Inflation in India

Just as I post this the inflation rate in India has climbed to a three year high of 7.31%. While economists argue that inflation is a sometimes inevtiable consequence in an economy, which is burdened with several crippling economic tumours, while at the same time yearning for growth rates as high as 9%+. In fact, real growth rates have exceeded 8% on occasion over the last few years.

Ironically, the rising inflation sucks out the purchasing power of the poorest sections of the populace - negating or even reversing the real income increases over the last few years for this section.

India's Reserve Bank has been cautious as usual on this matter. On the one hand , the rising rupee against the dollar has put severe strain on the export industries, including the globally competitive IT sector - and the governement is being lobbied hard not to let the rupee strengthen further. However this just might be the only way to keep a tab on the inflation - and the government should hopefully bit the bullet this time - since inflation is likely to be a big issue in the forthcoming general election.

This article is from the Apr 10th edition of the Economist. It does discuss many of the above points in its usual incisive-but-dismissive-and-condescending style. The article is available online here.

The Indian government's knee-jerk response to inflation is as worrying as the rising prices


IN COLONIAL times, the Coronation Building in old Delhi was one of the city's most prestigious hotels. Today, it is home to a commodity-futures market. But you would not know it. The Rajdhani Oil and Oilseeds Exchange is hidden among a cluster of small shops and peopled by men in kurta pyjamas, their hair dyed with henna, reclining in the afternoon heat under rusted fans. Over an ageing intercom, they take orders to buy and sell mustard seed and jaggery for delivery one or two months hence. The day's opening and closing prices are chalked on a blackboard.

The blackboard shows that prices of the two commodities have fallen in recent weeks. This will come as a relief to India's policymakers, who are frantically seeking to suppress a nasty bout of commodity-price inflation. On April 4th the Ministry of Commerce and Industry revealed that wholesale-price inflation, the measure most closely watched by the Reserve Bank of India (RBI), the central bank, rose to 7% in the 12 months to March 22nd, its highest rate since December 2004. This price pressure is worrying. But the government's panicked response to it is even more so.


Behind the jump in inflation were higher prices for fuel, food (including edible oils) and metals. The price of iron ore leapt by 46%. This has spooked the government, which faces elections in several big states as well as a national poll before next spring. In response, it has cut import duties on edible oils and banned the export of pulses and rice (except for basmati rice). It even briefly banned the export of edible oils, such as coconut oil, much to the chagrin of Keralite emigrants to the Gulf, who swear by the stuff to keep their hair black and their joints flexible.

Steelmakers in particular have felt the sharp edge of the government's resolve. The Steel Authority of India (SAIL), a state-owned steelmaker, boasts that “there's a little bit of SAIL in everybody's life”, a slogan that runs above pictures of metal bridges, pipes, jugs and even dog-food bowls. After prices rose by more than 20% in the first three months of the year, everybody's life became a bit dearer. Carmakers and scooter-makers protested to the government. Dog-owners no doubt joined them in spirit.

The government threatened to add steel to its list of 15 “essential commodities”, which would allow it to dictate the production and distribution of the alloy. In response, steelmakers “voluntarily” agreed to cut the prices of steel bars used in construction and the corrugated sheets that poor households use for roofing. But steelmakers complain that they are merely passing on the rising costs of coke and iron ore. They fear being caught between “the two prongs of a pincer”, according to the Indian Steel Alliance, an industry group.

Commodity traders, such as the ones reclining in the Coronation Building, fear they may be next in line. Last year the government banned futures trading in two types of bean, rice and wheat, arguing that speculators were driving up prices, beyond what the fundamentals would dictate. Some in the leftist parties, on whose support the government relies, now argue it should extend the ban to other commodities, such as edible oils and perhaps even iron and steel.

This would be like “shooting the messenger”, argues B.C. Khatua, chairman of the Forward Markets Commission, which regulates futures exchanges. Before they were shut down, he points out, the futures markets conveyed the message that prices of wheat and rice would continue to rise. Sure enough, that is what happened.


Banning futures trading would do little to curb prices, especially for commodities like edible oils that are heavily imported. But it would arrest the development of India's financial system, which is finally growing more sophisticated. Since 2003, the government has allowed trading in future contracts for many commodities. One of the two main exchanges, the Multi Commodity Exchange, averages volumes of over $3 billion a day. The Rajdhani exchange turns over about $20m a month.

