Competitive federalism: India’s large market, favourable demographics and expanding infrastructure may persuade a company to enter the country. They do not determine where it will build a factory, data centre or research facility. That decision depends on operating costs, reliable power, access to land, skilled workers and the time required to secure approvals.
West Bengal Finance Minister Swapan Dasgupta brought these questions into focus this week when he outlined reforms covering electricity, global capability centres, start-ups and building regulations. The state is considering an open-access policy intended to lower power costs for industry. Its effort to improve the investment climate illustrates a larger shift in India’s federal economy. Once a company chooses India, state governments must convince it to choose them.
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Competition among states can improve the business environment in ways that investment summits and capital subsidies cannot. It can also widen regional disparities if states with stronger finances, infrastructure and skilled workforces keep drawing investment away from poorer competitors.
Industrial clusters are redrawing India’s investment map
The competition is already visible in industries that India considers strategically important. Gujarat is developing a semiconductor cluster around Sanand and Dholera. Tamil Nadu has a formidable base in automobiles and electronics. Karnataka and Telangana compete for global capability centres. Uttar Pradesh has become an important electronics manufacturing location around Noida. Assam, Odisha and Andhra Pradesh have secured semiconductor projects of their own.
Semiconductors show how an early lead can become self-reinforcing. Micron, Tata Electronics, CG Power and Kaynes have facilities in Gujarat. The Tata Electronics-PSMC fabrication plant at Dholera entails an investment of ₹91,526 crore and a planned capacity of 50,000 wafer starts a month.
The commercial value of such a project extends beyond the investment announced. A fabrication or packaging plant needs specialised chemicals, industrial gases, logistics, equipment maintenance and trained engineers. Suppliers have an incentive to locate nearby, making the cluster more attractive to subsequent investors. The larger prize is this network of firms and skills, rather than the prestige attached to one factory.
The Union government’s semiconductor programme has spread projects more widely than early approvals suggested. By July 2026, it had approved 12 manufacturing projects across Gujarat, Uttar Pradesh, Punjab, Assam, Odisha and Andhra Pradesh. The list includes a silicon fab, specialised fabrication facilities and several assembly, testing, marking and packaging units. Three facilities had begun commercial production, according to the Ministry of Electronics and Information Technology.
National subsidies have influenced these investments, but state preparedness helps decide where they land. Gujarat issued a dedicated semiconductor policy early and backed it with industrial land and infrastructure. The useful lesson for other states is to identify sectors in which they possess a credible advantage and build the required capabilities before investment decisions are taken. Copying Gujarat’s policy document without its infrastructure would achieve little.
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States need different industrial strategies
Tamil Nadu followed another route. Its manufacturing base accumulated over several decades through automobiles, engineering, electronics, ports and an experienced industrial workforce. Foxconn and Tata Electronics have expanded production in the state as Apple’s suppliers have increased assembly in India. Their presence rests on a much broader network of component makers and engineering companies.
The state is now seeking a larger role in semiconductor research and product development. Its planned ₹100 crore semiconductor centre with IIT Madras Research Park is intended to combine training, micro-fabrication, prototyping and applied research. It is a capability-building institution, rather than a commercial chip fabrication plant.
Uttar Pradesh has developed its electronics industry around Noida, helped by proximity to Delhi, a large labour market and improving transport links. The ₹3,706 crore HCL-Foxconn project near Jewar, approved under the India Semiconductor Mission, will produce display-driver chips. It takes the state into a more sophisticated part of the electronics supply chain, although the project’s eventual contribution will depend on execution and the local supplier base.
These experiences suggest two approaches to investment promotion. A state can bid for each large project with land and subsidies, or it can build an industrial ecosystem that reduces costs for every firm in the sector. The second approach is slower, but each successful investment improves the prospects of securing another.
Lagging states may be able to match a capital subsidy. Reproducing the workforce, suppliers, infrastructure and administrative competence of an established cluster is harder. Their industrial strategies should therefore start from capabilities they can plausibly develop, rather than from whichever sector currently attracts the most generous Union incentives.
Power and approvals outweigh glossy policies
The cost of doing business will decide much of this contest. Industrial policy documents offer little compensation for expensive electricity, unreliable supply or delayed approvals.
Power is especially important for semiconductor plants, data centres and energy-intensive manufacturing. Open access can allow eligible consumers to procure electricity from generators other than the local distribution company, subject to network charges and state regulations. Its usefulness depends on the charges imposed, the availability of transmission capacity and the reliability of supply. Announcing open access and making it commercially viable are different tasks.
Suppose two states offer similar capital assistance to a data centre. The investor will still compare the price and quality of electricity, the speed at which additional capacity can be connected, land availability and the predictability of local approvals. Differences in these recurring costs can outweigh a one-time subsidy.
Competitive federalism can expose which reforms produce results. It may reveal that dependable electricity, serviced industrial land and time-bound approvals attract more durable investment than concessions negotiated for individual companies. States should publish project implementation data, including the interval between an announcement, construction and commercial production. That would help distinguish investment secured from memoranda of understanding signed at public events.
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Competitive federalism has a fiscal limit
There is also a risk that investment competition becomes a contest in giveaways. States cannot keep purchasing projects through cheaper land, tax reimbursements and power subsidies. Nor does moving a proposed factory from one Indian state to another necessarily create a national gain commensurate with the public money spent.
State budgets are already constrained by committed expenditure. According to PRS Legislative Research, salaries, pensions and interest payments were budgeted to absorb 52% of states’ revenue receipts in 2024-25. Revenue expenditure accounted for 84% of their total expenditure, excluding debt components. These averages conceal large differences among states.
Richer states generally have more fiscal capacity to improve infrastructure and support investors. They also tend to possess deeper labour markets and stronger supplier networks. If competitive federalism rewards these inherited advantages without helping poorer states address basic deficiencies, industrial concentration and regional inequality will increase.
The Union government must therefore act as an equaliser. National industrial policy should discourage subsidy auctions while directing transport links, power infrastructure and skills programmes towards states that cannot finance them alone. Union incentives could also place greater weight on supplier development, worker training and measurable project milestones.
Every state need not become a semiconductor hub or imitate Tamil Nadu’s electronics industry. India would gain more from several states acquiring distinct industrial strengths. For a country seeking a larger private investment cycle and millions of productive jobs, the quality of competition among states may prove as important as the incentives offered from New Delhi.