘economies of agglomeration’.
Agglomeration benefits—accruing from labour market pooling, proximity to input and output markets, and knowledge spillovers between firms ‘clustered’ together—unleash powerful synergies and efficiencies among such firms, markedly boosting the overall economic performance of states/regions housing such economic clusters.
In-fact a McKinsey report, titled India’s Economic Geography in 2025: States, clusters and cities, identifies 49 economic clusters which are likely to account for 77% of India’s incremental GDP from 2012 to 2025.
The idea that the economic map of a nation is characterised by ‘clusters’ was first documented by Professor Michael Porter (Harvard Business School) in his book The Competitive Advantage of Nations in 1990. Porter’s academic work has influenced several nations, especially those legislatively organised on federal-state lines, to structure regional developmental activities using a ‘cluster paradigm’. The Aayog should explore if such a paradigm can be used to remodel the structure of India’s economic federalism.
The importance of a cluster paradigm emanates from the fact that although competition in the global economy is often viewed as being between nations, it is really between high-performing economic regions. For instance, within the global technology markets, competition between the US and India is in reality competition between firms located in the technology hot-spots of the respective nations—San Francisco or Austin in the US with Bangalore or Hyderabad in India. Therefore, the success of Make-in-India is dependent upon the relative competitiveness of India’s technology clusters of Bangalore and Hyderabad.
While these regional technology hubs compete for foreign investments and talented human resources, India’s federal government and the respective state governments (of Karnataka and Andhra Pradesh) can coordinate cluster-specific strategies—directing public investments to jointly develop research centres, educational and training institutions, incubators, industrial parks and necessary infrastructure, focused on the specific requirements of the technology cluster. Collaboration of resources and investments between states to fortify their strongest sectors would also allow them to save funds to develop potentially competitive ones.
Using the cluster paradigm as a policy tool can provide other ancillary benefits too. For example, fixing India’s labour laws remains a priority for the Modi government. Given the political sensitiveness of such reforms, states with similar industrial clusters can be nudged to appropriately amend their labour laws—to boost productivity of the state’s economy and provide more local jobs to the state’s electorate—while the federal government maintains a status-quo. Even the Modi government’s ‘Skill India’ programme can yield better results by orienting appropriate skill training initiatives to the local employment requirements of an agricultural or industrial cluster. Cooperation among states will also provide a platform to exchange and document industry specific best-practices, which can guide other state governments interested in developing similar economic clusters.
The Niti Aayog can institutionalise such state level networking by identifying and organising cluster-specific development councils (CDCs) with membership for representatives of the federal and state governments (within whose territory a cluster is localised). Such CDCs can then regularly meet to discuss and coordinate cluster specific strategies, including on lines of – tax or regulatory environment, availability of skilled human resources, access to relevant technology, capital availability and physical infrastructure. CDCs should also coordinate with business leaders from within a cluster to help better understand the cluster’s assets, needs, and challenges. These CDC discussions will help the central government to effectively disburse funds to states, create project milestones and monitor results.
Further given that the factors for development of specific sets of industrial clusters, across different states, may not be uniform, CDCs can provide the federal government with an institutional framework to tailor macro-level federal schemes/programmes to the micro regional industrial requirements—thereby enhancing a scheme’s overall effectiveness. Even the Modi government’s current efforts to improve the overall ‘doing-business’ rankings for India will be better served if government policies to enhance business-friendliness are calibrated to the local needs of an industrial cluster.
With the BJP (or a member party of the NDA) currently ruling over the entire the belt of Indian states from Punjab to Maharashtra and from Gujarat to Jharkhand—covering an area localising much of the country’s agricultural growth and economic prosperity and accounting for almost 37% of India’s GDP—the Aayog has a historic opportunity to effectively design and quickly implement the new structure of Indian economic federalism.
By Avirup Bose
The author is a former expert consultant to the Competition Commission of India