Great hopes for such markets were expressed this week in a report by a ten-man committee on financial-sector reform, appointed by the planning commission, and led by Raghuram Rajan, now of the Chicago Graduate School of Business, and formerly chief economist of the IMF. It laments “the knee-jerk reaction to ban [markets] or intervene in them whenever they send unpleasant messages.”

The futures market provides farmers with a sneak preview of the prices they will face in the months ahead, which should allow them to make an informed decision about what to sow. In principle, futures contracts should also allow farmers to lock in a price for their crops, insulating them from the vagaries of the spot market. At the moment, farmers are too small to participate in the market directly. But Mr Rajan's report suggests that small banks could aggregate the demands of farmers up to a practical size.

“Just as it is counter-intuitive to steer in the direction of the skid”, Jagdish Bhagwati of Columbia University once wrote, “it is difficult to persuade the layman” that the best solution to scarcity is a market price, which encourages supply and discourages demand. As Bajrang Lal Goyal, a trader who joined the Rajdhani exchange 40 years ago, points out, India's winter crop is just days away from hitting the market. If the politicians who bash the futures market could be bothered to look at the message it is conveying, they would see that the prices of several sensitive commodities are already on their way down. Just in time, that is, for the elections.

India's economy :What's holding India back?

From the Economist Print Edition here.

This week, the cover story on the economist is how the India 'bubble' is going to deflate (though not burst) soon, largely because of the government's lack of commitment to sesrious reform.
Mar 6th 2008
From The Economist print edition
Failure to reform a bloated civil service is putting the country's huge economic achievements at risk.

“THE tiger is under grave threat,” India's finance minister, Palaniappan Chidambaram, intoned at one point in his budget speech on February 29th. He was referring to the stripy animals that prowl the country in declining numbers. But India's tigerish economy, which has grown by 9% a year on average over the past three years, is itself under threat.

In many ways India counts as one of liberalisation's greatest success stories. For years, it pottered along, weighed down by the regulations that made up the licence raj, producing only a feeble “Hindu” rate of growth. But over the past 15 years it has been transformed into a far more powerful beast. Its companies have become worldbeaters. Without India's strength, the world economy would have had far less to boast about.


Sadly, this achievement is more fragile than it looks. Many things restrain India's economy, from a government that depends on Communist support to the caste system, power cuts and rigid labour laws. But an enduring constraint is even more awkward: a state that makes a big claim on a poor country's resources but then uses them badly.
The state's cage

It is not unusual for a country's bureaucrats and politicians to be less efficient than its businesspeople; and the Indian civil servant, with his forms in triplicate, has been a caricature for so long that it is easy to forget the impossibility of many of the jobs involved (see article). But India's 10m-strong civil service is the size of a small country, and its unreformed public sector is a huge barrier to two things a growing population needs. The first is a faster rate of sustainable growth: the government's debts and its infrastructure failings set a lower-than-necessary speed-limit for the economy. The second is to spread the fruits of a growing economy to India's poor. By the government's own admission, most development spending fails to reach its intended recipients. This is bound to stir up resentment—and risks causing a backlash against business.

Like his prime minister, Manmohan Singh, Mr Chidambaram is by instinct a liberal and a reformer. He is remembered for his “dream budget” of 1997, which cut both taxes and tariffs—and helped spur today's boom. The new budget is his government's final one before it calls a fresh election, probably later this year. He gave an assured performance, doling out money freely and leaving voters appeased, opposition parties stumped and bondholders unruffled (see article). But the budget also confirmed several sad truths about how little reform the government has made during the good years.

Take the public finances. The government is predicting a budget deficit of 3.1% for the current fiscal year and 2.5% next. But these numbers are artificially low. They omit the states' deficits and also most of the cost of fertiliser and fuel subsidies (which all told add another 3.5% of GDP). Other big emerging markets have been less complacent, leaving India in the worst fiscal shape of the lot.

