The economic case for creating small states

S A Aiyar, 20 December 2009, 12:53 AM IST

Should India be broken up into smaller states? After the decision to give statehood to Telangana, many
analysts want a new States Reorganization Commission.

India today has 28 states. Assuming 20% population growth since the last census, Uttar Pradesh has
198 million people, more than Brazil, Russia or Pakistan. Maharashtra has 106 million, West Bengal 96
million and Andhra Pradesh 90 million. All are much bigger than France or Britain. At the other end of
the scale, Sikkim has just 0.6 million people, Mizoram 1.1 million and Arunachal Pradesh 1.3 million.
Clearly, statehood has been determined by political expediency, not logic.

Is there an economic case for carving smaller states out of large ones? Some analysts say small states
won’t be economically viable. Others believe small states will fare better, since ordinary people will
have better access to power elites. Consider the record of three states carved out of larger ones in 2000
- Jharkhand, Chhattisgarh and Uttarakhand. Ignore data for the first few transitional years. Instead,
focus on the average growth rate of gross state domestic product for the last five years, from 2004-05 to
2008-09.

Amazingly, all three new states have grown fabulously fast. Uttarakhand has averaged 9.31% growth
annually, Jharkhand 8.45%, and Chattisgarh 7.35%. All three states belong to what was historically
called the BIMARU zone, a slough of despond where humans and economies stagnated. Out of this
stagnant pool have now emerged highly dynamic states.

Some caveats are in order. The central government exempted industries in Uttarakhand from excise
duty, a concession already applicable to other hill states such as Himachal Pradesh, Kashmir and the
north-eastern states. Many big industries rushed to Uttarakhand for the tax break, giving the state’s
growth an artificial boost. Still, Uttarakhand easily outperformed Himachal Pradesh (8.47%) and
Kashmir (5.98%). Remember, Uttarakhand was once considered the poorest, most backward part of
UP. After statehood, it has become a growth champion.

Jharkhand and Chhattisgarh were the most backward parts of Bihar and Madhya Pradesh, which in turn
were among the most backward states of India. Yet, after becoming separate states, Jharkhand and
Chhattisgarh have emerged as industrial dynamos. Both have large tribal belts with pathetic
infrastructure. In Chhattisgarh, four-fifths of habitations lack road access. Both states have ample
minerals like coal and iron ore. But this was not an economic advantage when they were part of larger
states. Rather, their mineral revenues were diverted to state capitals. This diversion ended after they
became separate states.

Their rapid economic growth has been tainted by massive corruption. Sheer money power enabled an
independent, Madhu Koda, to become chief minister of Jharkhand and rule for years. He handed out
dozens of mining licences, instead of auctioning them to the highest bidder. Alas, this problem affects
the whole of India: Natural resources from coal to the telecom spectrum are constantly gifted to
favoured parties instead of being auctioned, and this enables politicians to amass fortunes. But just as
the telecom revolution has been good for India despite corruption, so has private entry into mining and
processing.

Jharkhand and Chattisgarh are not growing fast simply through mining. They have experienced a
manufacturing boom. Read what research firm Indicus Analytica has to show:

"Since 2001, Jharkhand and Chhattisgarh have moved up into the top 10 (industrial states), displacing
Rajasthan and Punjab... The phenomenal growth in these two states has seen the share of
manufacturing in their GDP rise dramatically as they have attracted industrial projects. Looking at the
share of income that originates in the manufacturing sector, these two states have shown higher levels
than Maharashtra, Haryana and Tamil Nadu...Being newer and smaller states, they responded more
rapidly than their larger — and in some cases better endowed - neighbours… Raipur in Chhattisgarh
has now entered the top 10 districts of India in manufacturing, with two industrial estates at Urla and
Siltara".

Now, millions of tribals have been bypassed, especially in remote areas where Maoism flourishes.
However, the biggest tribal agitations against giant mining projects are in Orissa. The big Jharkhand
projects of Tata and Mittal are in limbo since the state has stalled land acquisition.

The neglect of tribals and consequent rise of Maoism is a blot on the record of Jharkhand and
Chattisgarh. The creation of the vigilante Salwa Judum to counter Maoists in Chattisgarh has widely
been condemned for violating civil rights.

