Does the creation of smaller states lead to higher 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. But the debates along economic lines were muted, owing to a lack of data. Equipped with three and a half decades-long macro panel data, we investigate whether the event had an impact on the per capita income. For comparison, we construct five separate counterfactuals using techniques such as synthetic control and elastic net regularization. The three erstwhile `combined' states do not show any evidence of extraordinary growth. We further investigate the six states separately to see if the `new' states grew at the expense of their `parent' states. The state of Uttarakhand shows `extraordinary' growth 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 path. Overall, we find that the creation of smaller sub-national administrative units may not be a panacea for their economic problems.