Smaller states are not the solution

Written by Devendra Kumar Pant | Updated: Aug 29 2013, 06:29am hrs
After Independence, smaller princely states were combined together mainly on linguistic basis. States have been reorganised since then. Andhra Pradesh was carved out of Madras in 1953. In 1956, 14 states and six Union Territories were created. Bombay was split into Maharashtra and Gujarat in 1960. In 1963, Nagaland was carved out of Assam; in 1966, Haryana and Himachal Pradesh were carved out of Punjab. In 1972, Meghalaya, Manipur and Tripura were formed. In 2000, three states were carved outUttarakhand from Uttar Pradesh, Chhattisgarh from Madhya Pradesh and Jharkhand from Bihar. The United Progressive Alliance government decided to carve out Telangana from Andhra Pradesh on July 30, 2013.

Generally, regional variation in development has been the major reason for demand for a separate state. Both bigger and smaller states have their own sets of problems. Improved governance is a major argument in favour of smaller states due to the smaller area to be governed. A homogeneous economic environment augurs well for the development of smaller states. However, if the state is not self-sufficient in generating its own resources for developmental needs, its dependence on central government for resources increases. A number of states have problems relating to distribution of river-water. State reorganisation not only aggravates this but also creates complexities with respect to redistribution of power, other resources/assets and liabilities of combined states.

An oft-quoted argument in favour of smaller states is their higher economic growth achievement. Smaller size of operation is not the only condition affecting growth. Initial conditions, proactive growth policies, quality of labour force and governance have a larger role to play in the growth of an economy. A states economic growth performance depends on national economic growth performance, which in turn depends on global growth performance. The production structure of a state also weighs heavily on its economic performance. During the global trade slowdown, the states with larger proportion of exports (for example, Karnataka) were adversely affected. The auto sector, at present, is going through a tough time. As a result, the economy of states like Gujarat; Haryana and Tamil Nadu will be more affected compared to other states. Due to different economic regimes, a comparison between pre- and post-state formation economic performance will yield incorrect conclusions.

The state-wise economic growth patterns between FY05 and FY13 throw up some interesting facts. In this analysis, 21 states had been considered. The growth patterns of north-eastern states barring Assam, union territories like Delhi and Chandigarh were not considered in this analysis. The economic growth pattern for all states except Gujarat, Goa, Rajasthan and Kerala is available up to FY13. In order to avoid problems associated with compound annual growth rate, average annual growth rate is used. The states are divided in two groupssmall and big. States having more than 2.5% of the all-India area are classified as big states and the rest as small states. To avoid non-availability of FY13 growth numbers of four states, the ratio of average GSDP growth to all-India GDP growth for FY06-FY13 has been computed (for the four states, ratio has been computed on the basis of average growth up to FY12).

If the ratio is more than one, it implies that the states economic performance is better than the national growth performance. In terms of average GSDP growth, 11 states performed better than all of India and the performance of the remaining 10 states was lower than the nations. However, among the better-performing 11 states, only three are small; the remaining eight have been classified as big. The list of the ten that performed lower than the nation taken together is split equally under the small and big classifications. Uttarakhand, Haryana and Goa are the three small states that have performance figures better than the countrysalthough some small states did well, the hypothesis that smaller states grow faster compared to bigger states looks untenable.

Another hypothesis put forward in favour of having smaller states is that they perform better than the larger parent states. While Uttarakhand performed much better than its parent state, Uttar Pradesh, in case of Bihar, the parent state has performed much better than the new state, Jharkhand. In the case of Madhya Pradesh and Chhattisgarh, although Madhya Pradesh has performed better than Chhattisgarh, the performance of parent state and the new state is not significantly different. The growth performance of these six states does not provide any conclusive evidence to accept hypothesis that newly-formed states perform better than their parent states.

Income is one of the dimensions of development, not the end result. Even the social performance of the three states carved out in 2000 does not support the hypothesis of better development in smaller states. In case of literacy and infant mortality rate, all three bigger states have performed better than the states carved out of them. All three parent states after division had worse social indicators compared to the newly-formed states, which hints at faster improvement by the parent states. However, in case of household access to safe drinking water, the trend is mixed.

Although small size increases the likelihood of improved governance, this cannot be assumed to be a given. While improved governance may push the growth of the newly-created states economies, other factors are more important for sustaining that growth over the years. In India, broader economic policy contours are fixed by the economic policies of the central government. It is the responsibility of the state governments to align their policies in line with the national economic policies. While the global factors have a role in the present Indian economic slowdown, policy logjam, project clearances, environment/forest clearances, land acquisition and infrastructure issues are some bottlenecks to growth. The size of the economy has no role in either fast-tracking or slowing these decisions.

The author is chief economist and head, public finance, India Ratings and Research Private Ltd (Ind-Ra). Views are personal