India must promote market competition to eradicate social discrimination

Nobel laureate economist Gary Becker’s insight on how competitive markets undercut social discrimination offers an effective policy solution to eradicate discrimination in India. Praveen Togadia of the Vishva Hindu Parishad (VHP) says that Hindus should collude and prevent Muslims from acquiring housing in a particular area in Ahmedabad. In many schools across the Hindi heartland, it is found that young children are being discriminated against for their caste. In Mumbai, Muslims face difficulties in renting or buying apartments. A prominent Chennai-based English-language newspaper bans the consumption of non-vegetarian food in its canteen. Colleges in Kanpur, Bhiwani and Bhopal place bans on women from wearing jeans and western clothes.

All these are examples of discrimination, a subject typically studied by sociologists, anthropologists and psychologists. University of Chicago economist Gary Becker was the first to apply economic reasoning to study discrimination. His research on racial discrimination in the US, conducted as part of graduate work, was published in 1957 in a book titled The Economics of Discrimination.

Becker’s path-breaking research was largely ignored at the time. A few economic journals reviewed his findings, and practically no other economist published again for the next five years on the topic of discrimination. Racial discrimination was a subject of fierce public debate in post-war America. Over time, Becker’s original thinking and pioneering work stood vindicated, and he won the Nobel Prize for economics in 1992.

The parallels with India are striking. Nearly 70 years after independence, discrimination based on religion and caste continues to be an ugly reality of our society. What lessons can India draw from Becker’s work to eradicate such discrimination?

The key insight one derives from Becker is that in competitive markets, discrimination hurts those who practice it as much as those who are discriminated against. As Becker and Richard Posner wrote in an essay published in 2008, “An employer discriminates against untouchables, women, or other minority members when he refuses to hire them even though they are cheaper relative to their productivity than the persons he does hire. Discrimination in this way raises his costs and lowers his profits. This puts him at a competitive disadvantage relative to employers who maximize their profits, and hire only on the basis of productivity per dollar of cost. Strongly discriminating employers, therefore, tend to lose out to other employers in competitive industries that have easy entry of new firms.”

There is empirical evidence to support this position. In a paper titled Labour market discrimination in Delhi: evidence from a field experiment published in 2008 by World Bank’s Saugato Dutta, Massachusetts Institute of Technology’s Abhijit Banerjee, University of Chicago’s Marianne Bertrand and Harvard’s Sendhil Mullainathan, it was reported that there was “no evidence of discrimination against non-upper caste (scheduled castes, scheduled tribes and other backward classes) applicants” for jobs in the software industry, one of the most competitive sectors in India. There was also no evidence of discrimination against Muslims. That is because the software industry is intensely competitive, and bigotry hurts profits.

The same logic that applies to labour markets also applies to land and capital markets. A buyer or seller who discriminates against another individual or entity based on their identity stands to lose in industries that are competitive. It follows that to reduce discrimination, it is imperative that India should promote market competition. Two contrasting examples from the private sector illustrate how competitive markets promote individual freedom and choice.

Kasturi and Sons Ltd, owner of The Hindu newspaper, was in the news for the wrong reasons recently, after it implemented a corporate policy to bar the consumption of non-vegetarian food in its canteen. As a private organization, the company is entitled to set policies that do not otherwise violate any laws in India. There was much outrage on social media, both at the discriminatory attitude of the company and its hypocrisy in promoting liberal values for others while itself staying true to socially conservative choices.

In December, chairman of Aditya Birla Group Kumar Mangalam Birla penned an essay for McKinsey and Co. titled Butter Chicken at Birla, describing how his conglomerate had to change as it globalized. Birla wrote about how after completing the acquisition of a copper mine in Australia, the employees expressed concern on whether “they have to give up their Foster’s and barbecues at company events”. They were assured that no such thing would happen, but then that led to a protest by employees in India, who asked why “they should have to go meatless at parties, if employees abroad did not”.

Expectedly, Aditya Birla Group had to liberalize rules and amend company policy that had been against non-vegetarian food. The difference between Kasturi and Sons and the Aditya Birla Group is that while the former is in a protected, quasi-monopolistic industry where the entry of new firms (say, foreign newspapers) is difficult because of government policy, the latter is subject to the forces of competitive capitalism. The promoters of Kasturi and Sons know that their employees don’t have a choice. It’s the only game in town for journalists who want to work at a major English-language newspaper in Chennai, while the Aditya Birla Group is competing with other large industrial firms in the metals industry, on a global scale.

Becker posited that in competitive markets, discrimination hurts both those who discriminate and those at the receiving end of discrimination, but the former more. In the case of Kasturi and Sons, discrimination hurts only the employees. In the case of Aditya Birla Group, it hurts both the company and its employees; market competition transferred the cost of discrimination from the individual to the global corporation, which had to adapt to stay competitive, or pay the price for being a discriminator by losing competitiveness.

Frequently, when there is discrimination in India, there is the predictable clamour for a new law to protect minorities or the specific group being discriminated. Unfortunately, a barrage of such laws has failed to check discrimination. For too long, socialist economics and anti-discrimination legislation have made happy bedfellows. The former creates the basis for discrimination which the latter is supposed to check. If more industries in India become as competitive as the software industry, this social problem can be eradicated. The debate in India needs to turn towards how competitive market forces can be deployed in sectors like real estate and education.

Take another example from the food and restaurant industry. Writing in 2011, Chandra Bhan Prasad had observed that “home delivery of pizza and other foodstuff is caste-neutral.” It is difficult for those not from a low caste to appreciate the experience that a Dalit, who has been told that nobody will accept food from her hands, would have when they serve food at restaurants or deliver pizzas, without anybody even asking their caste. This is enabled by competition in the restaurant industry.

Muslims will be able to rent apartments in Mumbai and Ahmedabad if the real estate markets become as competitive as the software industry’s labour market. A number of bottlenecks need to be removed by various state governments, since land is a state subject, to achieve this. However, in the case of housing, it should be remembered that Indian jurisprudence allows for discrimination. In the 2005 Zoroastrian Cooperative Housing case, courts had ruled that the private cooperative housing society was allowed under the Constitution’s freedom of association provision to discriminate based on religion. Even then, should India contemplate having an anti-discrimination legislation for housing, it should be ensured that such a law applies uniformly to all citizens, and no exemptions are carved out for any community.

A child empowered with school vouchers can leave the school where he is discriminated against because of his caste. Girls presently attending colleges with strict dress codes can choose to go to those that offer a more liberal environment if the market grows and the higher education sector is opened to supply-side competition (by allowing foreign and for-profit players) and demand-side competition (by letting subsidies follow the student, not the institution). Becker’s economic insight has transformational implications for India’s diverse society. All politicians who speak for social harmony would do well to adopt policies that promote choice and competition.

Rajeev Mantri and Harsh Gupta are co-founders of the India Enterprise Council.