Creation of smaller states not a panacea for rapid growth

Written by fe Bureau | New Delhi | Updated: Apr 8 2014, 19:14pm hrs
Creation of smaller states is not a panacea to improve economic performance, social indicators and other infrastructure as past data show some of them, including Jharkhand and Chhattisgarh, have failed to grow faster than their parent states, India Ratings said in a report on Monday.

The report, which reveals some important facts about newly formed states, assumes importance after the government announced its decision to divide Andhra Pradesh into Telengana and Seemandhra and offer a special package to the later.

Incidently, the BJP's election manifesto released on Monday advocated creation of smaller states while ensuring full justice to Seemandhra, the residual part of Andhra Pradesh after formation of the new state of Telengana. BLP has always stood for greater decentralisation through smaller states, the party said.

Stressing on economic rationale for dividing states, India Ratings principal economist Sunil Kumar Sinha said although the policy framework is necessary before division, in practice, the states are carved out without weighing the strengths and weakness. In short, elaborative administrative and governance framework is necessary before splitting rather than announcing the division and then settling the differences on an ad-hoc basis.

While smaller states have grown faster after division, the belief that they necessarily grow faster than large states is flawed. Only 11 states grew faster than the national GDP growth of 8% between FY06 and FY13. And of these 11 states, only five were small Uttarakhand, Kerala, Haryana, Goa and Himachal Pradesh, India Ratings said.

In case of newly formed states, the average growth rate of Chhattisgarh (7.7%) and Jharkhand (7.7%) lagged the parent states MP (8.4%) and Bihar (9.9%) respectively. Though Uttarakhand (13.2%) grew faster than Uttar Pradesh (6.9%) between 2005-06 to 2012-13, it was due to tax concessions offered to the new state that attracted new industrial units.

Although the newly formed states have reasonably healthy and improving social indicators, parent states have also managed to prudently improve their social indicators after the split. All the three new states upgraded their infrastructure after formation and addressed deficiencies in power, roads and access to drinking water. However, their parent states also did not lag behind in addressing infrastructure issues.

The fiscal performance of small states was diverse during FY06-FY13 with a few states being disciplined and following tight fiscal policies and the rest embracing expansive policies.

However, both the newly formed states and their parents rely heavily on central government. The amount of central taxes and grants as a percentage of the state revenue receipts was 65.51% for Bihar during 2006-13 while it was 56.74% for Jharkhand. Similarly, the ratio was 47.96% for MP while it was 44.07% for Chhattisgarh. In case of UP, 52.65% of the revenues came from Centre while it was 55.89% for Uttarakhand.