Ind-Ra: Small States' Creation Unlikely to Catalyse Economic Growth

India Ratings & Research (Ind-Ra) says creation of small states is not a panacea to improve economic performance, social indicators and other infrastructure statistics. Even though the growth performance of small states is commendable, the belief that they necessarily grow faster than large states is flawed.

Ind-Ra's analysis of the growth performance of Indian states reveals that only 11 states grew faster than the country on the whole over FY06-FY13. Of these 11, only five were small states - Uttarakhand, Kerala, Haryana, Goa and Himachal Pradesh. The mixed growth performance of the states formed in 2000 (Uttarakhand, Chhattisgarh and Jharkhand) also reinforces that the carving out a small state does not assure strong growth performance. The growth performances of these new states were largely driven by the specifics of the state and the policies framework.

According to Ind-Ra's analysis, although the newly formed states have reasonably healthy and improving social indicators, parent states have also managed to prudently improve their social indicators after the split. Notwithstanding the size, states with high literacy rates managed the infant mortality rate better than the rest. All the three new states upgraded their infrastructure after formation and addressed deficiencies in power, roads and access to drinking water. However, their parent states also did not lag behind in addressing infrastructure issues. Nevertheless, these infrastructure changes could have been delayed in these regions if there had been no division. That said, Ind-Ra does not believe division alone is the reason for these improvements.

The fiscal performance of small states was diverse during FY06-FY13 with a few states being disciplined and following tight fiscal policies and the rest embracing expansive policies.

As the performance of small states differs across various economic parameters, carving out a new state is not a remedy. Concurrently, formation of new state would not simply assure robust governance and higher economic growth. On the contrary, it is essential to develop a comprehensive administrative and governance framework and ascertain the economic sense before splitting rather than announce the separation first and then sort out the differences and issues on an ad-hoc basis. Ind-Ra believes the size of state does not play a decisive role in protracting or shortening decision making process.

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