The two states account for 68% of all Maoist attacks. That’s bad for civil rights and security. Yet,
achieving fast growth amidst such insurgency is a major economic feat. It highlights the dynamism
created when backward regions become separate states. Hopefully, this economic dynamism will help
mitigate the backwardness on which Maoism thrives.
Is There A Case For Small States?
Any rational reorganization of the nation into smaller states would give India around 50 states. Do
small states suffer? Not if one views Punjab , Haryana and Himachal Pradesh.
Fasting Telangana leader Chandrasekhara Rao’s condition is critical. If he succumbs there could be
chaos. The situation must be defused. How? The union government should unequivocally accept the
creation of Telangana state in principle.
[This article was written before the centre conceed the demand for Telangana state - Ed]
But statehood should only be granted after the findings of a newly appointed Second States
Reorganization Commission (SRC) are given. Smaller states within the same linguistic regions are
desirable when history, administrative efficiency, dialect, or any other strong characteristic renders new
statehood desirable. Thus, the Nizam’s rule in Hyderabad has given the people of Telangana a distinct
identity. Portuguese rule in Goa has set it apart from other Marathi speaking areas. To ignore such
differences arising from history would be denying the affirmation of healthy local pride. Up till now
official policy on this subject has been unprincipled, ad hoc and arbitrary.
The rot started after the first SRC submitted its report. For one, its decision about Bombay , which has
become the private hunting ground of Thackeray clan goons, was ignored because of electoral
considerations. The Union government reluctantly and belatedly has conceded the creation of new
states only after agitation, disruption and deaths have taken their toll. This unprincipled and expedient
approach must end once and for all.

The demands for smaller states have periodically erupted across India . People agitate, they are quelled,
and agitations die to revive again after a while. Vidharbha, Harit Pradesh, Gorkhaland, Mithalanchal
Pradesh, Bodoland, Bundelkhand – the list of aspirants for statehood stretch very long. Any rational
reorganization of the nation into smaller states would give India around 50 states. Do small states
suffer? Not if one views Punjab , Haryana and Himachal Pradesh.

Certain norms would have to be observed for creating smaller states. As far as possible the new states
should be carved out of one large state and not comprise territory cutting across the borders of two
large states. Opponents of Telangana state in Andhra argue that the voters rejected Telangana in the last
assembly elections. This argument is flawed. People in Andhra legitimately oppose bifurcation of their
state in isolation. But if all states -- UP, Bihar, Maharashtra and the rest -- are divided into smaller
states, how would voters react? One suspects that a nationwide referendum would give a very different
voter response, including response from voters in Rayalaseema and coastal Andhra.

The reorganization of states throughout India would be a huge task requiring time and patience. But it
should be undertaken and accepted in principle immediately. While the proposed Commission
undertakes its task other measures regarding a rational division of responsibility between local, district,
state and central governments should also be studied. India ’s political system requires reappraisal in its
entirety. Let the announcement of a second SRC be the starting point. Let acceptance of a new
Telangana state in principle defuse the explosive situation in Andhra.

Friday, 11 December 2009

Telangana Conundrum (Divide, divide again and rule?)
This post is about the flavor of the week. It is my take on Telangana and the argument for breaking up
the larger states into smaller more efficient states. When I sat down to write this post, I was against any
division of the states. The “divide, divide again and then rule” approach was not making sense and
appeared colonial. However, a little bit of research has managed to partially change my opinion. I will
try and present some of the data that I came across.

First, comments on what has been happening

The pro-Telangana politicos are in hot pursuit of their goal for statehood. Chidambaram issued a
statement that kicks of the process of state-formation.

Going by Chidambaram’s track record on contentious issues (e.g. Operation Green Hunt) the directive
to the Andhra government is probably a red herring aimed at a) diffusing a potential crisis and/or b) an
effort to divide the opposition benches by throwing a bone to regional parties who have state autonomy
as a part of their agenda.
I will stick my neck out to predict that in all probability, Chidambaram will “clarify” his statement in
studio interviews with anchors in a few weeks. The clarification will say that the issue is first a state
subject and unless the legislature passes a resolution his hands are tied. He will once again play the
“state subject” card with ease.

As far as Telangana is concerned, he chose his words (as always), with great care. In the process, he
created a win-win situation for a fleeting moment. The media, and all parties concerned, bit the bait
hook, line and sinker.

