Social Identity

The persistence of caste in India: An economic explanation

  • Blog Post Date16 July, 2012
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Kaivan Munshi

University of Cambridge

Despite many efforts by the government and by civic institutions, the caste system continues to have a firm hold on Indian society. This column presents an economic explanation for this persistence and argues that economic development rather than social engineering may be the most effective way to dismantle this system.

Why does caste continue to play such an important role in Indian life? One explanation is that ancient inequities and prejudices are slow to change. The higher castes, which exploited the lower castes for centuries, continue to discriminate against them both socially and economically today. A second explanation, which has been the subject of intense public debate, is that caste reservation in higher education and the government has served to perpetuate a system that would otherwise have withered away. While these explanations for caste-persistence are clearly potentially salient, I focus on a third explanation that has received relatively little attention. This explanation, which synthesizes research I have conducted in rural and urban India over the past 15 years, is based on the many forms of economic support that the caste provides to its members.

In the stylized world described by introductory economics textbooks, the market provides insurance and credit for people to invest and make purchases. Workers find jobs instantaneously and are paid a wage in line with their ability. The real world, especially a developing economy, does not function in this way. Market insurance is unavailable to a large section of the population. Bank credit is also unavailable without collateral, either because banks cannot observe whether borrowers are creditworthy or because they will refuse to repay their loans even when they can. Finally, many individuals do not get the jobs they deserve, either because they don’t have the money to invest in costly education or because potential employers have no way of knowing how able they really are and so will be reluctant to hire them.

In such an economy, social networks will often emerge in response to market failures. Members of a tightknit social group, living in the same neighborhood or sharing kinship ties, are well aware of the creditworthiness and the ability of each other. Members of such groups can also be sanctioned for reneging on their commitments. This allows social groups to form informal ‘mutual insurance arrangements’ and to provide loans to their members. Employed workers can also help capable unemployed members of their group find a job by providing referrals. Social networks thus work in parallel with the market economy, supporting the economic activity of their members in many different ways.

In India, individuals continue to marry almost exclusively within their (sub) caste or jati. Given the segregation along caste lines that continues to characterize the Indian village, most social interactions also occur within the caste. The jati is thus the natural social unit around which networks would crystallize in India. Indeed, rural insurance arrangements and urban job networks have long been organized around the jati. It is this relatively unexplored feature of the caste system – the ability of the caste to provide major forms of economic support to its members – that I believe has much to do with its persistence in modern Indian society.

Caste networks in the village

In an economy dominated by rain-fed agriculture, income can fluctuate widely from one year to the next. Marriages and adverse health events can also impose major expenditures, which are equivalent to negative income shocks, on the household. Risk-averse individuals want to smooth their consumption in the face of income uncertainty and so the gains from insurance can be substantial in such an economy. In rural India, mutual insurance arrangements have historically formed and continue to be formed around the jati. Households that receive a negative income shock receive support in cash and kind from relatives and other members of the jati. In the future, they reciprocate by providing the same support to other members of their community who receive negative income shocks. My research with Mark Rosenzweig indicates that the caste is the most important source of support, more important than banks or moneylenders, for major events such as illness and marriage, as well as for consumption smoothing in rural India (Munshi and Rosenzweig 2009). Mazzocco and Saini (2012), using a different data set, cannot rule out the possibility that full insurance takes place at the level of the caste but they can at the level of the village. This leads them to conclude that the caste rather than the village is the social unit around which insurance is organized in rural India.

These results are not surprising since the caste has accurate information about the income shocks that each of its members receives and those that renege on their obligation to support less fortunate members can be severely sanctioned. As long as income risk remains a prominent feature of the economy and as long as market insurance is unavailable, the caste will continue to play an important economic role in rural Indian life. What is perhaps more surprising is that the caste plays an important role in the city as well.

Caste networks in the city

Historical accounts indicate that traditionally rural castes supported the rural-urban migration that accompanied British rule and the growth of cities in the nineteenth century (Chandravarkar 1994, Rudner 1994). Particular castes found particular niches in the urban labor market, and once networks were established they supported the movement of fresh migrants from the hinterland. More than a hundred years later, Mark Rosenzweig and I surveyed the parents of Maharashtrian school children who entered schools in Dadar, Mumbai, over the 1982-2001 period. Seventy percent of the parents employed in blue-collar occupations reported that they received a job referral from a member of their caste, while about thirty-five percent of white-collar professionals reported receiving such assistance (Munshi and Rosenzweig 2006). These numbers match referral statistics from other countries. The chain migration that allowed jatis to establish themselves in the city, often over the course of many generations, is not particular to India. What makes the Indian experience different is the role played by a specific social institution -- the caste -- in supporting rural-urban migration and subsequently providing jobs for its members in the city.

Future prospects for caste networks

What are the prospects for caste networks in the future? Many of the urban jobs which were once difficult to obtain without access to a caste network are now less important with the restructuring of the Indian economy. For example, jobs in Mumbai’s mills and factories have largely disappeared. But this does not mean that urban networks will now be irrelevant. Harish Damodaran’s (2008) fascinating book on Indian entrepreneurs documents the movement of castes from agriculture and administrative occupations into business in recent decades. My own work on the diamond industry shows how a historically disadvantaged caste took advantage of a shock to the world supply of rough diamonds in the late 1970s to move from agriculture and then industrial labor into the export business over the course of a single generation (Munshi 2011). As long as such opportunities continue to arise and as long as markets continue to function inefficiently, caste networks will retain their salience. This may explain why less than five percent of the respondents in all the surveys I have conducted, in rural and in urban India, marry outside their caste. The only exception to this pattern are the Maharashtrian households we surveyed in Mumbai, where out-marriage starts to increase substantially in the 1990s as their traditional blue-collar networks started to break down with globalization. Economic development and the opportunities that come with it, rather than social engineering, may be the most effective way to dismantle the caste system.

Further Readings

  • Chandavarkar, Rajnarayan. 1994. The Origins of Industrial Capitalism in India: Business strategies and the working classes in Bombay, 1900-1940. Cambridge: Cambridge University Press.
  • Damodaran, Harish. 2008. India´s New Capitalists: Caste, Business, and Industry in a Modern Nation, Ranikhet: Permanent Black.
  • Mazzocco, Mauricio and Shiv Saini. 2012. Testing Efficient Risk Sharing with Heterogeneous Risk Preferences, American Economic Review, 102(1): 428-468.
  • Munshi, Kaivan. 2011. Strength in Numbers: Networks as a Solution to Occupational Traps, Review of Economic Studies, 78: 1069-1101.
  • Munshi, Kaivan and Mark Rosenzweig. 2006. Traditional Institutions Meet the Modern World: Caste, Gender and Schooling Choice in a Globalizing Economy, American Economic Review, 96(4):1225-1252.
  • Munshi, Kaivan and Mark Rosenzweig. 2009. Why is Mobility in India so Low? Social Insurance, Inequality and Growth, NBER Working Paper No. 14850.
  • Rudner, David West. 1994. Caste and Capitalism in Colonial India: The Nattukottai Chettiars, Berkeley: University of Calfornia Press.
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