Competing to grow: Why states must lead India’s next reform wave

Much of India's economic debate continues to treat 'Ease of Doing Business' as a national project. In reality, it is the everyday expression of federalism practised in a competitive sense. Investors choosing where to establish a factory or expand operations are rarely deciding between India and another country; they are deciding between Indian states. The speed of approvals, the availability of industrial land, the reliability of infrastructure, the predictability of regulation, and the responsiveness of public institutions increasingly determine where investment and jobs ultimately go.

This is competitive federalism in its most meaningful form. States are not competing through political slogans or fiscal demands on the Centre; they are competing through the quality of governance they offer to businesses and citizens alike. Where regulatory systems are efficient and predictable, capital follows. Where approvals are slow, compliance is fragmented, and administration is uncertain, investment looks elsewhere.

The next phase of India's economic reforms will therefore not be decided in New Delhi alone. It will depend on how effectively states use the constitutional powers already vested in them to create an environment where businesses can invest with confidence. 'Ease of Doing Business', correctly understood, is the substance of competitive federalism.

Where the friction lives

The Seventh Schedule to the Constitution locates the binding subjects of doing business predominantly in the State List and the Concurrent List. Land, industry, intra-state trade and commerce, and taxation of electricity are State List entries. Factories, labour welfare and electricity generation are Concurrent List subjects. Municipal governance sits with local bodies constituted under state law. Central reform of Union List statutes can define an outer envelope for doing business, but cannot compel a state pollution control board to process an application within a specified timeline, nor can it require a municipal corporation to sanction a building plan within one.

The Economic Advisory Council to the Prime Minister has argued in a working paper that factor-market reform, land, labour and natural resources, remains largely pending because it sits within state jurisdiction, and that the Seventh Schedule itself warrants re-examination.

The burden this places on an enterprise is substantial. A single manufacturing MSME operating within one state faces upward of 1,450 regulatory obligations a year, of which nearly a thousand are unique, at an annualised compliance cost of roughly ₹ 13 to ₹ 17 lakh. The obligations arrive across 48 registers, 59 categories of inspecting authority, and 486 imprisonment clauses embedded in the statute book, two-thirds of them within labour laws. India registered close to 9,331 regulatory changes in 2024-25, averaging 42 a day, roughly 90% of which touch MSMEs. The physical sequence a manufacturer must move through is equally instructive. Before construction begins, a

'Consent to Establish' must be obtained from the State Pollution Control Board. Once construction is complete, and before commercial production commences, a Consent to Operate is required from the same board, contingent on the commissioning of pollution-control systems. Occupancy Certificate, fire NOC and factory licence follow, each administered by a separate state department, each with a theoretical timeline which is considerably longer in practice. A public policy analysis of the Ministry of Commerce's own single-window portal records that of more than 7.1 lakh approvals applied for by October 2024, only 4.81 lakh had been granted, a description in effect of a single window that leads to multiple ones.

Some states have moved

A small number of states have built the administrative habits that consistent investment attraction requires. Gujarat accounts for roughly eight % of national GDP, retained its position as India's largest exporting state in 2024-25 with a share of approximately 26.6% of national merchandise exports, and supplies 46.16% of the country's chemical exports and between 65 and 70% of its denim production, from just under 6% of India's landmass. Haryana, with about 1.3% of India's land and 2.1% of its population, produces two-thirds of the country's passenger cars, half of its tractors, sixty per cent of its motorcycles, and contributes 7.1% of national GST collections. Neither state has achieved this through a single flagship policy.

The Gujarat Industrial Development Corporation kept industrial estates plotted and serviced well before investor demand materialised, and iNDEXTb provided firms with a single continuous institutional counterparty across successive chief ministers. Haryana's Enterprises Promotion Centre operates as a single window for industrial approvals, and its compact administrative geography permits the chief secretary to convene every approving department in a single room within days of an investor's first visit. Haryana's per capita income has risen from ₹ 1.06 lakh in 2011-12 to ₹ 3.53 lakh in 2024-25 at current prices, an increase of 232.9%, and Gujarat's per capita net state domestic product has grown at a compound annual rate of roughly 8.8% over the same period.

The evidence that state effort decides investment outcomes is now vivid, particularly in the semiconductor programme. Under the India Semiconductor Mission, twelve facilities have been approved. Gujarat holds six of them, and roughly three-quarters of approved capital, including Micron's assembly and test facility at Sanand worth US $ 2.75 billion and the Tata-PSMC fabrication plant at Dholera worth ₹ 91,000 crore. Assam has secured the Tata assembly and test centre at Jagiroad, financed in part by a 40% capital subsidy.

The pattern extends beyond semiconductors. Foxconn's Devanahalli iPhone assembly plant in Karnataka, on which the company has committed close to ₹ 20,000 crore, hired approximately 30,000 workers in the eight months following commencement, roughly 80% of them women, and is now on track to exceed Foxconn's own Sriperumbudur operation in Tamil Nadu. Ola Electric's lithium-cell gigafactory at Krishnagiri, the only operational such plant in India, sits in Tamil Nadu under a series of state MoUs. In each case, the marginal decision variable has been the same, namely the speed with which a state can convert intent into a serviced site, a functioning utility connection, and a set of enforceable clearances. Site selection committees within multinational corporations evaluate potential locations against operational metrics of this kind: the availability of serviced land, the reliability and cost of power, regulatory clearance timelines, water availability, and the credibility of state government commitments. The reputation and continuity of state administration weigh as heavily on these evaluations as any single incentive package.

