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In independent India, the debate on inequality has been largely hijacked by the protagonists of reservation on the basis of caste. Certainly, the age-old inequities of the caste system have much to do with the mass poverty and abject social status of millions of Indians. Does this justify the adoption of caste quotas in higher education and employment as the major instrument of an egalitarian redistribution? This is a question that has evoked intense and prolonged controversy.

The debate has focused essentially on two issues: whether the presumed gains of the intended beneficiaries of reservations offset and justify the presumed losses of the others, and whether the presumed improvement in the distribution of income and power justifies the possible losses in average efficiency and aggregate output. No one has doubted that the intended beneficiaries do benefit and that in consequence distribution does actually improve. If a college is forced to admit a target-group student who would not otherwise have qualified, or a firm to hire someone from a protected category whom it would otherwise not have considered, surely the target group must benefit. Right?

Wrong. In economics, the obvious is not always the truth. When we look at the immediate context of an action or policy, we may predict a particular outcome with perfect certainty; but when we consider its remoter consequences and their repercussions, our confidence may well disappear. Policy analysis is further complicated in India by the impact of globalization. When goods, capital and some grades of skilled labour flow freely in and out of a country, it necessarily limits the degree of freedom of the economic policy-maker. He must take into account the international flows of goods and factors that his policy would induce in assessing its likely outcome. We must, therefore, examine the likely impact of a quota regime on the distribution of employment and income in an open economy.

The economist’s traditional way of exploring such issues is to construct a simplified hypothetical picture of the economy as a whole, and to see how it changes in consequence of a particular policy. Imagine an economy set in a world where free trade in goods equalizes product prices worldwide and free capital mobility sustains profits at global rates. The economy produces goods that require capital along with either skilled or unskilled labour. Unskilled labour is an undifferentiated mass without productivity differentials, where the headcount is all that matters. Skilled labour is heterogeneous and a college education is indispensable for it.

The economy has a college system that caters to this demand. Colleges admit students on the basis of a test of their pre-college ability, accepting all those who score above a certain cut-off. They then train their students up to a final level of skill which is reflected in their eventual grades. Students differ in their initial abilities as well as their final scores; they also differ in the extent to which they benefit from college, depending on the extent to which it offers them opportunities they did not enjoy earlier and the intensity of effort they choose to exert. However, assume that exposure to the same educational process, while it may result in a convergence of the ability scores of different students, will not actually reverse their ability rankings.

A firm that requires skill will hire a college graduate on the basis of his grade, which is the only signal it has of his ability and productivity. Firms have to match the global rate of profit if they are to retain their capital. Given their technology and the price of their product, this implies that they cannot afford more than a specific unit cost of work. Competition among firms for labour ensures also that they do not pay any less. So, in a globalized economy, the unit cost of work in each viable firm is set by global parameters. Now the unit cost of work is the ratio of the wage per head and the productivity of the worker. Thus, firms can absorb low-productivity workers, provided they pay them proportionately less. There is, however, a minimum below which wage per head in skilled industry cannot fall: this is determined by the wage in the unskilled sector plus the cost of college education.

Labour in the unskilled sector is homogeneous and earns a uniform wage, which represents the unit cost of unskilled work. This, too, is determined by global parameters: the imperative of paying the global rate of profit to attract capital dictates the wage of unskilled labour (given the technology and the product price). The global economy thus imposes the unskilled wage and sets a floor to the wage per head of skilled labour. Since it also determines the unit cost of skilled work, it fixes the minimum productivity of skilled workers. Skilled industry can only hire those graduates whose grades match this minimum productivity requirement. Since colleges are interested in the employability of their graduates, they will admit only those applicants whom they expect, on the basis of their admission test scores, to achieve such grades. Indeed, if the relationship between admission test scores and final grades, and that between final grades and employability, are common knowledge, the college need not have any admission policy at all. If it simply discloses the admission test scores, applicants who do not, on the basis of these scores, expect to achieve the grade-requirement for employability would simply select out of college education — they would prefer unskilled work to the pursuit of an expensive college education that would not culminate in a skilled job. Given full public knowledge of all the relationships involved and full disclosure of admission test scores, the pattern of admissions would be identical with what colleges seek to achieve through their admission cut-offs.

