Business Today

Divide and grow

Political calculations may have spurred the recent demand for new states but a study shows that states perform better economically after they break up into smaller entities.

Print Edition: January 24, 2010

Sumita Kale and Laveesh Bhandari of Indicus Analytics, a research firm, have in a recent paper argued the case for smaller states. The study, which focussed on economic growth in the states of Greater Punjab, Greater Assam, Uttar Pradesh, Bihar and Madhya Pradesh before and after their division, shows that the statesf breakup into smaller entities was followed by higher economic growth with the exception of new Madhya Pradesh which recorded a decline. They also acknowledge that exogenous factors.the Green Revolution in Punjab and Haryana and militancy in Assam, for instance played an important role in enabling (or disabling) higher growth. Excerpts from the study:

  • Do states grow faster after they break away from larger states?
  • Do the larger states grow faster after the smaller units have broken off?
  • Does the overall entity grow faster after the reorganisation?
  • How does state-level growth compare with the rest of the country before and after reorganisation?

We seek to answer the above questions as much as data permits. Ideally, all instances of major reorganisation should be examined. But there are severe data limitations; state income series published by the Central Statistical Organisation (CSO) begin only from 1960-61 and have missing values for new states in early years. Analysis was therefore conducted case by case with the most appropriate data points available.

UP, Bihar and MP
Of the six new states formed out of the three older states of Uttar Pradesh, Bihar and Madhya Pradesh in 2000, five have grown at a rate greater than the national average.Madhya Pradesh being the only exception. The growth rates of all the smaller states. Jharkhand, Uttarakhand and Chhattisgarh.increased by 4-6 percentage points following reorganisation, which was far higher than the 2 percentage point for India as a whole. Uttar Pradesh and Bihar have also had significant increases in growth rates.1.9 and 3.7 percentage points, respectively.

The last few years have seen a significant increase in Bihar's growth. Can Bihar's reorganisation be given some credit for this? Indeed, it should be so. Bihar's improved performance in recent years can be ascribed to better governance. With many institutions as well as the administration not functioning as desired, a smaller state with a narrower ambit would have made it easier for the new administration. In other words, Bihar is a good case for the argument that smaller states make it easier to govern well.

The increase in growth rates of Uttarakhand, Jharkhand and Chhattisgarh can all be, to some extent, due to the fact that the new administrations in these states could better focus on the issues of relevance for them. Moreover, both Uttarakhand and Chhattisgarh accounted for a very small proportion of undivided Uttar Pradesh and Madhya Pradesh. in terms of population, size and economy. In Jharkhand's case this was less so, as it was a significant part of undivided Bihar. Hence after reorganisation, greater focus on the issues at hand would enable much greater improvements in Chhattisgarh and Uttarakhand than in Jharkhand. The data reflect the same.

By the same logic, the benefits have been limited for Madhya Pradesh and Uttar Pradesh, since the states carved out from these were a small proportion of the total. Uttar Pradesh's growth rate increased 1.9 per cent after the division, while that of Madhya Pradesh has further fallen. a result that is likely due to other factors, and not so much the break-up. In case of Madhya Pradesh, we begin by examining the per capita income levels at two points in time. 2001-02, the year following the reorganisation, and 2007-08, the latest year for which estimates are available.

Districts that lie on the border of the parent and new states are compared with each other. The hypothesis to be checked is whether districts across the borders started out with similar levels of development and took different growth trajectories due to different governance modes. We find a clear case supporting our hypothesis in Chhattisgarh-Madhya Pradesh, where bordering districts began with similar levels of per capita income, but the districts in Chhattisgarh soared way ahead of those across the border in Madhya Pradesh in the years after reorganisation.

Why might this have occurred? Chhattisgarh immediately in its postcreation years went in for significant reforms. Privatisation of poorly-functional public sector enterprises, closing down of non-functional entities, an emphasis on public-private partnerships, and perhaps the most important, significant road building activity are some examples. These contributed in part to the initial surge of investments and resultant economic growth. In other words, the problem of Madhya Pradesh is a larger problem of poor governance and not so much due to its reorganisation.

