Caste and the Indian Economy ∗ Kaivan Munshiy June 2017 Abstract Caste plays a role at every stage of an Indian's economic life; in school, university, the labor market, and into old age. The influence of caste extends beyond private economic activity into the public sphere, where caste politics determines access to public resources. The aggregate evidence indicates that there has been convergence in education, occupations, income, and access to public resources across caste groups in the decades after independence. Some of this convergence is likely due to affirmative action, but caste-based networks could also have played an equalizing role by exploiting the opportunities that became available in a globalizing economy. Ethnic networks were once active in many advanced economies, but ceased to be salient once markets developed. With economic development, it is possible that caste networks will cease to be salient in India. The affirmative action programs may also be rolled back and (statistical) discrimination in urban labor markets may come to an end, if and when there is convergence across caste groups. In the interim period, however, it is important to understand the positive and negative consequences of caste involvement across a variety of spheres in the Indian economy. Keywords. Caste. Affirmative Action. Community networks. Migration. Mobility. Education. Business. Risk-Sharing. Public Goods. Politics. JEL. H41. I25. J12, J62. J71. O15. ∗Research support from Cambridge-INET, the National Science Foundation through grants SES-0431827 and SES- 0617847, and the National Institutes of Health through grant R01-HD046940 is gratefully acknowledged. I am grateful to my collaborators Nancy Luke and Mark Rosenzweig for many conversations that have shaped my thinking on this topic and to the editor, Steven Durlauf, five anonymous referees, and Guilhem Cassan for comments on the paper. I am responsible for any errors that may remain. yUniversity of Cambridge 1 Introduction Caste plays a role at every stage of an Indian's economic life. His caste will determine the type of school he has access to, the way he is treated by his teachers, and his interactions with his classmates. In young adulthood, his caste will determine whether or not he benefits from affirmative action in higher education and (later) access to government jobs. Over the course of his working life, his caste will determine how he is assessed by potential employers, while, in parallel, networks organized around his caste help him find new jobs. Overlapping caste-based networks will provide him with credit, help him start a business if he is endowed with entrepreneurial talent, and provide him with insurance against income shocks and major contingencies into old age. The influence of the caste extends beyond private economic activity. Electoral politics in post- independence India has had a strong caste component, with political parties targeting public resources to particular castes in return for their votes. Caste politics extends down to the local level. While it is well known that local politicians target their own caste, new research shows, in addition, that cooperation within the caste can lead to an increased supply of non-excludable public goods. The importance of caste in India's economy and polity should not come as a surprise, given the structure of its society. Hindu society is stratified into four hierarchical classes or varnas, with a large sub-population of untouchables excluded from this system entirely. Within each of these classes, and among the untouchables, are thousands of castes or jatis. The central rule in Hindu society is that individuals must marry within their own caste. Recent genetic evidence indicates that this rule has been strictly followed for over 2,000 years. Each caste consists of approximately 250,000 members spread over a wide area covering many villages (and, sometimes, urban locations). Spatial segregation within the village results in a high degree of local social connectedness, with caste clusters in distant villages linked to each other through ties of marriage over many generations. The unusual social architecture described above has given rise to economic networks organized around specific castes (jatis) that are exceptional in their size and scope. While these networks smoothed the consumption of their members in the face of income fluctuations for centuries, they later expanded the domain of their activity to the urban labor market and into business when new opportunities became available under colonial rule. Caste networks have continued to play an important role in the Indian economy after independence in 1947. This period witnessed, in parallel, the establishment of the world's most aggressive affirmative action program, whose stated objective was to eliminate the 1 historical inequities of the caste system. Internal cooperation within castes supports economic networks, which compete with each other in the market without regard to their position in the social hierarchy. The much more visible affirmative action program, in contrast, was explicitly targeted at large groups of historically disadvantaged castes, giving them preferred access to higher education, government jobs, and political representation. These two forces have worked in tandem to shape the evolution of the modern Indian economy. The aggregate evidence indicates that there has been convergence in education, occupations, income, and access to public resources across caste groups in the decades after independence. Some of this convergence is likely due to affirmative action, but caste-based networks could also have played an equalizing role by exploiting the opportunities that became available in a globalizing economy. It is possible that the caste-based affirmative action programs will no longer be needed at some point in the future. The available evidence indicates that caste discrimination, at least in urban labor markets, is statistical; i.e. based on differences in socio-economic characteristics between upper and lower castes. This type of discrimination will disappear, if and when there is convergence between these broad caste groups. Caste networks and caste politics will also lose their relevance once the market economy and the democratic political system begin to function efficiently. In the interim period, however, it is important to understand the positive and negative consequences of caste involvement across a variety of spheres in the Indian economy. 2 Caste in Indian Society The caste system is a system of social stratification in India that goes back as far as 1500-500 BCE. The caste system is comprised of four hierarchical classes or varnas, the Brahmins, Kshatriyas, Vaishyas, and Shudras. Certain population groups, known today as Dalits, were historically excluded from the varna system and were regarded as untouchables. Within each varna, and among the Dalits are hundreds of castes or jatis. The view among scholars of the British colonial era, as articulated by Dumont (1970), was that the hierarchical aspect of the caste system, characterized by the varnas, was largely symbolic. Upper castes maintained higher levels of ritual purity than lower castes, for example, by being vegetarian, but these differences had no direct economic consequences. Other research has contested this view, arguing that social status allowed the upper castes to economically exploit the lower castes (Gupta 2000, Dirks 2001). 2 In recent decades, the affirmative action program put in place by the Indian government has given the varna system a new role in the Indian economy. This affirmative action program reserves positions in institutions of higher education, the central government, and local politics for individuals belonging to historically disadvantaged castes. These castes comprise the former untouchable castes, who are collectively classified as Scheduled Castes (SC's), socially and economically marginalized indigenous ethnic groups that are classified as Scheduled Tribes (ST's), and, more recently, another group of castes, which are referred to as Other Backward Castes (OBC's). When evaluating the affirmative action program, it is appropriate to compare broad caste categories; i.e. SC, ST, OBC versus the other (forward) castes. This may also be appropriate when studying discrimination in urban labor markets, where employers may care about the socio-economic background of job candidates, which is proxied by caste category, rather than their specific caste. However, any analysis of economic networks in the Indian economy must be based on the caste or jati and not on the broad caste group (SC, ST, OBC) or the village. As discussed below, a number of recent studies on networks in India have ignored this critical requirement. Unlike the varnas, the castes or jatis were explicitly established to serve an economic function. Gupta (2000) posits that they were initially occupational guilds, tracing their emergence to the feudal period (7th to 12th century). Other scholars have claimed that jati identity and the rigid boundaries between castes that exist today were a creation of the British colonial government (De Zwart 2000, Dirks 2001). Although the British were not the first to enumerate the Indian population by caste, this goes back to Mughal rule (Appadurai 1993), it is true that they assigned government jobs to particular castes, possibly creating a new jati identity or reinforcing an existing identity (Bayly 2001). Recent genetic evidence, however, places the origins of the jati system much