This is how the system would work in the absence of government intervention in the admission process. Assume, now, that government legislates a 50 per cent quota for specific castes in college admissions. In order to make the best possible case for reservations, add the heroic assumption that the implementation of the quota system has no impact on the quality of college teaching or the integrity of the examination system. If colleges remain interested in the employability of their graduates, they will not reduce their admission cutoffs for anybody. If they did, the ‘beneficiaries’ of this relaxation would not get the final grades required for skilled employment. Applicants themselves may anticipate this after seeing their admission test scores and refuse the admission offer, should one be made. Not a single member of the target group really benefits as a result of the quota — except perhaps for a broadening of his intellectual horizon thanks to a college education.

But if there is no increase in target group admissions, how can colleges comply with the 50 per cent quota requirement? The only possible way is by limiting admissions from other castes to the number admitted against the quota. A large number from the other castes (who would have qualified for college and skilled employment in the absence of quotas) are denied admission and driven into the unskilled sector as a result. Quotas yield no benefits for the ‘beneficiaries’ but substantially reduce educational and employment prospects for others. National income contracts drastically (since, for a large number, high skilled wages are replaced by low unskilled wages); so does the higher education system, since, with admissions stagnant among the protected castes and dwindling among the unprotected, fewer colleges remain viable.

If the quality of college teaching or evaluation is impaired by quotas (if, for example, they have been implemented in faculty recruitment as well, as indeed they have been done in India), things can only get worse. With poorer teaching, a given initial ability would translate into lower final productivity, so that admission cut-offs would actually have to be raised to ensure employability — so that quotas would no longer be neutral in their impact on the protected groups, but would actually hurt them. If grade inflation, particularly of a discriminatory kind, occurs, the credibility of the entire system is compromised. Industry can no longer trust the signals from the colleges as indices of productivity and the economic justification for the higher education system melts away. So possibly does skill-intensive industry.

In the immediate present, colleges may be persuaded or forced to lower admission cutoffs for the protected castes, thus substantially increasing their admission offers, students may be myopic or optimistic enough to accept such offers, government may even dragoon industry into offering jobs to graduates of protected groups whose college grades are lower than the minimum that it would earlier have insisted upon. Disillusionment, however, is just round the corner. Industry will soon discover that the unit cost of skilled work for its additional recruits is higher than the global level and erodes its profits below the global rate of return on capital. It will then be forced to migrate to locations outside the jurisdiction of the Indian government and its quota regime.

It is not surprising that two generations of reservations have done so little for the scheduled castes and tribes. Reservations earlier had some justification. Quotas in legislative representation are not subject to the economic constraints described above. Further, when India was a closed economy, the penalties for inefficiency were not immediate. A protected industrial sector could absorb much inefficiency. So could government. Productivity was of little or no concern in government, which was, up to the 1980s, the major employer outside agriculture. Job reservations then were a meaningful, if costly, instrument of redistribution; so were reservations in a higher education system that catered essentially to government demand. Whatever little quotas have achieved for the SCs and STs is a reflection of these two factors. In the India of today, neither of these factors is of any importance.

Is there a better policy option that might go some way towards achieving the avowed objectives of social justice? Suppose that government fully subsidizes college education for target groups. With college being costless, they will be inclined to accept any wage per head that offers them a surplus, howsoever small, over the unskilled wage. The decline in the minimum acceptable wage per head implies a decline in the minimum productivity post-college at which skill-intensive industry will be able to hire graduates. Every target group member who, on the basis of his admission test score, expects a final grade commensurate with this lower minimum productivity requirement can now opt for college in the realistic expectation of a job in skilled industry. It may not be a job with a wage much higher than the unskilled wage, but it is an escape from the unskilled sector. Given the pre-college ability distribution of the target group, this is all that can possibly be achieved without an improvement in the quality of college education. Whether this achievement is worth the expense of a comprehensive subsidy is for the government to decide.

Nothing about contemporary India is as tragic as the fact that millions here are excluded by birth and early environment from educational and economic opportunities that could reveal their full potential. This is a problem that needs to be resolved at its root. In a world that values quality above all, it is a problem that cries out for a scheme to discover talent at the primary level, to nurture it during childhood and adolescence and to enjoy its efflorescence in the adult college years. Jawaharlal Nehru wrote about mass education and a wide-ranging system of scholarships for all “bright boys and girls” as a possible solution. Rajiv Gandhi had visualized a more specific scheme that aimed at this objective — the Navodaya schools programme. Politicians, unfortunately, dubbed it ‘elitist’ (meaning it would not get them any votes) and nothing of any significance was done about it. Instead, today’s vastly extended quota scheme in higher education was designed, a purely symbolic obeisance to the idea of equality, which would, however, do nothing substantive for its objective while compromising India’s competitiveness and economic future in the 21st-century world.

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