The cost of standing still

The economic cost of administrative inertia is measured most accurately not in aggregate output but in the investment that a state fails to attract. Between October 2019 and June 2025, cumulative foreign direct investment equity inflows into Maharashtra amounted to approximately US $ 94 billion and into Karnataka US $ 63 billion, according to DPIIT records. The four leading recipient states together account for roughly 70% of all cumulative FDI over the period. States whose administrative systems have not been comparably reformed record smaller inflows, notwithstanding populations, land banks and mineral endowments that would in principle support far larger investment. The corresponding domestic pattern is visible in the pipeline of announced projects that fail to reach financial closure or physical commencement. State investment summits routinely announce memoranda of understanding that exceed a state's gross state domestic product several times over; the fraction of these that ground into operating capacity remains modest across most states, and the shortfall is concentrated in jurisdictions where clearances, land availability and utility connections continue to move slowly. The consequences of this shortfall are borne primarily by workers.

The Census of 2011 recorded an inter-state migrant population of approximately 5.4 crore, with the largest source populations concentrated in states that have historically attracted the least investment relative to their size. The direction of that movement has been consistent across a decade of subsequent labour market data. Workers migrate, in effect, toward jurisdictions where state administrations have made it possible for factories to be built and enterprises to expand. The point is not that some states have done poorly; it is that competitive federalism, once state administrations engage with it seriously, produces gains that compound, and inaction carries a corresponding compounding cost.

A template that works

India is not unfamiliar with the underlying mechanism. Under the Atmanirbhar Bharat package in 2020, the Union government permitted states additional borrowing of up to two per cent of gross state domestic product, contingent on progress against four specified reforms, of which the Business Reform Action Plan was one. The Special Assistance to States for Capital Investment scheme, launched the following year, extended a comparable principle to interest-free capital expenditure loans conditional on state-level reform. The Urban Challenge Fund announced in the 2025-26 Union Budget applies similar conditionality at the city level. What these instruments share is that they treat central fiscal transfers as instruments of behavioural change, and not merely as resource transfers.

Economies elsewhere have used the same mechanism at a considerably larger scale. Following the Hilmer Review of 1993, the Commonwealth of Australia and its states signed three intergovernmental agreements in April 1995 establishing the National Competition Policy. The Commonwealth made competition payments to states conditional on their implementation of agreed reforms in electricity, gas, water, road transport, and the review of anti-competitive regulation. Progress was assessed independently by the National Competition Council, and payments were released only where verification was satisfactory. States that failed to reform forfeited their share.

Approximately AUD $ 4.9 billion was disbursed between 1997-98 and 2005-06. The Productivity Commission's 2005 review concluded that the reforms had lifted Australian GDP by approximately 2.5 per cent, or roughly AUD $ 20 billion in 1993-94 prices. Australian per capita income rose from sixteenth in the OECD in 1990 to eighth by 2004. The mechanism that compelled a federation whose central government has no direct writ over state subjects to nevertheless compete on them was conditional fiscal transfers, independently verified and tied to state-level reform.

Rather than propose new instruments, the question is whether the levers already in use can be extended and deepened. Three directions are worth considering. The first is the broader application of conditionality already embedded in existing central financing schemes. The Atmanirbhar Bharat borrowing conditions covered a narrow set of reforms over a defined window. Applying a similar principle more systematically to a wider set of state actions, including land conversion, construction permits, factory consents, inspection burden and utility connections, would extend the mechanism's reach without designing a new one. Independent verification drawing on firm-side data rather than departmental self-reports would strengthen it further. The second is the coordination between central reform initiatives and state administrative machinery. The 2026 Uniform Consent Guidelines, the National Single Window System, and the Jan Vishwas framework each represent central action whose full effect depends on parallel state-level adoption. Much of the return on existing reform efforts now lies in that coordination. The third is the replication at the state level of decriminalisation exercises already conducted at the Union level. The Jan Vishwas framework has covered central statutes twice.

The majority of imprisonment clauses a manufacturing enterprise routinely encounters sit within state-administered laws, particularly in labour statutes. Whether these are addressed through a formal state-level parallel or through a systematic review of individual statutes, the direction of travel is clear.

The larger observation underlying these three directions is direct. Haryana's per capita income, at ₹ 3.53 lakh in 2024-25, is approximately 4.6 times Bihar's at ₹ 76,490. That absolute gap has more than tripled today. This divergence is not an accident of geography or endowment. It is the cumulative result of a competitive process in which some states have engaged seriously with the reform of their own administrative machinery, and others have not.

The next decade of Indian economic growth will therefore be determined less by any single new initiative of the Union government than by whether the states that have thus far declined to compete on this dimension choose to do so. Ease of Doing Business, correctly viewed, is not a technocratic reform agenda or a ranking exercise. It is the principal mechanism through which competitive federalism operates in India. The states that recognise this early will disproportionately shape the country's next phase of economic development.

Kartikey Agarwal is a Team Manager, Centre for Law, Policy and Governance, NFPRC Foundation, while Ankit Shrivastava is a Senior Associate, Centre for Law, Policy and Governance, NFPRC Foundation.

The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.