However, his statement has set the cat amongst the pigeons in regional political circles. Many regional
forces are brining back their demand for state-hood. Area that are being discussed include
• Vidarbha (Maharashtra)
• Bundelkhand (Uttar Pradesh)
• Gorkhaland (West Bengal)
• Bodoland (Assam)
Second, the crux of the debate

Two questions that are resurfacing and are being debated include-
• Is the division of state based on language the right thing to do?
• Are smaller states easier to govern and they do they tend to have better administrative
efficiencies?
For starters the two questions are VERY different. The first question has political roots. Identity based
on language has been a useful political platform for regional parties (e.g. MNS in Maharashtra and
DMK in Tamil Nadu). I am not going to bother analysing this question. I think any discussion on these
lines will be counter-productive.

The second and far more relevant question is about administrative efficiencies. Do Small states address
development priorities and administration better than a large state? Do they have less corruption? The
rest of this post is an attempt to figure out the answer.

Small states and administrative efficiencies?

• Small Assemblies
One down side of the small state assembly (number of MLAs) is that they may be unstable.
Small assemblies and the divisive nature of local politics leads to brittle governments with
wafer thin majorities. Horse trading is rampant and governments may change more than once
between elections. Haryana, Goa and Jharkhand are examples that come to mind.

My Argument: If I were forced off the fence, I would say that it will not necessarily help in
brining about better administrative efficiencies.
• Corruption
Will small states breed less corruption? Hard to say! Data that I found on the net did not provide
any conclusive proof that small states fair much better than large states. However it is apparent
that the level of corruption appears to be marginally less in the smaller states.
My Argument- Based on available data. It appears that small states deal slightly better at
 dealing with corruption particularly when it relates to their poorest citizens.

Note - Jharkhand, Chhattisgarh, Himachal, Uttarakhand, and Punjab are treated as “Large States” by the original
report/source

• Voter Turnout
Since we are a democracy, one good way to judge how healthy our democracy is to see what the
voter turnouts looks like. Data Available in the National Election Study 2009 (courtesy EPW)
seems to indicate that small states produce far better voter turnouts. This is a positive sign and
an argument that works in favor of smaller states.

My Argument: Electorates seem more responsible in smaller states.

• Literacy Rates
One interesting indicator that should shed some light on development is literacy rates.
According to the data available with the National Literacy Mission smaller states are
performing much better than larger states. The area that grabs my attention is literacy rates
amongst women.

My Argument: Small states seem to have better literacy rates when it comes to women. It
reflects that a key government portfolio is being delivered more efficiently if the state is
smaller. Can we extend this to other indicators? Maybe or maybe not. At the risk of sounding
radical, literacy and women’s literacy are good enough reasons to start creating smaller states.

• Sate Per Capita Domestic Product

Data is not readily and uniformly available on Per Capita domestic product (maybe I was
looking in the wrong places). I will present two graphs based on Government of India data for
2009 (data downloaded with some difficulty).
Source: MOSPI.gov.in [India in figures - 2009]

My Argument: If this economic indicator is to be believed, smaller states are doing better
economically (at least on a per capita scale). We can find case specific reasons for each small
state and why they are where they are in these rankings. However, the fact remains, that citizens
in small states appear to be doing better than the larger ones. Again, an argument in favor of
small states.
 • Urbanization of India
Over 28% of India now lives in its cities.By 2030 this number will be close to 40% (source:
EPW Vol 48, 2009).
It is not just the metros that are bursting at the seams. Like metros, towns and cities across the
country have grown. What was a large town 50 years ago is now a sprawling city. Many of
these cities have remained underdeveloped.
My Argument: Infrastructure infusion into capital cities in new and smaller states will ease the
burden on Metro cities in the country.There will be a multiplier effect around these cities that
will give a better geographic spread to development.
Conclusion
When I began this post, I was convinced that Small states would not work well. What data I found says
I may be wrong. I am confident, based on what I have read in the last two days, that most development
indicators will be better in smaller states. Maybe this question deserves some serious thought. If the
division of states happens based on regional developmental goals and not feudal family structures, I
think we should invest in the shift.
Wake Up The State Of States

