* Based on the relationship between the central and state government–the concept of federalism is divided into- Co-operative federalism and Competitive federalism.
* In Cooperative federalism the Centre and states share a horizontal relationship, where they “cooperate” in the larger public interest.
* It is an important tool to enable states’ participation in the formulation and implementation of national policies.
* Union and the states are constitutionally obliged to cooperate with each other on the matters specified in Schedule VII of the constitution.
# In Competitive federalism the relationship between the Central and state governments is vertical and between state governments is horizontal.
* This idea of Competitive federalism gained significance in India post 1990s economic reforms.
* In a free-market economy, the endowments of states, available resource base and their comparative advantages all foster a spirit of competition. Increasing globalisation, however, increased the existing inequalities and imbalances between states.
* In Competitive federalism States need to compete among themselves and also with the Centre for benefits.
* States compete with each other to attract funds and investment, which facilitates efficiency in administration and enhances developmental activities.
* The investors prefer more developed states for investing their money. Union government devolves funds to the states on the basis of usage of previously allocated funds.
* Healthy competition strives to improve physical and social infrastructure within the state.
* Competitive federalism is not part of the basic structure of Indian constitution. It is the decision of executives.