The number of district and municipality in Indonesia has been doubled within six years. The local government is proliferated in the sense that they are multiplying in such a short period. They were “only” bit more than 200 units when Suharto step down in 1998, and doubled into 466 units in 2006. Interestingly, this took place in an absence of definite plan, as the state shows its enthusiasm in decentralization and bottom-up process of decision-making. This article aims to scrutinize this phenomenon in order to understand the way identity politics evolve within the process of decentralization, and the extent it responsible in explaining the proliferation. In doing so, there are several point to make. First, the state can no longer maintain its hegemonic role. During Sukarno and Suharto leadership, state equipped itself with technocracy and bureaucracy to ensure that it has effective control over its people as well as its agenda. Through technocratically-equiped bureaucracy the state mobilisized certain kind of discourse, which in turn defining what is deemmed proper to be done within the banner of ethnic as well as religious solidarity. The state lost much of its coercive capacity and ethnic and religious solidarity-making were virtually unconstrained in shaping political landscape, not only at the local but also at the national level. Discursive engagement presented in this study will figure out why that process takes place. Second, local elite plays critical role in the process of proliferation. Moreover, they are in many cases even reverse their role. They previously are co-opted by the state; but the they are co-opting back the state. Why is that so? The state are well aware, and even too sensitive to, the potential of ethnic-based, race-motivated conflict as well as secession potential (Wellman, 2005). Indeed, conflict did take place quite extensively in Indonesia for that reason. The state chooses to accommodate the interest of local elite, instead of confronting them which also mean allowing the state to ruin. In other words, proliferation of local government serves as strategy for preventing political disintegration. Local autonomy is the best solution to ethnic conflict in Indonesia. (Bertrand, 2004). Third, the proliferation of local government confirms the importance of territoriality or territorial attachment (Kahler and Walter, 2006). Territory serve as basis for identity politic. By establishing new set of local governments, the central government still retains territorial control and at the same time local activists also have opportunity to do so.