Posted online: May 18, 2003 at 0000 hrs

Bibek Debroy and Laveesh Bhandari could have been addressing the hearing impaired. Everything that
they said — at the India Today-organised meeting to unveil the ranking of Indian states — fell on deaf
years, and no one was more deaf, and more livid, than Laloo Prasad Yadav. Laloo had good reason to
be disturbed. The state of Bihar was described as ‘the last and the least’. Of the nine heads that were
chosen for ranking the states, Bihar had the distinction of occupying the last rank under six heads,
including the head of ‘overall performance’. In the remaining three, Bihar’s rank out of 19 states was
18, 16 and 16. Laloo ranted and raved, staged a comic walkout and, after a while, returned to defend
the realm of Rabri Devi.
It is not easy to rank the states on their performance. The thankless task was undertaken by Debroy and
Bhandari using, in their words, “objective data” obtained from Central government sources, the
NCAER (National Council for Applied Economic Research) library and www.india stat.com. They
picked eight heads (plus the ninth head of ‘overall performance’), identified the parameters under each
head, normalised the data, aggregated the variables, used principal components analysis, arrived at a
score for each head for each state and ranked the states according to the scores. A pretty impressive
effort, considering that it was the first exercise of its kind.
The methodology has its drawbacks. It is invidious to compare small states with big states, for example
Goa with Uttar Pradesh (UP). Besides, the states did not start at the same level in 1991. During the
decade, exogenous factors like drought, riots or immigration were different for different states. While
the ranking may have been objective, the exercise does not explain — or purport to explain — the
reasons for the low rank obtained by some states. The ‘State of the States’ report is a snapshot, and
snapshots do not explain why some people are ugly.
The final results were not startling. In fact, they reaffirmed our intuitive conclusions about the
performance of different states since the process of economic reforms began in 1991. It did not require
a study to tell us that the worst performing states lie to the east of Kanpur or that Goa, Delhi, Gujarat,
Maharashtra and Karnataka have, during the period 1991-2001, grown as fast as the tiger economies of
east Asia. In many ways, 1991 to 2001 has been a splendid decade of growth. At the end, however, we
find that there are more questions about governance than answers and more fears about the future than
hope.
The case for small states
The report makes out a nearly uncontestable case for small states. Goa, Delhi, Himachal Pradesh,
Kerala, Haryana and Punjab easily outscore the bigger states. And among the bigger states, it is the
biggest in terms of population and size that have performed the worst. With hindsight, it is possible to
say that that the division of Punjab and Maharashtra were wise decisions; otherwise, would Haryana
and Gujarat have recorded such impressive development? Not all states need to be bifurcated or
trifurcated, but if there is a demand based on size, population and geographical characteristics, it seems
that division would be a wise solution. The jury is still out on Chhattisgarh, Jharkhand and Uttaranchal,
but the early indications are that development will get a boost in these new states unless, of course,
misgovernance takes over. In my view, there is a strong case for the creation of Vidharba (out of
Maharashtra, population 9.67 crore) and Telengana (out of Andhra Pradesh, population 7.57 crore). UP
and Bihar should also be further divided.
Small states have some inherent disadvantages such as a high proportion of administrative expenditure
to total expenditure and political instability. It appears, however, that once the states are pushed into a
competition mode, political parties try to overcome these disadvantages and work out arrangements
under which the government of the day can get on with the business of government. There was less
instability in Haryana in the nineties than in the seventies and eighties. Goa had 11 chief ministers
during the check period of 10 years, but that does not seem to have affected development. It is also
likely that the people depend less on government in the smaller states.
The perils of misgovernance
The consequences of the misgovernance of a state do not stop at the borders of that state. They pull
down the whole country and its progress. Take the cases of UP, Bihar and Orissa. These three states
have 45 per cent of all Indians living below the poverty line. They have the lowest growth rates, the
lowest per capita incomes and among the poorest human development indices. Yet, their constitutional
claim for a large share of the resources of the Central government cannot be denied. Most of these
funds are poured into a bottomless pit of corruption and inefficiency. It is the progressive states that
subsidise the laggards, and soon someone will ask the question why the revenues from income tax,
corporation tax and excise generated from the hardworking and producing states should be shared with
states that contribute little to the national exchequer. As the disparities between the states grow, so also
will the mutual resentment.
The best human resources of the backward states — for example engineering and medical graduates
from Bihar — tend to migrate to states that have jobs to offer them, besides a better quality of life.
Even unskilled labour tends to migrate in search of jobs. The backwardness of a state may become a
self-perpetuating phenomenon. The politics of such a state will also remain hostage to those who
exploit the very backwardness that they helped to create.
We cannot abandon the people of Bihar or UP to their respective fates. The Constitution that proclaims
India as one nation must assert itself. The Central government, and instrumentalities like the Planning
Commission and the Finance Commission, must call these states to account. The Comptroller and
Auditor General must show no mercy to those who are responsible for the misrule. Above all,
mainstream political parties that claim to have the larger national interest at heart must stop cohabiting
with political parties that have brought ruin and misery to millions of human beings.