Punjab, Haryana and Himachal Pradesh
The Greater Punjab region comprising Himachal, Haryana and Punjab saw much more rapid growth after its division (see chart). Moreover, though the available data do not allow for a state-wise comparison, we can comfortably argue that Himachal, Punjab and Haryana have not performed worse than the national average in terms of economic growth after their reorganisation.

Since the division also broadly coincided with the Green Revolution in Punjab and Haryana, it could be argued that the success of Punjab should be ascribed to the Green Revolution. But that would be fallacious. The success of the Green Revolution cannot be treated as an exogenous shock. Rather, it could be argued that a smaller, more homogenous Punjab could better work with the central government in ensuring the success of the Green Revolution— something that a large state like Uttar Pradesh could not manage.

In other words, a smaller Punjab was better able to focus its efforts towards a single objective of ensuring rapid increase in agricultural productivity. But there is a counter-argument, too—Greater Punjab may have been better able to spread the benefits of the Green Revolution. That is, the time taken for the Green Revolution to spread through Haryana could have been lower had it remained a part of Greater Punjab. It would generally be very difficult to obtain unambiguous empirical evidence supporting or opposing the creation of smaller states because of such counterfactuals. But Punjab’s story is not the only one.

Greater Assam was reorganised into Assam, Arunachal Pradesh, Meghalaya and Mizoram in 1971. For most of the smaller states, data is not available before or immediately after the reorganisation—Meghalaya and Mizoram data begin in 1980-81, and Mizoram income series at constant prices begins only from 1999-2000. Therefore, only new Assam was taken up for the analysis. Though Assam may not have gained immediately after its reorganisation, it was not inordinately harmed in terms of economic growth.

But Assam has suffered inordinately due to various law and order problems throughout the '70s, '80s and even later, which have affected its growth in the post-reorganisation years. It could be argued that the smaller size of the state made it more difficult to garner enough resources and expertise to combat the various militant elements. Hence, the persistence (if not the emergence) of militant elements should not be treated as independent of the state's reorganisation.

However, we could also argue that the presence and persistence of militancy in larger states like Jammu and Kashmir, West Bengal and Andhra Pradesh and others strongly indicates that greater size is not a good enough criterion to judge a state's ability to counter militancy. Therefore, the threat of militancy cannot be a convincing enough reason to oppose the creation of smaller states. The available evidence for Assam seems to indicate that though reorganisation may not have boosted economic growth, it did not harm it either on a long-term basis. Other factors were more important.

From the limited data that is available, it's evident that when states break up, the smaller regions have the capability to work on their strengths and correct their weaknesses in a more efficient and cohesive manner towards higher growth. At the same time, smaller states may also be more susceptible to other forces that can cause systemic disruptions.

Overall, the case for smaller states is building up, both empirically and politically. But these alone will not be sufficient to break-up large states into an ever-growing number of smaller states. Two things should be done as a prelude to their reorganisation.

One, democratic institutions and other governance mechanisms at the regional level should be strengthened on a long-term basis. Deepening of civil society in various parts of India (and not just at the state level) needs to become a policy objective. Two, there is a need to build a smoother system that is responsive to the demands of sub-state ambitions.

This system should take into consideration a certain minimum and maximum population size, the issue of resource availability and resource sharing, agro-climatic homogeneity and, most important, the wishes of the people within the region for achieving statehood. This need not be a one-time action; rather, as and if demands for statehood grow a set of factors should be studied, before statehood is granted.

No new state has seen a complete unravelling of institutions or growth post re-organisation whether on a short- or long-term basis, That should be sufficient enough evidence to not blindly oppose the formation of smaller states, but to promote them on a caseby-case basis.

— (Excerpted from a study by Indicus Analytics titled 'Small States—Large States') The authors can be contacted at and

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