Last month, when Google unveiled its plans for its largest Artificial Intelligence (AI) data centre outside of California, U.S., in Andhra Pradesh, Chief Minister N. Chandrababu Naidu gleefully claimed bragging rights — a global tech titan choosing his State for a marquee investment over regional rivals such as Tamil Nadu and Karnataka. The jubilation in Visakhapatnam, Andhra Pradesh, could be heard across State borders. In Tamil Nadu, a former All India Anna Dravida Munnetra Kazhagam Minister chided the Dravida Munnetra Kazhagam-led Stalin government for failing to woo Google, although it is headed by a true-blue Tamil. Across another border, a Karnataka Minister suggested, with barely concealed envy, that Andhra Pradesh had lured Google with “extravagant subsidies”.
Strip away the politics, though, and what you see is something profoundly healthy — competition among States for investment — a potentially powerful engine for growth. For the first time in decades, Chief Ministers are not queuing in Delhi’s corridors of power, but are in boardrooms of multinationals and corporate conclaves, persuading investors that India’s best destination is their State.
Central patronage to competitive federalism
To appreciate this shift, cast your mind back to pre-1991 India. For four decades after Independence, capital investment was largely a political decision made in New Delhi. The “commanding heights” of the economy were occupied by bureaucrats who dispensed patronage through licences, permits and quotas. The country’s industrial geography was determined by political calculation rather than market forces. The Centre decided what should be produced, how much should be produced, and, crucially, where it should be produced.
States, on their part, vied for investment not by wooing potential investors but by wooing politicians in Delhi.
The reforms in 1991 changed that. By dismantling industrial licensing and opening India to trade and investment, liberalisation shifted power — at least partly — from the Centre to the States. One of the unstated hopes then was that economic freedom would unleash competition among States to attract investors through better infrastructure, governance and policy stability.
That transformation took time. For much of the next two decades, investment decisions remained Delhi-centric. Public enterprises continued to dominate and State bureaucracies were slow to adapt to a more entrepreneurial era.
The promise of reforms is now being realised. The rise of competitive federalism has been one of the quiet revolutions of the past decade. States today compete not just with land, concessional utilities and tax breaks, but with reliability — predictable policy, faster clearances, skilled labour and good governance.
Andhra Pradesh, Tamil Nadu and Karnataka vying for global tech mandates — from Google to Micron — is evidence of a maturing federal economy. When Foxconn debated where to locate its electronics facilities, States from Maharashtra to Tamil Nadu made pitches at the highest level. When Vedanta and Foxconn announced their semiconductor joint venture, both Maharashtra and Gujarat lobbied intensely, with Gujarat eventually breasting the tape. The tussle between Tamil Nadu and Telangana over electric vehicle (EV) manufacturing hubs underscored how investment courting has become a professional, high-stakes exercise.
Experience in other federations
India is not unique in this. Healthy subnational competition is a defining feature of all successful federations.
In the United States, when Amazon announced plans for a second headquarters, over 200 cities submitted proposals offering tax breaks, infrastructure support and workforce commitments. Although critics called it a subsidy race, it forced cities to improve governance and transparency. Many of the proposals later formed blueprints for urban renewal projects even where Amazon did not invest.
In Germany, the federal Länder (States) compete to attract high-tech industries. Bavaria’s transformation into an innovation hub — home to BMW, Siemens and a cluster of “Mittelstand” firms — owes much to policy agility that other German States have since emulated.
Australia and Canada show similar patterns. Australian States compete to attract mining, clean energy and education investments, while Canadian provinces such as Ontario and British Columbia vie for technology and film production hubs. The result in all these cases is a virtuous cycle: competition that spurs innovation, efficiency and reform.
India’s own States are now entering that league. The best-performing ones are magnets for both capital and ideas, setting governance benchmarks that others must meet or exceed.
The Centre, to its credit, has encouraged this shift. Rankings on ease of doing business, startup promotion and export readiness have intensified competition in constructive ways. Investors, once daunted by India’s bureaucracy, now see its regional diversity as a positive — multiple entry points, each with distinct strengths. Andhra Pradesh’s ease of doing business, Punjab’s entrepreneurial verve, Tamil Nadu’s skilled workforce, Gujarat’s infrastructure, Jharkhand’s mineral base and Uttar Pradesh’s vast untapped potential — each is part of a mosaic that together makes India a federation of opportunity.
Competition, of course, carries risks. It should not degenerate into a race to the bottom. States must guard against reckless subsidies or indiscriminate land giveaways that undermine fiscal stability. The smarter path lies in competing through competence and credibility, not concessions.
Healthy rivalry also fosters imitation of best practices. When one State reforms single-window clearances, others follow. When one launches an EV policy, others sharpen theirs. A Haryana success provokes a Himachal response; a Madhya Pradesh reform triggers a Chhattisgarh recalibration; an Odisha initiative spurs West Bengal to better it. This dynamic, cross-State learning is driving policy diffusion across India — a hallmark of vibrant federalism. The global manufacturing and services landscape is now in churn. As multinationals diversify away from China, they seek scale, predictability and credible governance. The “+1” in the China+1 formula must be earned — State by State. No investor lands in “India” in the abstract; they land in Bengaluru, Bhopal or Bhubaneswar. In that sense, India competes globally through its States.
The new federal compact
In just three decades, India has moved from a permission-based economy to a persuasion-based one. States no longer queue for Delhi’s patronage; they campaign with CEOs and investors, pitching their case with confidence and data.
This is a transformation of mindset as much as of policy. The Andhra Pradesh-Tamil Nadu-Karnataka exchanges over Google’s data centre may sound like parochial bickering, but they actually signify a maturing federal compact. States now view every investment not as central patronage but as a conquest earned through effort.
Every time Andhra Pradesh secures a tech data centre, or Gujarat wins a semiconductor plant, or Uttar Pradesh’s electronics parks around Noida light up with new investment, or West Bengal breathes life into its ports and power grids to attract industry, the benefits ripple far beyond State borders. Each success strengthens supply chains, builds skills, and deepens India’s industrial fabric. The bottom line: In the race for investment, every State that wins for itself, also wins for India.
Duvvuri Subbarao is a former Governor, Reserve Bank of India (2008-2013)
