The persistence of caste in Indian business

Mint edit points how caste continues to matter in Indian business, The edit is based on this paper by team of 4 economists.

A research paper titled Firms Of A Feather Merge Together: Cultural Proximity And Firms Outcome by scholars of Indian Institute of Management Bangalore and Pomona College, Claremont, California, has revealed that a disproportionate number of mergers and acquisitions (M&A) occur between businesses whose directors belong to the same caste group. The report, which took up 1,200 M&A deals in the country for analysis, also delves into the mechanism that makes endogamous deals more likely. Not only is information shared more smoothly between caste-proximate firms, their directors tend to place a higher value on the outcome of such a merger. To those who see business as a caste-neutral meritocracy, this is an eye-opener.

A crucial point made by the study is that caste-proximate deals see a significant reduction in value compared to caste-distant ones. In other words, businesses are harmed by in-group mergers. That a policy of caste diversity is always better for profits, however, cannot quite be inferred from this. It could well be the case that identity blindness, which ought to bring about diversity, holds the key. Several observers had expected the forces of private enterprise and free market competition unleashed by liberalization to loosen the hold of caste on commerce. Indeed, millions of Indians found work beyond the traditional occupations ordained by their lineage, but even a cursory look at any list of India’s business elite since 1991 shows the sustained dominance of a caste group that has been in this profession down the ages. This is so even of new-age markets to an extent. The role of nature versus nurture in this remains contested, though the latter seems far better backed by academic research.

What’s woefully underexplored by economists is what the prevalence of caste implies to the Indian economy. A basic premise of the free market model is the absence of entry barriers—not just for firms keen to enter markets for goods and services, but also for people pursuing career options. In theory, companies that are under the pressure of competition to perform would want to hire workers in a way that maximizes the productivity of their workforce; a caste bias would probably stymie the cause of corporate efficiency. None of it may be overtly or even consciously done, but the effects of such a tendency could add up. Caste, thus, would result in an inefficient allocation of human resources across the economy. On this reading, the expectation that a shift towards capitalism would dissolve the unofficial rigidities of our labour market may have been wildly optimistic. For India to achieve its economic potential, the identity of individuals needs to matter less and less.




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