State-size and economic growth: evidence from state reorganization in India

In the largest territorial reorganization since the 1950s, when the modern state boundaries were demarcated, the Indian union government carved out three new states from three large north Indian states in November 2000. This was accompanied by discussions along political and sociological lines. Owing to a lack of data, the debates along economic lines were muted. Equipped with three and a half decades-long macro-panel data, we exploit this natural experiment, to investigate whether smaller states grow faster, in terms of per capita income. We construct five separate counterfactuals, using techniques such as synthetic control and elastic net regularization, for comparison. We do not find statistical evidence that support higher growth for the three erstwhile 'combined' states, in the post-reorganization period, compared to their counterfactual. We further investigate the six states separately to see if the 'new' states grew at the expense of their 'parent' states, or vice versa. The state of Uttarakhand shows significantly higher growth compared to its counterfactual in the post-reorganization period. Two other smaller states (Bihar and Chhattisgarh) did grow faster than their counterfactual, but do not qualify for the statistical significance test. Three other states (Jharkhand, Madhya Pradesh, and Uttar Pradesh) also do not show a significant change in their growth trajectory. Overall, we find that the creation of smaller states may not be a panacea for their economic problems.