Liberalisation and Democracy: Balancing Economic Growth and Social Justice in India

In July 1991, India stood on the brink of an economic collapse. Foreign exchange reserves had shrunk to barely enough to cover a few weeks of imports, and the government pledged gold to secure emergency loans. The response was a sweeping set of economic reforms that dismantled the old licence-permit system and opened the economy to private enterprise, foreign investment, and global trade. More than three decades later, the verdict on these reforms is deeply contested. Did liberalisation deliver prosperity that reached everyone, or did it create a richer nation with sharper divides? And crucially, what does a democratic political system have to do with how this question gets answered? This is the central tension between economic growth and social justice that continues to shape policy debates today.

What liberalisation actually changed 🔗

Liberalisation refers to the loosening of government controls over the economy. Before 1991, businesses needed licences to produce goods, expand capacity, or import technology. Foreign companies faced steep barriers. The state dominated key industries. The reforms reversed much of this by reducing industrial licensing, lowering tariffs, encouraging foreign direct investment, and shrinking the role of the state in production.

The results, by aggregate measures, were dramatic. The growth rate rose from around six percent in the 1990s to eight or nine percent beginning in 2003. The trade-to-GDP ratio tripled, and sectors such as telecommunications, automobiles, and software expanded at rates unseen before. Foreign investment, which was negligible in 1991, surged into the billions. The information technology and services sector became globally competitive, with India emerging as a major hub for software and outsourcing.

This is the growth side of the story. The harder question is who benefited from it, and whether the gains translated into social justice for the country’s poorest and most marginalised citizens.

The case for “just growth” 🔗

Supporters of liberalisation argue that opening the economy created the conditions for what can be called “just growth”, meaning growth that generates employment and lifts people out of poverty. The strongest evidence for this view comes from poverty figures.

The poverty reduction record 🔗

By official estimates, the share of people below the poverty line fell substantially in the decades after reform. More recent multidimensional measures show even sharper progress. The NITI Aayog, in collaboration with the UNDP and the Oxford Poverty and Human Development Initiative, reported that multidimensional poverty fell from about 55 percent in 2005-06 to roughly 15 percent in 2019-21. The World Bank has since reported broadly similar findings, noting that extreme poverty dropped steeply over the past decade, lifting well over a hundred million people above the line.

Proponents connect this decline to the broader economic expansion that liberalisation enabled. A growing economy generates tax revenue, which funds welfare schemes, and it creates jobs in services, construction, and manufacturing. The argument is that market reforms, far from hurting the poor, gave them new avenues to escape deprivation. Some economists go further, arguing that the reforms produced genuinely inclusive growth rather than growth that bypassed the disadvantaged.

Employment as the engine 🔗

The employment argument is central to the “just growth” position. The IT and business-process sector alone came to employ millions of workers, and the expansion of consumer markets created demand across the economy. Where new opportunities open up, the reasoning goes, social mobility follows. A young person from a modest background who learns to code or finds work in a growing service industry has a path that simply did not exist under the old controlled economy.

The concerns: inequality and uneven gains 🔗

The counter-argument is equally grounded in data. Even as absolute poverty fell, income inequality widened. Research using the sharp 1991 trade liberalisation examined how districts with different industrial compositions fared, finding that the effects on poverty and inequality were uneven across regions rather than uniformly positive.

Who got left behind 🔗

The benefits of liberalisation were concentrated in urban areas and among educated, skilled workers. Rural communities, small farmers, and informal-sector workers saw far more limited gains. Agriculture, which still employs a very large share of the workforce, was largely bypassed by the first wave of reforms. As one analysis of a quarter-century of market reform observed, increased growth came at the cost of ever-widening inequality, with the farm sector in decline even as services boomed.

This produced what economists describe as a dual economy: a modern, globalised sector growing rapidly alongside a traditional, low-productivity sector where most people still work. The gap between urban and rural incomes widened, and regional imbalances grew as states with better infrastructure and governance attracted investment while others fell behind.

The problem of “jobless growth” 🔗

A particularly troubling concern is that high economic growth did not produce proportionate employment. Much of the growth was driven by capital-intensive industries that create wealth without creating many jobs. A working paper on inclusive growth noted that productive jobs were not being created anywhere near the rate required for inclusive growth. Much employment that did exist was vulnerable or informal, offering no security or social protection. This challenges the “just growth” thesis at its core: if growth does not generate enough decent jobs, it cannot reliably reduce poverty in a sustainable way.

