The Telegraph
Since 1st March, 1999
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- Reservations will reverse the growth surge of India's economy

In recent polemics, reservation has been projected primarily as an issue of caste conflict. It has well-defined profiles of beneficiaries and of losers: and the losses of one are the gains of the other. The government claims that its negative effects are confined to the upper castes, that they can be dispelled and an optimal, consensual solution achieved by increasing university admissions so as to maintain the number of open seats. All this sound and fury has drowned out debate on three key questions. What explains the persistent backwardness of the scheduled castes and scheduled tribes after more than half a century of SC/ST quotas' How will reservations affect economic growth' And what will be their long-term impact on the social and economic status of the groups they seek to protect'

A starting point for an exploration of these issues is a piece of data from a major university. For several years now, the fractions of SC, ST and other backward classes applicants for admission to this university have averaged around 9 per cent, 6 per cent and 17 per cent respectively, as against the existing and proposed quotas of 15 per cent, 7.5 per cent and 27 per cent. An immediate implication is that an ST applicant will have at least a 50 per cent higher probability of success than one without quota benefits, while for SC and OBC applicants the chances of success are more than double those of non-quota candidates, regardless of merit and entirely because of caste.

This may of course be precisely the objective of the quota regime. The really important question however is quite different. The university we refer to is perhaps the most 'progressive' in the country. It is extremely punctilious in fulfilling, even over-fulfilling, quota requirements in the offers it makes. It waives eligibility criteria for application for quota candidates and substantially reduces their passing requirements in its admission test. Once a quota candidate is admitted, it gives him preferences in scholarships and hostel seats. Finally, it awards him a degree even if his performance is well below that required of a non-quota student.

Why, despite all these multifarious temptations, is the fraction of lower caste applicants to the university so much lower than their presumed shares in the population' The answer: there simply aren't enough lower caste students who have completed the earlier stages of education and wish to continue. Perhaps they have better things to do ' in which case, the whole argument for reservation in universities collapses. Assume therefore that this is not so, that the problem is simply one of an insufficiency of lower caste students who have reached this phase of the educational process. Too many dropped out earlier. Not many achieved literacy in the first place ' and these are precisely the groups whose socio-economic status needs addressing. Reservation cannot reach any of them. Its prime beneficiaries belong to the microscopic minority of the SC or OBC population which is affluent enough to have reached the doors of the university or the professional institute. The real problems of the lower castes ' and they are both profound and far-flung ' cannot be touched by quotas; their solution lies in rapid economic growth and a massive improvement in the delivery of primary education and basic health care.

No wonder therefore that more than 50 years of reservation have done little or nothing for the SC/ST masses. It was never designed for this purpose, but essentially for the benefit of their elite, their political leadership and its hangers-on, their MPs, MLAs, the quota bureaucracy and the dynasties that all these groups have set up over half a century. And, given the numerical strength of this group in the corridors of power, it is not at all surprising that political parties have unanimously supported, not the dismantling of reservation that was originally envisaged, but its perpetuation and limitless expansion.

The redistribution of jobs and university seats in favour of the SC/ST/OBC elite will not directly affect the socio-economic status of the underprivileged. Its indirect consequences, through its impact on economic growth and on the delivery of primary education and health could, however, be significant. As for the latter, the performance of the government, and specifically that of the ministries of human resource development and health, over the fifty-odd years of the quota regime has been one of the worst in the world; and there is no reason to expect an extension and expansion of quotas to produce any improvement. Indeed, it is interesting that the ministers for HRD and health have been the champions of the recent increase in reservations: draping oneself in the symbolic colours of 'social justice' can be an excellent masquerade for another half-a-century of inaction on any matter of real substance.

But what about the consequences for economic growth of the proposed vast expansion of the quota system' The main characteristic of caste quotas as implemented in India is that they eliminate the incentives of beneficiaries to improve, or indeed to perform. Individuals enjoy the benefit of the quota not at a single point of their careers but at every step ' in school, in college admission for every degree, in selection for government jobs, in promotion. At no stage need they measure up to the criteria that general candidates are supposed to fulfil. What is more, by making them a numerous component of any institution, quotas encourage them to organize pressure groups for selective dilution of standards of evaluation. The celebrated black economist, Glenn Loury, in collaboration with Stephen Coate, has shown that mandatory preferences given to a group by impairing individual incentives to perform may create a group stereotype of low performance. Employers now believe, correctly, in the pervasiveness of this group stereotype and, to the extent that they are not themselves constrained by quotas, discriminate against the preferred group. Individual group members cannot escape stereotyping and so have no incentive to distinguish themselves. Thus, even if the group is as capable ex ante as any other, quotas themselves reduce its performance level and generate discrimination against it. In educational institutions, the sizeable presence of such a group compels lowering of standards of instruction: this retards the academic progress of non-quota students as well. Since caste quotas are imposed in faculty recruitment too, the capacity of the institution to teach its students ' including those not admitted through quotas ' is impaired. A vicious circle of progressive deterioration in quality is set in motion.

The dilution in quality of admissions, instruction and evaluation erodes the credibility and value of degrees. A degree from an IIT or an IIM was once a reliable signal of ability. With the dilution in the quality of this signal, employers, both Indian and foreign, now have to conduct their own independent and costly assessments of ability. Further, as the value of Indian degrees melts away, Indian students of merit of all castes are tempted abroad, if at all they can afford it on their own, or if they are good enough to earn scholarships. This reduces the general level of talent available for admission to Indian institutions and accelerates their devaluation in yet another vicious circle.

With such a decline in quality, India's comparative advantage in human capital-intensive activities is certain to disappear. Employers are bound to turn increasingly to other countries where the educational system is not similarly constrained. Not only will they recruit fewer graduates from Indian institutions, they will also curtail their investments, at least in human capital-intensive production, in India.

This is the likely outcome of the vast expansion of quotas in educational institutions alone. If the government goes further along the path already charted out and imposes quotas on private business, the inflow of capital into India's knowledge-intensive industries is likely to be reversed. We may witness an exodus that could turn into a deluge and include an outflow of domestic Indian capital in search of low-wage havens where hiring is unconstrained.

There is little doubt that reservation will extinguish the growth surge of the Indian economy. In the long run, the groups it supposedly protects will not be able to escape the consequences of the resulting stagnation. The nation at large needs to ponder over this before it lets itself be steered into a bottomless pit by selfish and short-sighted politicians.

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