Poster Paper: Do Smaller States Lead to More Development? Evidence from Splitting of Large States in India

Saturday, November 5, 2016
Columbia Ballroom (Washington Hilton)

*Names in bold indicate Presenter

Mukesh K Ray and Mywish Maredia, Michigan State University

Politics is usually considered to the detrimental in the path of economic development; not in the case of India. After a long political struggle the advent of the new millennium saw the creation of three new states in India -- Chhattisgarh, Uttarakhand and Jharkhand (New States), carved out from the parent states of Madhya Pradesh, Uttar Pradesh and Bihar (Old States), respectively. The idea behind splitting was to provide more autonomy and political representation to the earlier neglected parts of the state by making them a full-fledged independent states (Kumar, 2010). Smaller administrative boundaries are likely to make administration more responsive to people’s needs due to the democratic framework and therefore would lead to better service provision by government stimulating economic development (Mawdsley,2002). Further, the new states are likely to kick start industrialization for generating new jobs and create new sources of finances, and attract new industries, which will again bolster growth.

As states are the proximate determinants of local institutions driving development outcomes, a change in their boundaries provides an opportunity to evaluate the impact of these shifts on the provision of public goods and distribution of development outcomes. The splitting of states can have many effects on both the parent and the new state. For example, the division can unleash suppressed growth potential in the new state, stemming from efficiency in decision making, better management and allocation of public resources due to smaller size, conducive policies that meet local needs in a geographically and culturally homogenous areas, and control over natural resources found in the newly created states. Potential negative impact on the new state could be the increased vulnerability to the pressures of corporations and the greed of newly emergent regional elite. However, as majority of the impacts seem to be positive, the paper hypothesizes that the overall impact of state splitting on both states will be positive and will be reflected in the developmental indicators. The paper uses large datasets from National sample survey (120,000 households over multiple periods) and Indian Human Development Survey to test this hypothesis.

The paper uses three methods to show the impact of the split on development through policies and efficient administration. First it uses a difference-in-difference in which all the adjacent states are considered as comparison and the states that go through division as treatment. Second, this paper goes one step ahead and uses the methodology of synthetic control to get precise estimates of impact of division. The synthetic control which is a relatively new method in economics is relevant when there is no single untreated unit that provides a good comparison for the unit affected by the treatment or event of interest. Third, to show how the new states have done better (or not) compared to the old states, the paper uses a Regression Discontinuity Design based on geographical boundaries (Imbens and Lemieux, 2008).  RD method was used to see the changes in developmental indicators on people living in districts on both sides of the newly formed state borders.