Where democracy enters the picture 🔗

This is where the political dimension becomes essential. Economic liberalisation in India did not happen in an authoritarian setting where rulers could impose reforms by decree. It unfolded within a noisy, competitive democracy, and that shaped both the pace and the character of the reforms.

Democracy as a check and a corrective 🔗

A democratic system makes governments accountable to voters, including the poor and marginalised who form a large share of the electorate. This accountability creates pressure to soften the harsher edges of market reform. The introduction of large social-protection programmes, such as the rural employment guarantee scheme, can be read partly as a democratic response to the gaps that liberalisation left behind. When growth fails to reach everyone, elected representatives face pressure to act.

The economist Amartya Sen has argued powerfully that famines do not occur in functioning democracies because leaders must respond to citizens’ demands. The same logic applies more broadly: a free press, competitive elections, and the right to organise give disadvantaged groups tools to demand a fairer share of national prosperity.

Development as freedom 🔗

Sen’s wider framework reframes the entire debate. In his view, development is not just about raising incomes but about expanding the real freedoms people enjoy. He emphasises social opportunities provided through schooling, basic health care, and land reform, arguing that economic facilities like employment are deeply linked to social opportunities like education and health.

Working with Jean Drèze, Sen has noted that India’s reasonable aggregate growth after the reforms coexisted with persistent deprivation and deep social failures. They traced this imbalance to the continued neglect of public investment in education, health care, and social security during the post-reform period. The lesson is direct: markets alone do not deliver social justice. Active public action, which democracy can encourage, is needed to convert growth into genuine human development.

Democracy as a constraint on speed 🔗

There is also a tension to acknowledge. Democratic politics can slow reforms that might boost growth, because affected groups can mobilise to resist change. Land reform and agricultural policy illustrate this well, where the diversity of interests and the complex role of the state in balancing growth and justice has produced repeated policy gridlock. Some observers see this as a cost of democracy; others see it as democracy working exactly as it should, by forcing negotiation and compromise rather than allowing one group to impose its preferences.

Managing globalisation for inclusive growth 🔗

The practical question that emerges from all this is how to manage liberalisation and globalisation so that growth becomes broad-based. The World Economic Forum has argued that what matters is not just growth but inclusive growth, meaning the degree to which rising GDP per capita actually improves living standards for the population at large.

Several priorities follow from the evidence. Investment in human capital matters because education and health determine whether people can seize the opportunities a growing economy creates. Support for agriculture and rural areas is essential because so much of the workforce remains there. Social security for informal workers addresses the vulnerability that jobless and informal growth produces. Reducing regional disparities through targeted infrastructure can prevent lagging states from being permanently left behind. These are not arguments against liberalisation but arguments about how to complement it with public action.

A balanced verdict 🔗

The honest assessment is that liberalisation has been neither an unqualified triumph nor a betrayal of the poor. It coincided with the most rapid reduction in poverty in India’s history, yet it also widened inequality and left large groups behind. The reforms expanded freedom and opportunity for many while exposing others to new insecurities.

What makes the Indian case distinctive is that this entire process has been mediated by democracy. The political system has acted both as a brake on reform and as a mechanism for redistributing some of its gains. Whether the country achieves the elusive goal of “just growth” depends less on the market alone and more on whether democratic institutions can channel the wealth that liberalisation generates toward the capabilities and freedoms of all citizens, not just the fortunate few.

What do you think? Does India’s experience suggest that democracy ultimately strengthens the case for inclusive growth, or does it slow down the reforms needed to lift everyone out of poverty? And if liberalisation widens inequality even as it reduces poverty, how should a society weigh these two outcomes against each other?

References

1. https://scholarship.law.columbia.edu/books/263/
2. https://archive-yaleglobal.yale.edu/node/16476
3. https://www.undp.org/india/national-multidimensional-poverty-index-progress-review-2023
4. https://www.nber.org/system/files/working_papers/w11614/w11614.pdf
5. https://www.isas.nus.edu.sg/wp-content/uploads/media/isas_papers/ISAS%20Working%20Paper%20137%20-%20Inclusive%20Growth%20-%20How%20is%20India%20Doing.pdf
6. https://www.britannica.com/money/Amartya-Sen
7. https://www.asiancenturyinstitute.com/development/333-amartya-sen-on-developmentas-freedom
8. https://books.google.com/books/about/India.html?id=UpOl35r8UHQC
9. https://www.isas.nus.edu.sg/papers/244-india-at-cross-roads-beyond-the-dilemma-of-democratic-land-reforms
10. https://www.weforum.org/stories/2015/09/how-can-india-make-sure-its-growth-benefits-all-citizens/