Small is better?

Yesterday I was watching NDTV and there was a debate over whether we should have smaller states. Of course it was a waste of time. No one seems to make any substantial point in those debates. If someone makes an attempt, the anchor immediately calls for a commercial break.

In this case too, most of the arguments made were emotional ones. How breaking up Maharashtra into two endangers the unity of India, is not immediately clear to a dispassionate observer, nor is it immediately obvious to him how having two Marathi speaking states is an affront to Marathi pride.

The economic arguments made, such as they were, only served to display the ignorance of the one making them. For example, a person from Western Maharashtra was claiming that Vidarbha (which is the eastern wing of Maharashtra) was not “viable” because it did not have any “natural resources”. Leave aside the simple-mindedness of using natural resources as a proxy for viability. Doesn’t the argument, if true, mean that it makes sense for a person from Western Maharashtra to let go of a Vidarbha that is sucking out the “resources” generated by the west?

On the other hand, the arguments for smaller states advanced by supporters of the idea, don’t ring true to me. They say that smaller states mean that the local government can focus its effort on the development of that state. Now, I am a capitalist and this idea of the government focusing its efforts to cause development scares me, because I’ve seen what disasters such efforts can cause. Duplication of government infrastructure – the ministries, the bureaucracies and the courts seems like a reason not to have smaller states.

Do we have any advantages that will offset the loss of economy of scale caused by division of states? The strongest reason I can think of is that states will compete among themselves to attract private investment and businesses. But they will do that only if they have to raise their own money.

I am not an expert on government finances – perhaps people in CCS know more about this – but it seems to me that the states do not have to raise their own money. Federalism in India means that the Central government collects most of the taxes and distributes it among the states based on some vague formula that decides how much each state needs. Naturally, there is much scope for politicking, and states exploit this fully by announcing populist schemes and blaming the Centre for not picking up the tab. Maharashtra complains that it gains no advantage from all the commercial activity that takes place in Mumbai. Bihar cribs that it has been deprived of the royalties that should accrue to it for the coal that is mined in the state. Who is right and who is wrong? No one knows.

I think that the case for smaller states makes sense only if it is also a case for financial independence. But that is not the reason why the supporters of those states want their states. They want it because they think that other regions are hogging the handouts from the Centre. They want their “fair” share. If that is the reason, then we had better not have any more states.