Strengthening federalism will be key to India’s Viksit Bharat 2047 goals, shaping infrastructure, exports, and responses to structural challenges.
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In May 2025, Prime Minister (PM) Narendra Modi highlighted the role of states and the centre working together in driving growth and progressing India’s developmental agenda during the 10th governing council meeting of the National Institution for Transforming India (NITI) Aayog. States were urged to remove barriers to growth by discontinuing outdated laws, improving the ease of doing business, and employing the Free Trade Agreements (FTAs) more effectively.
When states drive their own progress, the cumulative effect can significantly contribute to a holistic national development.
India’s growth has been largely driven by strong domestic demand. However, persistent challenges such as inequality, regional disparities, and inadequate infrastructure continue to hinder broader progress. To achieve the vision of becoming a developed nation by 2047 (Viksit Bharat 2047), there must be a greater focus on boosting investments and exports. This will require strengthening manufacturing and building local productive capacities. One way to achieve this is by localising growth, wherein states take the lead in attracting investment, expanding exports, and advancing localised development. When states drive their own progress, the cumulative effect can significantly contribute to a holistic national development. While the centre provides the overall policy framework, meaningful change depends on how state governments implement these policies on the ground. A stronger and more coordinated partnership between the centre and the states, along with healthy competition among states, is essential to ensure growth that is inclusive, balanced, and long-lasting.
India’s growth trajectory and outlook are robust with a growing consumer base, a rising population (294.3 million households of 2022-23), a rising middle class, and large public investment programmes. These factors, among others, have contributed to a pattern of demand-driven growth, particularly led by consumption. This mirrors what economists refer to as the Keynesian theory of demand-driven growth, which posits that key economic outcomes such as Gross Domestic Product (GDP), inflation, and unemployment are largely shaped by fluctuations in aggregate demand.
The four main ingredients for growth in this model are consumption, investments, government spending, and net exports. As of FY 24 -25, Private Final Consumption Expenditure (PFCE) grew at 7.3 percent, and was the biggest contributor to the GDP with a share of 61. Percent. Furthermore, while Gross Fixed Capital Formation (GFCF) contributed 33.5 percent, the Government Final Consumption (GFC) stood at 10.14 percent of the GDP. Clearly, the key ingredient of India’s growth recipe has been consumption demand. When analysing the GDP through sectoral composition, the services sector (55.3 percent) is the largest contributor to India’s GDP, followed by manufacturing and agriculture.
A consumption-dominant growth may look impressive on the surface and uplift key economic indicators. However, the real concern is whether it truly delivers shared gain or also has some deeper imbalances. In the context of India, structural issues, such as a rising informal sector and widening income, inequality, regional inequality, and consumption inequality, continue to persist and amplify. Apart from these, India’s broader growth story has missed the manufacturing sector. Structural transformation typically involves an economy transitioning from agriculture-led to manufacturing, and eventually to services-led, creating jobs and driving growth across sectors over time. Nevertheless, India has leapfrogged manufacturing by jumping straight from agriculture to services.
Given these realities, two priorities become central. First, economic growth must also tackle the structural rigidities embedded in the economy. Second, it must reinvigorate manufacturing and boost exports, while ensuring that the gains from growth are inclusive. One promising way this can be achieved is by ‘localising growth’ or ‘state-led growth’, which the centre has also been pushing for. This involves empowering states to drive their own growth agendas, making state-level development a strategic and actionable priority. Such a shift can boost investments, enhance state-level manufacturing capabilities, boost productivity, and address deep-rooted inefficiencies. This can ultimately pave the way for a more inclusive and robust investment-driven (GFCF) or export-led growth trajectory.
Subnational or regional growth plays a vital role in driving a nation's economic growth. Organisation for Economic Cooperation and Development (OECD) research suggests that decentralisation, i.e., when authority and resources are devolved to subnational levels, is linked to higher per capita incomes, stronger educational outcomes, and greater investment in physical and human capital. This kind of fiscal and administrative autonomy also enables governments to allocate spending more effectively toward development priorities. State-led and state-designed policies play a pivotal role in revitalising local growth and development alongside investments, manufacturing and capacity-building.
