The Role of Caste-Based Networks in the Indian Economy

Originally published in the Emory Economics Review

The Indian economy is one of the fastest-expanding major economies in the world right now (Morgan Stanley, 2022). However, even as the nation makes headlines for rapid growth, the grim reality is that the unemployment rates continue to climb — increasing from 5% tp 7% over the last 5 years (CMIE, 2023). The country is growing, but not creating jobs for its 1.4 billion people (World Bank, 2023), and is thus stuck in a phase of jobless growth. The influence of caste in various spheres of the Indian economy might be one of the reasons behind this.  

The caste system in India goes as far back as 1500-500 BCE (Munshi, 2019). This social hierarchy, based on birth and occupation, comprised four broad classes or varnas—Brahmins (priests and scholars), Kshatriyas (warriors and rulers), Vaishyas (merchants and traders),  and Shudras (farmers and laborers). Some population groups, known as Dalits, were excluded from this system and deemed as “untouchables”. Within these varnas exist thousands of castes or jatis. These communities tend to be close-knit. A recent 2021 study showed that seven-in-ten Indians said that all or most of their close friends belonged to the same caste (Pew Research Center, 2021). 

Historically, the upper castes held a disproportionate amount of wealth and power, while the lower castes were relegated to manual labor and poverty, leading to a significant wealth gap between upper and lower castes. 

Suppose Rohan and Tia are two risk-averse individuals who earn either ₹2000 or ₹4000 per period. Their incomes fluctuate  and cannot be predictably stable over time. Assuming that Rohan  and Tia are risk-averse, they will benefit from a consumption-smoothing mutual insurance agreement (Munshi, 2019). If Rohan earns more than expected in a certain period, he helps out the unfortunate Tia, who does the same for him when she earns more. Rohan and Tia are both better off. The same could work for a group of people by pooling in everybody’s income, and then distributing it on the basis of some prior agreement. 

This is essentially the idea behind mutual insurance in caste-based networks in rural India. As private credit and government safety nets are absent in the economies in which they operate (Grimard, 1997), communities are able to smooth their income risk very effectively. In fact, based on a survey conducted in South India after a major drought (Caldwell, Reddy, and Caldwell, 1986), it was discovered that 54% of consumption loans taken by village members during the drought were taken from other members in the same caste-based network. As a solution to the inadequacy of market credit and government safety nets, these caste-based networks prove to be an irreplaceable service. Marriage within the caste is often a prerequisite for membership of these caste-based networks, which further explains the relevance of jati in India’s economy and society today. Intimate social connections and close relations within the caste comprising several households scattered around the village support efficient insurance systems.

To take advantage of arbitrage opportunities, rural workers often move to urban cities for higher wages, leaving their communal obligations behind. Thus, rural households face the risk of losing access to caste-based networks as migrants cannot be trusted by the community to honor their obligations and their exact income cannot be known for sure by the community members. Often, the trade-off the aspirational migrant must make to experience an income gain by moving to the city is more costly than beneficial because of the resulting loss of network insurance. The stronger the network is, the more discouraged rural households are to send migrants to the city. This is one of the reasons behind low labor mobility in India despite a high rural-urban wage gap. Statistically, the Human Development Survey conducted in 2005 shows a male rural-urban migration rate of 6.8%; while in the male subsample of the Indian Demographic and Health Survey (DHS), the migration rate is 5.3%.  

Once a migrant does manage to move to the city, he prefers to bring in more people from his own caste, leading to a misallocation of labor inputs by excluding competent outsiders. Additionally, caste-based networks that encouraged their members to migrate to cities discouraged occupational mobility among the next generations (Munshi and Rosenzweig, 2003). 

Caste-based networks and market inefficiency are thus stuck in a seemingly endless cycle, both contributing to each other. The caste-based economic networks should disappear in the long run once the markets function efficiently if government programs are re-evaluated and made more efficient. 

Edited by Stephen Adams

Works Cited

Caldwell, J. C., Reddy, P. H., & Caldwell, P. (1986). Periodic high risk as a cause of fertility decline in a changing rural environment: Survival strategies in the 1980-1983 South Indian drought. Economic Development and Cultural Change, 34(4), 677–701. https://doi.org/10.1086/451554

Grimard, F. (1997). Household consumption smoothing through ethnic ties: Evidence from Cote d'ivoire. Journal of Development Economics, 53(2), 391–422. https://doi.org/10.1016/s0304-3878(97)00016-3

India: Asia's Star of the next decade. Morgan Stanley. (2022). Retrieved January 15, 2023, from https://www.morganstanley.com/ideas/investment-opportunities-in-india#:~:text=India%20is%20already%20the%20fastest,more%20than%201%20billion%20people. 

Munshi, K. (2019). Caste and the Indian economy. Journal of Economic Literature, 57(4), 781–834. https://doi.org/10.1257/jel.20171307

Munshi, K. D., & Rosenzweig, M. R. (2003). Traditional institutions meet the modern world: Caste, gender and schooling choice in a globalizing economy. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.424620

Unemployment Rate in India. Centre for Monitoring Indian Economy. (n.d.). Retrieved January 15, 2023, from https://unemploymentinindia.cmie.com/

Sahgal, N., Evans, J., Salazar, A. M., Starr, K. J., & Corichi, M. (2021, June 29). Attitudes about Caste. Pew Research Center's Religion & Public Life Project. Retrieved January 19, 2023, from https://www.pewresearch.org/religion/2021/06/29/attitudes-about-caste/ 

World Bank. (n.d.). Population, total - India. Retrieved January 15, 2023, from https://data.worldbank.org/indicator/SP.POP.TOTL?locations=IN