Concept of Incentive Competition 激励竞争概念
Striking feature of the reform is that it brought about a thorough change in the federal set up of the country. Though India is a federal country much of the decision making power was concentrated with the Central Government. It was Central Government which used to decide upon the magnitude, composition and direction of investment thereby leaving little room for the state governments to decide upon the policies best suited for the socio-economic, socio-cultural profile of each state. With the easing of central government's control over investment decisions, state governments were given considerable freedom to pursue the policies which are best suited them. The reforms brought about a shift in the power structure with state governments acquiring more power vis-à-vis Central Government in decision making process. There was an attempt towards decentralizing the decision making process. There was devolution of power from Central Government to State Governments if not completely but to a certain extent (Shand and Bhide, 2004). With the reforms the central government started withdrawing from major economic activities and there was a decline in the importance of public investment which made the state governments to feel the need to attract more and more private investment. Since then states have started competing against each other for attracting investment by creating investment and business friendly environment. And the mechanism they have relied upon to do this is incentives. It is through incentives they are competing to attract more private investment. And this trend came to be known as "incentive competition".
Rationale behind Incentive Competition:
With the New Economic Policy of 1991 there was a pro market environment. If not absolute freedom there was a certain amount of flexibility given to the state governments in their respective economic activities. States became autonomous to certain extent in their economic matters. Some of the rationales behind the incentive competition are as follows.
Principle of comparative advantage: Each state can produce a commodity in which its having comparative advantage
Encourage competition: It encourages competition among states which helps to improve production efficiency
Economies of scale: Now economies of scale could be operated due to large scale of production
Trade is an engine of growth: It leads to increased trade as each state can interact with potential investors
Globalization: In an era of globalization where there is more decentralization of power, it becomes imperative for states to offer incentives to attract private investors
Political economy aspects: With the increased regionalization of politics, the politics at the state level is being driven by state issues than by central issues and the economic performance of each state has become an issue of potential electoral importance.(责任编辑：BUG)