If growth slows, so will tax collection—and India's vigour may be ebbing already. Growth of 9% now looks more like a cyclical peak than a permanent achievement: bottlenecks throughout the economy mean it cannot go faster without setting off inflation. The effects of overheating became clear in an inflationary scare early last year. Growth has since slowed a tad, to 8.4% in the year to the fourth quarter, thanks partly to the intervention of a nervous central bank. India cannot absorb a lot more foreign capital without worrying about stockmarket turbulence or the strength of the rupee. Much of the foreign money it has attracted has gone into inflating share prices or just accumulated unproductively in foreign reserves.

The government's other boast is to have fostered “inclusive growth”. In his budget, Mr Chidambaram duly handed out extra money to a long list of worthy schemes, from school meals to rural road-building. But as he himself conceded, outlays and outcomes are not the same thing. Standing between the two is an administrative machine corroded by apathy and corruption. The government's subsidies fail to reach the poor, its schools fail to teach them and its rural clinics fail to treat them.

Mr Singh made administrative reform a priority when he took office in 2004, and he duly set up a commission to look into it. But even the finance minister admits that most of its deliberations have been academic. The civil service is expected shortly to be awarded a huge pay rise, which will be swiftly embraced, along with tougher performance standards, which will be studiously ignored. One indication of officials' resistance to change is Mr Chidambaram's new proposal to erase the debts of 30m small farmers. This loan waiver may be costly (over 1% of GDP) and crude, but it has one big virtue: it transfers money to relatively poor people at the stroke of a pen, bypassing the cumbersome machinery of the state.
Unleash peepul power

Reform has not completely petered out. The government has called for more independent scrutiny of public programmes and better monitoring of the money it hands out to some 1,000 schemes. It also plans to experiment with “smart cards” for the poor that could cut out bureaucratic middlemen. But administrative reform needs to go deeper than this—if only to prevent the public sector throttling economic growth.

The government's debt burden leaves it short of money for infrastructure. It is reluctant to free banks, pension funds and insurers to serve the market better, because it needs them to buy its bonds. The miserable record of its social spending deprives firms of well-nourished, well-schooled workers, and saps the political will for reform. State governments are left scrabbling to appease rural disgruntlement rather than investing in efforts to lift the productivity of land and labour.

The tiger may be the animal most Indians associate with their private sector; but a more apt symbol is the peepul (sacred fig) tree. Revered by many Indians, the peepul has a habit of making room for itself, poking up through roads, sometimes smothering its rivals. India's dynamic private sector has shown a similar skill. But if the next government again flunks reform, it could be the peepul itself that is smothered.

Asia, The US Slowdown and the "Decoupling" Phenomenon.

A post from the latest Economist Magazine...Just to restart this blog after a long hiatus.
The piece talks about how Asia is going to be resilient to the (now largely recognized as very real) US Slowdown. However let me add that given the way the stock markets all over Asia have been sliding over the last couple of days, the Economist's view seems to have found few takers.
The article is here.

Next stop Asia?
Asia should withstand a knock from an American recession


INVESTORS in Asian stockmarkets were until recently big fans of the “decoupling” theory: the notion that Asian economies can shrug off an American recession. This week’s plunge in shares, taking the MSCI Emerging Asia Index down by 25% at one point from its October high, suggests they have changed their minds. But the fact that Asian markets have not decoupled does not necessarily mean that their economies will follow America's over a cliff.

Decoupling was always a misnomer, seeming to imply that an American recession would have no impact on Asia. In fact exports and hence profits would certainly be reduced. The pertinent argument is that they would be hurt by much less than in previous American downturns.

As well as hitting exports, America’s troubles could affect Asia through various financial channels. Asia’s exposure to the subprime mess is thought to be much smaller than that of American or European banks. Even so, Chinese bank shares tumbled this week on rumours that they would have to make much bigger write-downs on their holdings of American subprime securities. And if stockmarkets slide further as global investors flee from risky assets, this could dampen business and consumer confidence in the region.

Some Asian economies are more vulnerable than others: Singapore, Hong Kong and Malaysia have exports to America equivalent to 20% or more of their GDPs, compared with only 8% in China and 2% in India. There are already some ominous signs. Singapore’s exports to America are down by 11% over the past year, while Malaysia’s fell by 16%. Exports to other emerging economies and to the European Union surged, so total exports still grew by 6% in both economies. But that was much slower than at the start of the year, and the worry now is that demand from Europe has started to flag.

