Answer: Cooperative federalism is a concept of federalism in which national, state, and local governments increasingly interact cooperatively and collectively to solve common problems. The Indian model of federalism is predominantly ‘cooperative’ as laid down by the Supreme Court in State of Rajasthan v. Union of India,1977.

Areas of Conflict

• Issues around resource sharing: Shrinkage of divisible pools adversely affects Centre-State relations.

○  For instance, as per the 16th FC recommendations, many southern states are on the losing side of their share of tax resources.

• Homogenisation of social sector schemes: Owing to their unique socio-economic conditions and varying levels of development, the needs and priorities of States in the social sector differ significantly.

○  For instance, coastal states like Tamil Nadu might prioritize port development schemes i.e., Sagarmala but States like Rajasthan might concentrate on water management schemes i.e., Jal Jeevan Mission.

• Functioning of regulatory institutions: Regulatory institutions operate under the purview of the central government but their functioning can influence the power dynamics between the centre and the states.

○  For instance, CERC regulates the power sector at the central level. Decisions related to tariff regulations influence the availability and pricing of electricity within states.

• Powers of central agencies: The extent of powers held by central agencies can sometimes be seen as encroaching on the autonomy of states.

○  For instance, CBI's intervention in state-level issues has sparked concerns about federalism and the autonomy of state law enforcement agencies.

Economic consequences of these incursions

• Crowding out of investment: The spread of the Centre’s span of activities leads to centralization of planning and implementation. This limits States’ flexibility in infrastructure development resulting in reduced State investments.

○  For instance, in PM Gati Shakti, the lack of flexibility of States in formulating their State master plan has become a reason for underinvestment by States, which can hamper regional economies.

• Unusual fiscal competition: The Centre has enhanced fiscal space and engages in direct provisioning of many utilities and services through schemes and state-owned companies. This leads to a situation where states face limitations in revenue collection as raising non-taxes is confined to a smaller sphere.

○  Thus, states engage in fiscal competition not only amongst themselves but also with the Centre due to welfare provisioning.

• Inefficiencies from Parallel Policies: Federal conflicts lead to the Centre or States duplicating others’ policies. This is mainly due to the trust deficit prevailing in the federal system, whose fiscal costs will have long-run consequences on the economy.

○  For instance, many States joined the National Pension Scheme initially but some States started to roll back to the old pension scheme as the fiscal cost would be visible only after 2034 when most of the newly joined employees retire.

A harmonious relationship between the Centre and states within a federal system is crucial for a conducive economic environment. Promoting open communication, empowering states with more decision-making autonomy, and fostering cooperative policy initiatives are essential steps in achieving a harmonious Centre-state relationship.