Small states no guarantee for good growth

Apr 19 2014, 03:04 IST
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SummaryOnly five smaller states could outperform the national GDP growth during FY06-FY13.

The government of India’s recent initiative to divide Andhra Pradesh into Seemandhra and Telangana has reignited the demand for new states across the country. The demand for division of states is not a new phenomenon in India. Many states were created through the States Reorganisation Act, 1956. Before that, Andhra Pradesh was carved out of Madras in 1953. Then, in 1956, as many as 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, and in 1972 Meghalaya, Manipur and Tripura were formed. The states were initially reorganised along linguistic lines. However, notwithstanding other factors, uprisings in the undivided states have influenced the formation of new states lately.

The growth performance of small states is commendable, but the belief that smaller states necessarily grow faster than large states is flawed. An analysis of the growth performance of Indian states reveals that only 11 states grew faster than the country over FY06-FY13. Of these 11, only five were small states—Uttarakhand, Kerala, Haryana, Goa and Himachal Pradesh. States with over 2.5% of all India area are classified as large states and the rest as small.

Economic performance: mixed signal

As the initial reorganisation of Indian states in 1956 was driven by a variety of considerations, an evaluation of the growth performance of the new states formed in 2000 (Uttarakhand, Chhattisgarh and Jharkhand) and their parent states will help in ascertaining whether there is any economic rationale for the division of large states. Our analysis is confined to the FY06-FY13 period as we consider the first five years after the formation of the states to be the period of transition for these states.

The Gross State Domestic Product (GSDP) of Uttarakhand grew by 13.2% over FY06-FY13 compared with Uttar Pradesh’s 6.9%. One of the key reasons for this spectacular growth has been tax concessions given to Uttarakhand due to its geographical location. Chhattisgarh’s growth was not as remarkable as Uttarakhand’s. It grew at an annual average rate of 7.7% over FY06-FY13 as against 8.4% of its parent Madhya Pradesh. However, it was three times that Chhattisgarh’s growth surpassed the growth rate of its parent Madhya Pradesh between FY06-FY13. Although Chhattisgarh, well-endowed with natural resources, leveraged this advantage and transformed its industrial sector significantly (industry’s share in economy is 40%, comparable to

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