The Interplay Between Liberalisation and Democracy in India

India’s economic story since 1991 is one of remarkable transformation – and deep contradiction. When Prime Minister P.V. Narasimha Rao and Finance Minister Manmohan Singh dismantled the old License Raj and opened India’s economy to market forces, foreign investment, and global trade, few could have predicted just how complex the consequences would be. GDP accelerated, a middle class expanded, and India earned a place among the world’s major economies. Yet poverty remained stubborn in pockets, inequality widened, and large sections of the population were left asking: who is this growth actually for? Understanding the relationship between liberalisation and democracy in India means sitting with both of these realities at once – the growth and the gaps, the progress and the unfinished work.

What liberalisation actually meant for India
The tension between markets and democracy
Growth without equity: The challenge of ‘just growth’
Poverty has fallen, but inequality has widened
Regional and social disparities
The ‘jobless growth’ problem
The role of the state: Enabler, not bystander
Investment in education
Infrastructure as a democratic imperative
What ‘just growth’ would look like

What liberalisation actually meant for India

Before 1991, India operated under a heavily state-controlled economic model. Businesses required government licences to operate, foreign investment was tightly restricted, and import tariffs were high. The 1991 reforms – centred on liberalisation, privatisation, and globalisation (LPG) – reversed this, steering the nation toward a more open, market-driven economy. Industrial licensing was largely abolished. Foreign equity participation was permitted. Trade barriers came down. The financial sector was modernised, with private and foreign banks allowed to enter the market.

The results, in purely economic terms, were significant. GDP growth, which hovered around 3-4% in the pre-reform era, surged to an average of 6-7% in the subsequent decades. India’s services sector – particularly information technology – emerged as a global leader. Foreign direct investment (FDI) flowed in, and India’s standing in the world economy was firmly established. These were not trivial gains. For millions, liberalisation opened up new employment and consumer opportunities that simply did not exist before.

The tension between markets and democracy

Here is where the story gets complicated. Markets and democracy operate on fundamentally different principles. Markets are driven by efficiency and returns; they reward those who already have capital, skills, and access. Democracy, by contrast, is built on the premise that every citizen – regardless of income or social position – has an equal voice. The exclusionary tendencies of markets can exacerbate social and political exclusion, undermining the inclusive goals of democracy. In India, this tension has played out visibly over three decades of reform.

A democratic government, in theory, is accountable to all its citizens. Elected representatives must answer to voters, which creates pressure to ensure that economic policies are not purely growth-oriented but also welfare-oriented. Democracy encourages public participation in decision-making, ensuring that diverse voices are heard and leading to more equitable and sustainable development. In practice, however, this accountability has been uneven. Political parties have often found it easier to offer subsidies and populist schemes than to build the foundational infrastructure – quality schools, healthcare, and roads – that would enable the poor to actually participate in a liberalised economy.

Political parties know subsidies are excessive and irrational but claim they have to continue them to survive in elections, creating what analysts describe as a race to the fiscal bottom. The consequence is that limited public resources are channelled toward short-term political wins rather than long-term social investment.

Growth without equity: The challenge of ‘just growth’

The concept of just growth – economic expansion that simultaneously reduces poverty and narrows income inequality – sits at the heart of the liberalisation-democracy debate in India. The evidence on whether India has achieved this is mixed, and at times troubling.

Poverty has fallen, but inequality has widened

On the positive side, poverty reduction has been real. In 1977, India’s poverty rate stood at nearly 60%, and just after the LPG reforms in 1993, it declined to around 47%. Over the past 30 years, the country has successfully reduced poverty to 5.25% as of 2022. Post-liberalisation market-oriented reforms accelerated economic growth and expanded employment in sectors like construction, services, and informal urban employment, enabling large sections of the population to cross the absolute poverty threshold.

But poverty reduction and equality are not the same thing. The benefits of this growth were disproportionately captured by the top income deciles, driven by skill-biased technological change, higher returns to capital, and the rapid expansion of finance and information technology. In 1982, the top 10% held about 30% of income; following liberalisation, that share climbed sharply. A study co-authored by economist Thomas Piketty found that the share of GDP held by the top 1% doubled from 5% to 10% by 2000, highlighting the unequal nature of post-liberalisation growth.

