Q. Discuss whether formation of new states in recent times is beneficial or not for the economy of India. (15)
Model Answer
The reorganization of states has for long been a contentious issue in India. Creation of Telangana as the 29th Indian state was also preceded by intense street protests. But that is not the only type of disagreement when it comes to the creation of new states. There are also intellectual debates between those who see smaller states as a boon for development, while others say that dividing existing states can breed animosity to an extent that national political stability comes under threat.
A paper by economists Sam Asher of the University of Oxford and Paul Novosad of Dartmouth College provides the first systematic evidence of the impact of redrawing boundaries of these states.
Examining outcomes 12 years after the formation of the new states, we find a marked increase in economic activity immediately across the border in the new states,
- School enrolment increases, suggesting greater investment in human capital.
- Durable goods remain comparable across the two sides of the state border, suggesting that free movement of labour and capital can mitigate differences in economic opportunities across proximate geographies
- Large array of data sets to present evidence that breaking up the largest and the poorest of Indian states brought gains to the new states. Since the formation of the new states, using night-time lights data (a novel way of measuring economic activity)
- Greater devolution of power works because the local bodies know best the interests of citizens
- In addition, greater the social heterogeneity, the higher the number of states should be.
- Local expertise and technology can be harnessed better through local government.
- smaller states can make up for the costs of size effects by being more market-friendly
The results provide new evidence that institutions matter for development, and local control of institutions can have large economic impacts.
“When governments distribute resources on partisan lines and some regions are neglected for a long period of time, there can be gains from dividing the state into smaller ones. While there may be an economic case for Uttar Pradesh’s break-up, its ultimate fate will depend on whether politicians foresee any gains from such a move.”
Recent observations
- The new states are growing faster than the old states; by 2008 the difference between economic activity in old and new states is no longer statistically significant, and the gap continues to close until the end of the data in 2013.
- “The new state side of the border has approximately 25% more economic activity, 10 years after state separation”.
BENEFITS AND LOSS OF LARGE STATES
- A larger state, by virtue of having a larger market, can generate financial resources more efficiently to supply public goods to its citizens.
- when there are too many diverse groups in a sprawling state, conflict emerges. And instead of public-goods provisioning,
- redistribution of resources among regions becomes the central political issue.
- if the quality of the food sold by the public distribution system (PDS) is bad, people switch to other available markets.
when the diversity effect becomes greater than the scale effect, there is an economic case for a smaller state.
New states in the country are often seen more as the outcome of political compulsion and less as drivers of institutional change. If there are lessons to be learnt from the reorganization of 2000, it is that the new states, as the preliminary evidence suggests, did as well or no worse than their parent states.
It also remains to be seen how each of these states stack up against their parent states individually. It is only then that we will be fully able to comprehend the lessons learnt from redrawing political maps.