A consumption-dominant growth may look impressive on the surface and uplift key economic indicators. However, the real concern is whether it truly delivers shared gain or also has some deeper imbalances.
India’s federal economic governance has undergone a significant transformation over time. Beginning with a quasi-federal structure and the dominance of the Planning Commission, states historically functioned as implementers of centrally formulated plans, with resource allocation subject to central discretion. The establishment of NITI Aayog in 2015 marked a significant shift in India’s federal structure. It fostered cooperative federalism between the centre and the states, while also encouraging competitive federalism among the states. Under this model, states compete based on various performance indicators—such as health, water management, progress on the Sustainable Development Goals (SDGs), innovation, and export promotion. This encourages states to adopt more effective policies and strengthen governance outcomes. For instance, a study on fiscal federalism and economic performance in Switzerland found that competitive federalism was linked to improved economic performance across cantons. In India, the central government provides fiscal, monetary, and regulatory frameworks, while state governments are primarily responsible for driving economic growth and development at the local level.
Figure 1: Ternary plot of sectoral shares of Indian states and UTs’
Source: Author’s Own (Data Obtained from State of State Finances Report, 2024-25 and Economy of Indian States, Statistic Times. Prepared using Matplotlib.)
Interpretation: This ternary plot highlights how each state’s GDP comes from agriculture, manufacturing, and services. The closer a state is to the respective sector’s corner, the more that sector contributes to its economy. For example, Delhi is near the services corner because 85 percent of its GDP comes from services. It is far from the agricultural corner, which only makes up 2 percent. Andhra Pradesh is more in the middle, with its GDP roughly split between all three sectors, with around 40 percent from agriculture, 20 percent from industry, and 40 percent from services.
First, it is essential to identify and address the drivers of state-level growth. A recent study highlights two critical factors: a) state-level fixed effects, such as physical infrastructure, education, healthcare, and social infrastructure and b) key economic centres or agglomeration economies, referring to districts that serve as economic hubs and contribute significantly to the state’s GDP. Both these factors must be addressed and improved.
Second, states must identify, build, and harness their sectoral strengths by capitalising on local resource endowments, comparative advantages, and workforce capacities. This is essential for boosting economic activity and creating jobs at the grassroots level. For instance, Karnataka has successfully drawn on early public sector investments, a skilled talent pool, and forward-looking policies to establish Bengaluru as India’s Silicon Valley. Jharkhand, in contrast, has leveraged its abundant mineral reserves and power generation capacity to build a resource-driven industrial base. The ternary plot (Figure 1) offers an overall view of the diverse sectoral strengths across Indian states and Union Territories, highlighting the heterogeneity in resource endowments and development patterns. Recognising this, states must adopt tailored strategies including targeted skilling, investment promotion, and infrastructure upgrades to realise their economic potential fully.
As India continues to contend with persistent structural rigidities, the need for a renewed, inclusive and decentralised growth strategy is quite evident.
As India continues to contend with persistent structural rigidities, the need for a renewed, inclusive and decentralised growth strategy is quite evident. While earlier reforms, such as the 1991 liberalisation and ‘Make in India’, focused on national-level interventions, the next phase must come from the states. This shift requires a cooperative federal framework that can navigate political differences, fiscal constraints, and institutional limitations. Localising growth offers a timely opportunity to revitalise investment, expand productive capacity, and reduce widening regional disparities. A state-led approach can foster healthy competition to improve infrastructure, attract investment, and boost exports. Future research could examine how the nature of federalism in India shapes economic and governance outcomes, particularly amid challenges in manufacturing and persistent structural issues.
Manish Vaidya is a Research Assistant with the Centre for New Economic Diplomacy at the Observer Research Foundation.
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Manish Vaidya is a Research Assistant with ORF’s Centre for New Economic Diplomacy. His work centres on research and active engagement in applied economics, with a ...
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