Pros:
Better connectivity within districts and state capital
Better utilisation of available resource
Containing ticketless travel
Better punctuality can be achieved
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with better economy will have better public amenities
Cons:
2 levels of politicisation increase favouritism
Intentional neglect considering political affiliation
Running interstate trains would be cumbersome
Small state will get ignored
Passenger facilities will be affected in poor states
Appointment and training of Railway employees will be the biggest challenge

This is an old article (link belwo) which came about 4-5 years ago. From 2014-2017 (till 31 March, 2017) demands were received from 55 VIPs for new zones and from 119 VIPs for new divisions ( including Nitin Gadkari, Yogi Adityanath, Sachin Tendulkar , LK Advani & many more !!)
Railway board in their response clearly stated "Creating railway zones is a political compulsion" Committees formed by the railway board earlier in their reports have not only said that creating more zones was not financially or operationally feasible, but they have also urged the board to reduce the number of existing zones.
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per article The cost of infrastructure for creating a new zone, according to an internal assessment of railways will be around Rs 205 crore while creating a new division will cost the national transporter around Rs 29 crore

click here

Pros -
Regional discrimination in railway jobs will be reduced

Cons -
-Extreme politicization - Railways will become directly tied to state politics
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-Formation of divisions/zones based on state/district instead of traffic patterns will lead to worse traffic management, more congestion and more delays

- More imbalanced distribution of revenue - states with trunk lines and lot of freight traffic will earn more revenue, but will have to give it up for the other states. This can lead to political fights.

- Running long distance trains will become a headache - Earlier Madras - Delhi route only required approval from 3 zones - SR, CR, NR, which later became 4 zones in 1966 - SR, SCR, CR, NR and is now 6 zones - SR, SCR, CR, WCR, NCR, NR. With state based zones and divisions, this will need approval from 8-9 zones. Running long distance trains will become a huge hassle.

- Little to no benefit for short-distance or intrastate trains -
Entire state of Andhra Pradesh was in SCR since the late 1970s. Even after 50 years of formation of SCR, there is still very poor connectivity between Coastal AP and Rayalaseema area.
SWR formally started operating in 2003, but there were no benefits for Karnataka until the MoSR started prioritizing Karnataka in the past few years. The average number of new trains introduced per decade was higher under SR and SCR than under SWR until the MoSR intervened a few years ago.
So, having state based zones doesn't mean that priority will be given to intrastate connections.

- Management problems - Too many zones and divisions will create too much of bureaucratic hurdles even for small tasks. It will be a case of 'Too many cooks spoil the food'.