The growth in China’s exports to America slowed to only 1% (in yuan terms) in the year to December from over 20% in late 2006. So far the impact on GDP growth has been modest. Figures on China’s fourth-quarter GDP are to be published on Thursday January 24th and most economists expect growth to slow to a still healthy 9-10% this year.

China’s economy would probably still expand by around 8-9% even if export growth dried up. During the 2001 American recession China’s GDP barely slowed. In contrast, Hong Kong, Singapore, Taiwan and Malaysia suffered full-blown recessions. America’s recession this time is likely to be deeper than in 2001 and Asia is now more integrated into the global economy. Doomsters conclude, therefore, that these economies could be hit harder this time.

The main reason to be more optimistic is that domestic demand (consumer spending and investment) is likely to remain strong and governments have more flexibility. Last year, despite a slowdown in America’s imports, most Asian economies grew faster as domestic demand speeded up. Robert Prior-Wandesforde, an economist at HSBC, says that those who argue that Asian economies can not decouple from America are ignoring the fact that they already have. Take Malaysia: exports to America plunged, yet its GDP growth quickened from 5.7% at the end of 2006 to 6.7% in the third quarter of last year.

Contrary to the popular view that Asia's meltdown in 2001 was entirely due to a slump in exports, Peter Redwood, at Barclays Capital, argues that a fall in investment played a bigger role. Firms had too much debt and excess capacity, particularly in the electronics sector, which was at the heart of the American recession. Today firms are in much better shape. Capacity utilisation is high across the region; outside China investment as a share of GDP is low by historical standards; corporate balance-sheets are stronger and real interest-rates are low. Firms are therefore much less likely to slash investment than in 2001.

Macroeconomic fundamentals are also much healthier in East Asia. Large foreign-exchange reserves make countries less vulnerable to foreign shocks. Budgets are in surplus or close to balance, giving policymakers more room for a fiscal stimulus to support growth.

Thus even if Asia’s exports clearly have not decoupled from America, its economies will be hurt less than in the past. Standard Chartered forecasts that emerging Asia will grow by an average of 6.4% in 2008, down from 7.8% in 2007. In 2001 growth dropped by three percentage points to 4.2%. Financial markets were slow to realise that Asian growth and hence the profits of some companies would be dented by an American downturn. But now they risk exaggerating the damage. Economic decoupling is not a myth.

Untouchable and unthinkable

This article is also from the latest edition of the Economist.
Unlike the previous one (which was somewhat balanced) - this article takes a strong anti reservation stand.
The article is available here and at AFP.

Oct 4th 2007
From The Economist print edition
Hiring quotas would not help lower-caste Indians and would harm business

BUSINESSES in India are used to bad government. Indeed, this hardship has proved perversely useful: through coping with rotten infrastructure, throttling labour laws and mutable investment policies, many world-class Indian companies have emerged. A proposal to force firms to hire more workers from the dregs of Hinduism's caste system (see article) would be different. It would be a disaster.

India's long history of affirmative action springs from decent instincts. The caste system is possibly the world's ugliest social system. And it is sanctified by India's largest religion: according to the Laws of Manu, an ancient Hindu text, anybody from the lower orders who has the temerity to mention the name of a higher caste should have a red-hot nail thrust into his mouth; if he makes the mistake of telling a brahmin what to do, he gets hot oil poured into his ears and mouth.

Fortunately, India has moved on a bit since then. But socially and economically the place is still sharply stratified. Upper castes get a far larger share of good jobs than do lower castes; dalits—or untouchables—get virtually none. Which is why, soon after independence, India's government used affirmative action to try to redress the balance; and why calls for that action to be extended to business are so loud.

Affirmative action necessarily has a cost, both in fairness to those who in its absence would qualify for jobs and educational opportunities that they are denied, and consequently in efficiency. Still, if it went a long way to righting a big historical wrong, that might be justifiable.

But that hasn't happened in India. Nearly a quarter of university places and public-sector jobs have been reserved for dalits and tribal people since 1950; and, in 1993, a successor government handed a further quarter over to “other backward classes”. Yet there is no evidence that this has made any difference to the fortunes of the lower orders. They have certainly been getting richer—but, over the past two decades, at almost exactly the same rate as the rest of the population.