New Delhi, November 28, 2008

The demand for separate States of Telangana and Vidharbha has been under consideration of
successive Governments for some decades. Today, it has gathered urgency with the BJP promising the
creation of Telangana with 100 days of being voted to power. Since the demand for smaller States has
been raised by others also, the Central Government should seriously consider appointing a States
Reorganisation Commission (SRC) to go into the merits of the respective claims.

Needless to say, whenever the demand for new States is pressed by the people of a region, the
opponents to the creation of small States come up with a variety of arguments. Mainly, that the
formation of linguistic States in the 50s was itself a mistake as it seriously harmed the process of
national integration. This is a fallacious argument for two reasons.

One, the formation of new States in the 50s was not entirely on the basis of language; linguistic identity
was only one of the many criteria followed in creating them. Two, experience has shown that linguistic
States have in no way been a hindrance to national integration; they have only made administration
smooth and better. If linguistic identity was the only criterion, there should have been only one State
for all Hindi-speaking people. This, of course, would have been an administrative monstrosity.

Indeed, the demand now is for forming new States out of large States, even if they have a common
language. The main motivation of the people who demand the separate States of Telangana and
Vidharbha is the conviction that they have a sub-cultural identity and that a separate State alone can
enable them to get an equitable share of the benefits of development.

Importantly, the framers of the Constitution were fully conscious that there would be need for changing
the boundaries of a State which were primarily created for the convenience of the colonial rulers. The
reason why very liberal provisions were incorporated under Article 3 of the Constitution, giving the
Union Cabinet and Parliament adequate powers to form new States by separation of territories from
existing States or uniting two or more States, or parts of some States, or altering the name of a State.

The most important justification for the creation of new States is that this would help the cause of better
governance. Those familiar with the administration of development programmes know that one of the
main reasons for their unsatisfactory progress has been the inadequate supervision by senior officers.

Under the Parliamentary system of Government, the formulation of polices is the responsibility of the
political leadership with the assistance of senior officers, while the implementation is mainly the
responsibility of bureaucrats at the field level. Senior officers are expected to maintain a close watch on
programme implementation through field visits. But in the case of States with a very large population,
this important responsibility is not adequately attended to.

Therefore, reducing the size of the States has become an absolute necessity if the people are to get the
full benefits of development programmes. Out of the 28 States in the Indian Union, 10 have a
population above 50 million and five, namely Andhra Pradesh, Bihar, Maharashtra, West Bengal and
U.P. have a population of over 75 million each.

The demand for the division of States has arisen most forcefully from the people of these States as they
have been experiencing the disadvantages of having a large size of population. Uttar Pradesh, with a
population of 166 million, is a chronic case of under-development. The need for its division is obvious.

In the past, some senior politicians had resisted the idea of carving smaller States out of UP as they
feared that such a step would reduce its importance in national politics. But now most political parties
are in favour of getting three or four new States out of U.P, notwithstanding the creation of Uttaranchal.
Besides, there have been experiments, through Constitutional amendments, to provide for preferential
treatment to certain regions within a State in matters such as education and employment. The boldest
attempt in this direction was the provision for the establishment of Development Boards for backward
regions like Vidharbha and Marathwada in Maharashtra. Article 371 (2) of the Constitution provides
for vesting the Governor of the State the power for ensuring equitable allocation of funds to the
backward regions.

It may be recalled that when Dr P.C. Alexander was the Governor of Maharashtra, he held the view
that the special powers for the Governor diluted the responsibility of the Chief Minister and his
ministerial colleagues, who were always to remain accountable to the legislature.

In the ultimate analysis, if a separate State is what the overwhelming majority of the people of a region
wish to have on grounds of better administrative convenience and efficiency, conceding such a demand
will be in keeping with the spirit of Article 3 of the Constitution and with the principles of democracy.
—INFA