Is Dividing Sub-National Administrative Units Beneficial for the Economy? Evidence from Indian Experience

Abstract

Why do we do? Three new Indian states were created in November 2000- Chhattisgarh from Madhya Pradesh; Jharkhand from Bihar; and Uttarakhand from Uttar Pradesh, the largest reorganization of states since 1956. These states comprised of over a third of the population, a fourth of area, and a fifth of the domestic product of India. An economic rationale was also given, along with identity and self-determination, while introducing the bill in the Indian parliament. It is to be noted that these states have been among the least developed regions of the country, both economically and socially. We take stock of the growth experiences of these states here.

What do we do? We construct gross state domestic products (GSDP) data for major Indian states for 1981-2015. This we do use four different GSDP series: 1981, 1994, 2000 and 2005. Fortunately, the Central Statistical Organization (CSO) provides data for the newly created states from 1994, seven years before the 2000 reorganization. Thus, we can analyze the separate entity, as well as a combined one. For example, we analyze the growth rates of the new states of Bihar and Jharkhand and the combined entity of erstwhile Bihar. We use the difference-in-difference framework, along with growth rate comparisons.

What do we find? Three important results emerge from this exercise. Firstly, in the initial five years, post-reorganization the states seem to have different growth experiences. All three new states grew at a faster rate relative to their own pre-reorganization growth rates, respective parent states, and all India. The growth rates of parent states declined in this period. Secondly, when we take a longer view, fifteen year period, all the six states grew faster than their pre-reorganization performance and comparable to all India growth rates. Thirdly, there seems to be a differential impact on different sectors of the economy across different states. An important conclusion from this exercise: reorganization did not seem to have a negative impact, even on the parent states.

Keywords: State Reorganization, GSDP, Difference-in-Difference

JEL Classification: I31, O11, O20