What's more, the policy has had dangerous side-effects. Cynical politicians promise their fellow caste members more jobs and university places. Reservation inflation has therefore been on the rise, infuriating the losers. As a result, battles over reservations have become a common source of riots, and politics has thus become increasingly polarised along caste lines.

Extending into the private sector a policy that has been a disaster in the public sector is lunacy. This must be clear to India's prime minister, Manmohan Singh. As finance minister in the early 1990s, he started dismantling a system of industrial quotas, thus unleashing the economy. He should understand better than anyone the likely effect of introducing a quota on people. Yet he has been threatening to impose penalties on companies that don't hire more low caste workers.

Don't blame business

Reservations in companies would not just damage business. They would also distract attention from the real source of the problem. Responsibility for lower castes' lack of advancement does not lie with the private sector. There is no evidence that companies discriminate against them. The real culprit is government, and the rotten educational system it has created.

Originally, reservations were supposed to be needed only for a decade. After that, it was reckoned, they would be unnecessary, because primary education would be universally available. Nearly six decades on, it is not. And the quality of much of India's higher education is execrable. By one reckoning, only a quarter of engineering graduates, the raw material of a booming computer-services industry, are employable. The government should concentrate on sorting out schools and universities, not piling new burdens on business.

There's another effective weapon against ancient prejudices: growth. As Indians get richer, their caste biases fade. Middle-class urban Indians are less likely to marry within their caste than the rural poor, and less likely to wrinkle their noses at a dalit. Happily, the ranks of the middle class are swelling in a fast-expanding economy—for which India has its businessmen to thank. Hobbling them with quotas will only make it harder for them to help the country change.

With reservations

This article is from the latest edition of the "Economist." Best read without having to deal with my opinions on the issue ! :-)
Also Infosys reappears as the chosen representative of the aspiring Indian, for the nth time in Foreign writing highlighting India's progress. After Friedman, it HAS become a bit overdone methinks.

Also this time even the Economist hasn't really taken a stand on the issue, aiming to represent both sides of the reservation debate.
Sometime during BSchool (probably in one of those RMAS classes :)), i came to the conclusion that the caste system may never actually go away in India. Even with equality being the norm in the future, and cases of blatant discrimination thinning out - caste will retain its position as a symbol of identity, rather than social hierarchy - which could be important in a highly heterogeneous society like India. Gurcharan Das makes a very good argument for this scenario in "India Unbound."

I think the reservations in education and government service itself have done a reasonably good job on their own :-).And as this article points out- the private companies are not likely to reach out, through these affirmative action programs, to those who NEED this kind of assistance - merely upto those who WANT it, and can HAVE it (merely through an accident of birth).

The article is available here
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Oct 4th 2007 | BANGALORE, CHENNAI AND DELHI
From The Economist print edition
India's government is threatening to make companies hire more low-caste workers

A 23-YEAR-OLD dressed in white pyjama trousers and a black over-shirt represents two worlds in India that know almost nothing of each other. One is fast growing, but tiny: the world of business. Strolling through the Californian-style campus in Bangalore that serves as the headquarters of Infosys, a computer-services company, she grins and declares herself glad. Her brother, she adds shyly, is so proud that she is an “Infoscion”.

He is in the rural world where 70% of Indians reside: cultivating the family plot in Bannahalli Hundi, a village near Mysore. Life is less delightful there. Half the 4,000 population are brahmins, of the Hindu priestly caste. The rest, including the software engineer and her family, are dalits, members of a “scheduled caste” that was once considered untouchable.

Sixty years on this is still the case in Bannahalli Hundi, says the young woman, who does not want to be named. She has never entered the house of a brahmin neighbour. When a dalit was recently hired to cook at the village school, brahmins withdrew their children. Has there been no weakening of caste strictures in her lifetime? “I have not seen it,” she says.

The tale is in startling contrast to Infosys's modernity, and she is embarrassed by it. But it partly explains how she came to be hired by a company that is considered to be one of India's best. She is the beneficiary of a charitable training scheme for dalit university-leavers that Infosys launched last year.

