Caste networks continue to shape India's economic landscape: Cambridge economist

 

By Rajiv Shah 

A new working paper by University of Cambridge economist Kaivan Munsh  has revealed how centuries-old social structures both boost and constrain business activity. Focusing on a growing body of economic research, the paper suggests that India's caste system—a network of endogamous communities dating back nearly two to four thousand years—plays a powerful and often overlooked role in shaping the country's economy. 

The paper, titled "Community Networks and the Process of Development," documents how caste-based net works help individuals find jobs, access credit, and start businesses when formal markets fall short—but also how these same networks can lock out talented outsiders and restrict individual mobility.

'A Dense Web of Marriage Ties'

India's caste system comprises approximately 4,635 distinct genetic groups, with close to 95 percent of marriages continuing to follow traditional endogamous rules, the paper notes. "A dense web of marriage ties, formed over many generations, links members of each caste (directly or indirectly) to each other," Munshi writes.

These connections are not merely social. In rural India, caste networks provide a critical safety net. Survey data from the Rural Economic Development Survey shows that 20 to 25 percent of households report giving or receiving caste-based transfers—gifts or loans—in a given year. The amounts are substantial: receiving households obtain 20 to 40 percent of their annual income through these transfers, while sending households contribute 5 to 8 percent of theirs.

"Caste loans are the dominant source of informal credit," the paper states, exceeding money from moneylenders, friends, and employers. More than 20 percent of caste loans by value require no interest and no collateral.

'Capital Failed to Reach More Capable Individuals'

The most striking evidence of economic distortion comes from Tirupur, a South Indian town that supplies 70 percent of the country's knitted garment exports. There, researchers documented how a single community—the Gounders, who had previously been confined to agriculture—dominated the industry for decades.

The study found that Gounder firms held roughly twice as much capital per unit of production as firms run by "Outsider" entrepreneurs from traditional business communities. Yet Outsider firms saw exports grow faster at all levels of experience.

"The fact that different communities effectively face different interest rates implies that credit does not cross community lines," Munshi writes. "The inefficiency that Banerjee and Munshi identify is that this capital failed to reach more capable individuals outside the Gounder community."

Diamonds and Group Mobility

The diamond industry, which accounts for roughly 14 percent of India's total merchandise exports, offers a different window into caste dynamics. After massive diamond deposits were discovered in Australia's Argyle mines in 1979, a lower caste of agricultural laborers known as the Kathiawaris began moving into the diamond business—with support from established trading communities.

By 2004, nearly 50 percent of Kathiawari entrants were marrying within the industry, surpassing marriage rates among traditional business castes. "Almost none of the early Kathiawari entrants who established their firms before 1975 married within the industry," Munshi notes. By 2000, the share of Kathiawari entrepreneurs who reported their father was a businessman had dropped below 20 percent—dramatic evidence of first-generation mobility.

The Cost of Community

Yet the same networks that enable mobility also constrain it. In Mumbai's working-class neighborhoods, caste networks that historically secured blue-collar jobs have slowed the shift toward white-collar employment, even as returns to those jobs grew in the 1990s.

Among boys, Munshi and co-author Mark Rosenzweig found, "schooling choice was strongly determined by the fraction of adult men from the student's caste in working class jobs"—and this inter-generational persistence did not weaken over time. No such pattern existed for girls, who never benefited from those male-dominated networks.

The paper concludes that "competent individuals without access to a community network are shut out of jobs and economic activities. For those individuals with a network, there is a different cost, which is that independent mobility is discouraged."

The findings suggest that India's ancient social structure remains a powerful—and double-edged—force in its modern economy.