Does India need more States?

By Devesh Kapur

THE RECENT carving out of three new States (Chhattisgarh, Jharkhand and Uttaranchal from Madhya Pradesh, Bihar and Uttar Pradesh respectively) has raised concerns that this could amplify rather than dampen instability. Fears have been raised that in a society as heterogenous as India's, creating new States may simply open a Pandora's Box, with an ever-growing list of claimants. This, it is argued, could not only result in a further ethnification of Indian society (presumably at the cost of national integration) but also add additional wasteful administrative expenses in new capitals, bureaucracies and Ministries. Large States may diversify risk while enjoying economies of scale and scope, which could be lost upon breakup. Indeed with eight (possibly more) candidates in the wings - three additional States from Uttar Pradesh (Purbanchal in the east, Harit Pradesh in the west and Bundelkhand in the south), Bodoland (from Assam), Gorkhaland (from West Bengal), Telengana (from Andhra Pradesh), Vidarbha (from Maharashtra) and Saurashtra (from Gujarat) the question, ``Does India need more States?,'' needs some reflection. Should more States be created and how would India's development trajectory change if this were to occur?

The answer is a qualified yes. The country is more likely to benefit from a greater number of (smaller) States, than the status quo, notwithstanding the aforementioned concerns. Even with the creation of three new States, India still has just over half as many States as the U.S., with four times the population. In particular, the creation of additional sub-national units offers an institutional solution that could help check the growing economic divergence among States, without sacrificing economic efficiency.

There are several arguments that suggest a strong political and economic imperative for a greater number of States in the Indian Union. First, this allows for greater competition among States as well as for more experimentation and innovation. Both act as a positive force for reforms. There is considerable evidence that such market-preserving federalism has been an important political factor that has helped the rapid diffusion of reforms across sub- national units in China. The competition amongst Indian States to attract investment attests to this reality. Second, smaller States will have relatively more homogenous preferences. The tribals of Madhya Pradesh and Bihar may have a different set of priorities than the majority population of the State. The creation of new States allows groups to choose Governments whose policy choices are more in line with their preferences. This is likely to make policy-making less onerous and (other things being equal) is likely to mitigate political instability. Third, smaller States means smaller political stakes. India's problem today is not centralisation of power between the first and second tiers of Government (i.e. between the federal and sub-national Governments) but between the second and third tiers of Government (i.e. between States and local Governments).

Four, in large States with extensive natural resources, the natural resource curse thesis means that the sub-regions with the resources inevitably suffer (east Madhya Pradesh and southern Bihar are good examples). The demands from north Bihar politicians for compensation for the loss of the natural wealth of south Bihar underscores this point. If anything, it is the latter who should be claiming compensation for decades of stolen wealth. Five, if the quality of political leadership is a random variable, and the probability of a good leader being elected is low, dividing a State improves the probability that one of the units gets a good leader. If good leadership results in higher growth then by itself this will not change the overall average. However, if competition and spatial diffusion of innovation and other neighbourhood effects matter, then a virtuous circle of State-level reforms could result. Finally, since all structures of organising Government are pyramidal, smaller size of sub- national units also has two further advantages that are likely to improve the quality of governance. Vertically, there are likely to be fewer hierarchies in administrative structures, which improves the quality of information that decision-makers receive. And horizontally, the span of control is smaller, allowing for greater focus.

India's historical experience with state reorganisation, in two main phases the mid-1950s and the late 1960s, has also been reassuring. The major reorganisations were in the South, West, the Northwest (Punjab) and the Northeast. Analytically the interesting question is whether smaller units carved up from the larger entity have done better than the whole. While categorical evidence is not available, the general impression is that States that emerged from these reorganisations have done better. The experience of Himachal Pradesh, which today has emerged after Kerala as the exemplar in human development, is a good example of the possibilities and value of local experimentation, consequent to break-up of larger units. The only region that remained unaffected was the BIMARU States.

To be sure, creating new States is no panacea for India's problems and evidence from the Northeast could be cited to demonstrate that smaller States do not necessarily result in better economic performance. But the counterfactual in that region is hardly likely to have been better. Still, there are significant issues that need to be addressed before a further set of new States is created. The least of the problems is the one most cited, namely an increase in fixed administrative costs. They will indeed increase but modestly so. Given current excess staff at all levels of the Government in India, newer States need not mean an overall expansion in Government payrolls although there certainly are some additional expenses that come with a new state capital etc.

With most Indian States still larger than most countries, the case for the benefits of state breakup is very strong. However, three critical issues need to be addressed if the potential benefits of additional sub-national units are to be realised. One, India needs to considerably strengthen institutional mechanisms for collective action across state boundaries. This is particularly so since it is possible that the benefits at the state level may result in greater instability at the national level, if one result of a greater number of States is to further fragment political parties. The Inter-State Council offers a mechanism for inter-state coordination and its recent decision to implement a uniform floor rate for sales tax and value-added tax, and to withhold a fraction of Central Plan assistance from States which do not adopt the uniform floor rate, is a good example of efforts to limit the race to the bottom in States tax regimes. On the other hand, the poor record of inter-State water tribunals in resolving disputes points to the continued weakness of inter- State coordination mechanisms, and with environmental concerns and water shortages bound to become even more pressing, the consequences will become increasingly adverse. The refusal by States to sanction the creation of a federal police force and attempts to weaken Article 311 of the Constitution (on the federal civil service) are also tragically short-sighted. The role of the federal civil service as an institution of coordination needs strengthening.

A second danger arises from the possibility of increased parochialism, manifest in anti-migrant sentiment or barriers to movements of goods. Firm efforts must be made to abolish all barriers to inter-State movements of factor and goods, especially labour mobility. Finally the procedural requirements for creating new States need greater transparency beyond the Government's current official position: a resolution by the State Assembly and economic viability. In addition, a constitutional requirement of a minimum population size (say one crore) for a new State as well as a super-majority vote (at least sixty per cent) through a referendum in the districts seeking to form a new State would ensure that much needed expansion does not degenerate into political brinkmanship.

(The writer is Assistant Professor of Government, Harvard University.)

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