In collaboration with the elite Bangalore-based International Institute of Information Technology (IIIT), Infosys is providing special training to low-caste engineering graduates who have failed to get a job in its industry. The training, which lasts seven months, does not promise employment. But of the 89 who completed the first course in May, all but four have found jobs. Infosys hired 17.

The charity was born of a threat. India's Congress-led government has told companies to hire more dalits and members of tribal communities. Together these groups represent around a quarter of India's population and half of its poor. Manmohan Singh, the prime minister, has given warning that “strong measures” will be taken if companies do not comply. Many interpret that to mean the government will impose caste-based hiring quotas.

Quotas already apply in education and government, where since 1950 22.5% of university places and government jobs have been “reserved” for dalits and tribal people. In addition, since 1993, 27% of government jobs have been reserved for members of the Other Backward Classes (OBCs)—castes only slightly higher up the Hindu hierarchy.

Promoting the wretched

This is not enough for supporters of reservations. Since the introduction of liberal reforms in the early 1990s, public-sector hiring has slowed and businesses have boomed. Extending reservations to companies, they argue, would therefore safeguard an existing policy of promoting the Hindu wretched. It would almost certainly require changes to the constitution. But low-caste politicians are delighted by the prospect, so it could happen.

The chief minister of Uttar Pradesh, a dalit leader called Mayawati, has said 30% of company jobs should be reserved for dalits, members of the OBCs and high-caste and Muslim poor. Chandra Bhan Prasad, a dalit journalist, applauds this and argues that it would be in the interest of companies. “It is in the culture of dalits that they are least likely to change their employment because they are so loyal to their masters,” he says. It would also help them become a “new caste [sic] of consumers”.

Businessmen are unconvinced. Government, in both its intrusiveness and its incompetence, is a hindrance to them. Caste-based hiring quotas would be just another burden. People given a right to a job tend not to work very hard. So, in an effort to avert Mr Singh's threat, many companies and organisations that represent them are launching their own affirmative-action schemes.

The Confederation of Indian Industry has introduced a package of dalit-friendly measures, including scholarships for bright low-caste students. The Federation of Indian Chambers of Commerce and Industry plans to support entrepreneurs in India's poorest districts. Naukri.com, India's biggest online recruitment service, with over 10m subscribers, anticipates that companies will soon actively seek low-caste recruits. It has therefore started asking job-seekers to register their caste.

Basic training

Infosys's training scheme, as described by S. Sadagopan, the IIIT'S director, is a Pygmalion undertaking. Meeting the parents of his dalit students, he saw “almost an anger in their eyes”. For the first month the students were unresponsive. Their English was dismal. Mr Sadagopan felt compelled to introduce lessons in self-presentation, including table manners.

Matters improved. The course was based on Infosys's 16-week basic training, which 31,000 Indian graduates underwent last year. The low-caste lot scored similar marks and gained confidence. At a bonding session, filled with meditation and dancing, they wrote themselves a slogan: “As good as any, better than many”.

It is a moving story. But Mr Sadagopan's students were not all that deprived. In the words of three, now working for Infosys, they were “normal middle-class Indians”. A third of them were the sons and daughters of professionals. The worst had grades only a little below what Infosys routinely demands of its recruits. Almost all were from urban areas, where caste discrimination is rare.

One of them, Manjunath, says the only time he was ever reminded of his low caste was when he applied for a place at university. Had it not been reserved for him, he says, he might have worked a bit harder—and so joined Infosys without any special help. As for his colleague from Bannahalli Hundi, coming from one of the richer families in the village, she is its first female university graduate—of any caste.

The most that can be said for Infosys's programme—without devaluing Mr Sadagopan's efforts—is that it is a great opportunity for a tiny number of middle-class Indians, who happen also to be low-caste. The same would be true of caste-based reservations. This is because the percentage of India's workforce employed in the “organised” private sector (made up of firms that declare they have ten or more employees), where reservations might be applied, is also tiny: around 2%. And as far as anyone can tell (companies do not ask the caste of their employees), members of low castes are already well represented in low-skilled jobs there. Much of India's heavy industry, such as steelmaking, is located where the low-caste population is high. Tata Steel, which employs around 40,000 people in India, has its main operations in Jamshedpur, in the eastern “tribal belt”.

