Indirect rule and the unequal burden of persistence : Evidence from Hyderabad

We study the distributional consequences of colonial institutions in India by analyzing the effect of direct and indirect rule on the outcomes of historically disadvantaged and advantaged caste groups using a border discontinuity design. We find that disadvantaged caste groups in indirectly ruled areas have 1.4 fewer years of schooling and significantly less wealth than similar groups in direct rule areas. A similar analysis for Advantaged caste suggests that they have less wealth and small but insignificant differences in education. Cross-caste wealth inequality and land inequality are higher in indirectly ruled areas. Labor-repressive agriculture in indirect rule areas led to the emergence of these differences during the colonial era. These differences persist partly due to differential growth in credit institutions after independence. Indirectly ruled areas have fewer banks per grid cell post independence, and this negatively affected productivity. As a result, farmers in these areas have larger non-institutional debt than directly ruled areas, and disadvantaged caste farmers drive this effect