A New System for India

The government's free-market reforms will put a premium on ability and could help dismantle the country's age-old caste system

OVER a cup of afternoon tea at the canteen of the University of Bombay's Kalina campus, I asked a graduate student about his experience with India's caste system.

He described the one-room school he attended as a child in the state of Madhya Pradesh. There the caste system determined seating order. Children of Brahmins, the scholarly caste, sat in the front rows. Behind them sat the children of his caste, the Kshatriyas, or aristocratic caste. Next came the children of the Vaisyas, or tradespeople. Then there were the seats for the children of the Sudras, or menial workers. Last sat the Untouchables, who Mahatma Gandhi renamed the Harijans, or "Children of God."

At the end of each month the teacher would collect a small fee from each student. All students, except the Harijans, handed their coins to the teacher. The Harijans, to avoid defiling the teacher, had to put their coins in a vessel of water before the teacher would accept them.

Today, the caste system not only continues to haunt lower caste members, it also hurts India's economic prospects. But there's hope for change.

India's New Industrial Policy (NIP) may do more to weaken the caste system than all the well-intentioned social legislation of the last 44 years since independence. One Indian professor, echoing popular sentiment, told me, "We got political freedom on Aug. 15, 1947, but we got economic freedom on July 24, 1991," the day NIP was announced.

Briefly put, NIP turns India away from a government-planned and regulated economy toward a competitive free market. It reduces licensing requirements; permits the partial privatization of public sector enterprises (PSEs); allows foreign equity participation up to 51 percent in high priority industries; and abolishes government control over foreign technological agreements in key areas.

These steps are a welcome relief for India, a country that has suffered tremendous government failure, particularly in industrial development and education. This failure arises out of a cozy fit between India's peculiar brand of elitist socialism and its 3,000-year-old caste system, which has inbred in the higher castes a haughtiness toward commerce and any work considered menial.

Such an attitude partly explains why a newly independent India was drawn to the central planning model of the Soviet Union. The Soviet economy was also based on a demeaning view of commerce. A planned Indian economy kept the market subject to politics and left the higher castes in control. This opened the path for the caste system to entrench itself in the PSEs.

Today India has more than 230 federally run and 630 state-run enterprises. Isolated from competition, the PSEs have been relatively free to exercise hiring biases against members of the lower castes. By the 1980s, the majority of PSEs were losing money - despite government subsidies.

MEANWHILE, more than 50 percent of India's adults remain illiterate. Worse, half of governmental expenditures benefit the 10 percent of Indians who are best educated, and mostly higher caste. Legislation addressing caste divisions has not worked well. India has its own version of affirmative action quotas called caste-based reservations. They have brought great political and social conflict.

The 1990 attempt by former Prime Minister V. P. Singh to increase reservations in the PSEs from 22.5 percent to 49.5 percent led to violent demonstrations and student self-immolations and helped bring down his government. But even if attempts like Mr. Singh's were to succeed, increased reservations will do little to help the lower castes. Effective policy requires education reform to bring the lower castes up to competitive standards. This, however, will take years.

But greater market competition, which NIP promises to bring, can begin to help now. A firm in a competitive market can't afford the luxury of hiring a less productive member of a higher caste over a more productive member of the lower castes. Moreover, a competitive market offers much greater incentive for lower caste members to spend time, money, and energy in pursuit of training and education.

Examples of entrepreneurial potential outside the higher castes abound. The Jats, a farming community, were considered a lower caste before independence, but through increased productivity the Jats have become prosperous and are diversifying into other activities. Another example is the migrant Hakka Chinese, who dominate the leather-tanning industry in the north. High Hindu castes have traditionally believed that leather-tanning is defiling. Yet the leather goods industry is one of India's booming expor t earners, reaching $1 billion per year.

Because of India's history of anti-market policies, skeptics doubt that NIP will last. But several factors suggest it will.

First, India finds it embarrassing to be outdone by the success of the smaller four "tigers" of Asia, namely Hong Kong, Taiwan, Singapore, and South Korea. Second, the Soviet Union itself has discredited the centrally controlled and planned economy as India's model for economic development. Third, neither of India's two major opposition parties to the ruling Congress Party has made NIP a political issue.

Finally, and closer to the heart, many higher caste parents have watched their children leave India for opportunities in more market-friendly countries. In this way, they are like the villagers of medieval Hamlin whose children the Pied Piper charmed away. But Indians now have a chance to lure their children back by playing their own market-economy tunes.

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