Membership of a caste, as of a guild or a church, provides businessmen with a useful network. In the informal economy, where banks fear to tread, caste bonds tend to be affirmed through business. The fact that most Indian companies are family-owned exaggerates this: to prevent wealth being diluted, it encourages marriages not only within the same caste, but also within the same family. A sugar baroness of south India's kamma caste, Rajshree Pathy, recently explained this practice to an Indian newspaper, the Business Standard: “The PSG family produces girls, the Lakshmi Mills family produces boys, they marry each other and live happily ever after.”

The modernisation of India's economy has brought more dynamic change. Among educated, urban Indians caste identity is fading. Inter-caste marriages are increasing. According to Jeevansathi.com, a matchmaking (or, as Indians say, “matrimonial”) website, 58% of its online matches involved inter-caste couples. Meanwhile, in rural India—where unions are not fixed online—intra-caste marriages remain the norm.

Business has to some degree been a laggard in this process. Caste bonds rooted in expediency, not tradition, allow businessmen to borrow and lend money with a degree of accountability, which helps to minimise risk. They are not an affirmation of a vocational hierarchy within the Hindu universe. Nonetheless, in north India, where business is to this day dominated by members of ancient trading castes, like marwaris (whose famous names include Birla, Bajaj and Mittal) and bania (Ambani), it can look pretty traditional.

Rites of passage

Harish Damodaran investigated the caste origins of many of India's industrialists in a forthcoming book*. He identified three main trends. The first, which he calls a “bazaar to factory” route, is the passage of hereditary traders into industry. In northern India, some castes' monopolies have discouraged them from leaving their traditionally prescribed employment. So members of north India's farming castes—for example, jats and yadavs—rarely own a sugar or flour mill.

The second trend, “office to factory”, describes a recent movement of well-educated high-caste Hindus, including brahmins, into business. Lacking capital, these sophisticates tended to enter the services sector, where start-up costs are relatively low. India's world-class computer-services industry, including companies like Infosys, is the result.

The third trajectory, “field to factory”, is the transition into the business world of members of India's middle and lower-peasant castes. This must be the path of India's dalits, too. But they have not trodden it yet: across India, Mr Damodaran could not find a significant dalit industrialist.

There is no strong evidence that companies discriminate against low-caste job applicants. Upper-class Indians, who tend also to be high-caste Hindus, can be disparaging about their low-caste compatriots. “Once a thicky, always a thicky,” is how a rich businessman describes Ms Mayawati. Yet this at least partly reflects the fact that low-caste Hindus tend also to be low class; and in India, as in many countries, class prejudice is profound.

There is, on the other hand, plenty of evidence that few able low-caste graduates are emerging from India's universities. Since it began registering the caste of its subscribers—almost by definition computer-literate and English-speaking—Naukri.com has added 38,000 young dalit and tribal job-seekers to its books. That represents 1% of the total who have registered in that time.

For reservationists, this confirms the need for quotas. Others interpret the facts differently: reservations don't seem to work. And statistics support this view. Reservations notwithstanding, low-caste Indians are getting less poor at almost the same rate as the general population. Between 1983 and 2004, their spending power increased by 26.7%, compared with 27.7% for the average Indian, according to the National Sample Survey Organisation, a government body.

Low-caste students struggle in schools without special help, which is rarely available. Their English—the language of India's middle class—tends to be poor. Many drop out. Up to half of university places reserved for low-caste students are left vacant. So, too, are many of the university posts reserved for low-caste teachers. Most Indians emerge from this system with an abysmal education. Low-caste Indians perhaps almost invariably do.

A measure of this fiasco can be found at the political-science department of one of India's prestigious post-graduate universities. Each year it chooses 50 students, from 1,500 applications, for its master's degree. Successful applicants will average no less than 55% in their undergraduate exams. Dalit applicants scrape in with as little as 30%. Nonetheless, practically every student will be awarded a first-class degree.

India is failing to equip its young, of whatever caste or religion, with the skills that its companies need. This is one of the biggest threats to sustaining high economic growth. India's outstanding computer-services companies—which will account for around a quarter of overall growth in the next few years—intend to hire over 1m engineering graduates in the next two years. It will be tough. To recruit 31,000 graduates last year, Infosys considered 1.3m applicants; only 65,000 passed a basic test. To address the skills shortage, the company is investing a whopping $450m in training. “We are building India's human resources,” says Mohandas Pai, Infosys's chief of human resources.

