The economic case for creating small states

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.

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