Alas, reservationists have other concerns. Caste politics are pervasive. On August 28th the Supreme Court struck down an effort by Andhra Pradesh's government to reserve 4% of government jobs and education places for poor Muslims. The court is meanwhile weighing a more dramatic measure announced by the government last year: to reserve 27% of university places for the OBCs. To placate irate students, many of them high-caste, the government promises to increase the number of university places accordingly. Education standards would no doubt fall further.

Even so, the policy may be unstoppable. Since reservations for the OBCs were introduced in the early 1990s the rise of political parties dedicated to these groups has been inexorable. So has the proliferation of the OBCs, to around 3,000 castes. They include millions who are not poor at all.

“A massive deliberate confusion” is how Surjit Bhalla, an economist at Oxus Investments, a hedge fund, characterises reservations for the OBCs. When they were awarded reservations, the OBCs were estimated to make up 53% of India's total population. More recent counting suggests they are only about one-third of the population, although their 27% reservation remains unchanged. Moreover, by most measures, the average OBC member is no poorer than the average Indian. “How can you discriminate against the average?” asks Mr Bhalla, despairingly.

There by mistake

And despair he may. Practically no politician dares speak out against this caste-based racket for fear of being labelled an apologist for the caste system. Rather like guests at the Hotel California, those that join the list never leave—even one or two castes that were allegedly included by mistake. The surpassing example is Tamil Nadu, which reserves a total of 69% of government jobs: 1% for tribal people, 18% for dalits, 30% for the OBCs and 20% for a subset of them—members of castes once categorised by British colonisers as “criminal tribes” and now known more delicately as “de-notified communities”.

There is little opposition to this policy in Tamil Nadu, for two reasons. It is one of India's more literate and prosperous states. And low-caste Hindus are unusually prominent in Tamil Nadu, which suggests to reservationists that the policy is working well. Textiles companies in Tirupur, a T-shirt hub, for example, are mostly owned by gounders, members of a peasant caste that is officially listed as an OBC.

One defender of the policy is N. Vasudevan, chief official of the Kafkaesque vision of bureaucratic hell that is the Backward Classes, Most Backward Classes and Minorities Welfare Department in Chennai, where workers languish behind mountains of never-opened files. Asked when it might end he replies: “When everyone becomes equal.”

There is an alternative view: that Tamil Nadu is more equal than most states not because it has lots of reservations but because, overall, it has been run less badly. It has therefore delivered above-average economic growth, from which low-caste Tamils have benefited.

In addition, low-caste businessmen in Tamil Nadu have had opportunities that have nothing to do with government policy. In contrast to north India, where commerce is dominated by members of a few business castes, south India's business community has been more open to members of non-business castes. According to Raman Mahadevan, a business historian, this is partly because members of the south's main trading caste, the chettiars, chose to concentrate their investments outside India during the 19th century, in Malaya and Singapore.

Partly as a result, little large-scale industry emerged in southern India until the 1930s. Around the same time, a popular movement against brahmins—especially lordly in the south—emboldened members of the lower and middle castes, including gounders, who were quick to convert their new assertiveness into business.

The Hindu caste system has never been rigid. Low-caste Hindus do not accept their lumpen position in the hierarchy. Indeed, like middle-class English families, they tend to cherish a myth of their former greatness. By imitating the habits of a more prestigious neighbour, in dress or ritual, some low castes have sneaked a rung or two up the ladder. More recently, in an effort to be classified as an OBC or a dalit caste, some middle-ranking castes have tried to climb a rung or two down.

Meanwhile, on the lowest rung of the ladder, dalit businessmen can be found operating in the informal economy, perhaps as small traders. They must be especially reliant on caste as a business network. But that reliance will change if they can expand into the organised sector. Where businessmen can gain access to credit without having to claim kinship, caste affiliations wither. As Mr Damodaran writes: “A kamma sugar magnate ultimately identifies his interests with other mill-owners and not with fellow kamma cane growers or workers.” And his business may flourish, unfettered.