The liberalisation process created a dual economy where modern, globalised sectors coexisted with traditional, low-productivity sectors. States with better pre-existing infrastructure attracted more investment and grew faster; others lagged. The case of Gujarat illustrates this starkly – Gujarat is one of the fastest-growing states, yet its rate of poverty decline has been slow, demonstrating that economic growth alone is not sufficient to reduce poverty. By contrast, Kerala and Tamil Nadu reduced poverty faster because of redistributive policies and public investment, proving that growth is a necessary but not sufficient condition.

Marginalized communities – Dalits, Adivasis, and other minority groups – face persistent barriers to both economic and political participation. For them, the gains from liberalisation have often been indirect and inadequate. Scholar Harsh Mander has argued that since India opened its economy in the 1990s, society has become more polarized and the state has progressively abandoned its responsibility to the poor.

The ‘jobless growth’ problem

Another critical dimension of the equity challenge is employment. Economic growth was primarily driven by capital-intensive industries, leading to concerns about jobless growth and underemployment. India’s demographic dividend – a large, young working-age population – was supposed to be a strategic advantage. But the share of manufacturing in GDP has hovered around 15%, no higher than before liberalisation, while job growth in the formal manufacturing sector has been minimal. Without a manufacturing boom similar to that seen in East Asian economies, India’s growth model has struggled to generate the broad-based employment that could have made liberalisation genuinely inclusive.

The role of the state: Enabler, not bystander

A common misreading of liberalisation is that it means the state steps back entirely. In practice, the neoliberal state in India not only delivered growth but also provided public infrastructure and created a social safety net, with educational and gender outcomes improving after growth took hold. The question is not whether the state should be involved, but how – and whether it is doing enough of the right things.

Investment in education

Access to quality education is foundational to enabling citizens to participate in and benefit from a liberalised economy. Yet India’s track record here has been inconsistent. The Kothari Commission as far back as 1966 recommended investing 6% of national income in education. Successive governments have not reached this target, with the state spending only around 4% of GDP on education, resulting in widening cumulative gaps in school infrastructure and teacher quality. Some scholars note that governments are incentivised to invest in visible actions like building school buildings – which are attributable to them – over less visible investments in teacher training and learning quality, which are harder to showcase at election time.

The direction of reform has improved in recent years. From 2014 onwards, decades of separate trajectories – from economic liberalisation to global development frameworks – began converging around a critical question: what kind of education system does a growing economy need? The National Education Policy 2020 and targeted schemes like Sarva Shiksha Abhiyan have expanded enrolment significantly. But enrolment and learning are not the same thing. In 2005, Pratham’s first Annual Status of Education Report found that 72% of Grade 3 children could not read a Grade 2 text – a finding that exposed the gap between physical access to schooling and actual educational outcomes.

Infrastructure as a democratic imperative

Infrastructure – roads, power, connectivity – is not just an economic input. It is a democratic equaliser. When a rural farmer can access markets, when a small entrepreneur has reliable electricity, when a student in a remote district can access digital learning, the gains of liberalisation extend further down the income ladder. Poor infrastructure has been described as India’s Achilles’ heel – any time economic growth takes off, it runs into an infrastructure constraint. Despite significant public-private partnership (PPP) initiatives, many projects have been plagued by delays, financing problems, and regulatory bottlenecks.

It is difficult to find a single developed country that reached prosperity without substantial public investment in quality healthcare and education. The failing of public institutions – underfunded schools, overcrowded hospitals – lowers the benchmark for the entire system, including private providers. Strengthening the state’s capacity to deliver public goods is therefore not a retreat from liberalisation; it is the precondition for liberalisation to be socially sustainable.

What ‘just growth’ would look like

Achieving just growth in India requires moving beyond the binary of “more state” versus “more market.” The evidence from three decades of reform points clearly to a set of structural priorities. Policymakers need to focus on inclusive growth through increased public investment in agriculture, rural infrastructure, and skill development to reduce regional and income disparities. Social safety nets like MGNREGA need to be expanded and better funded. Universal access to public health, education, and social security can significantly reduce inequality by levelling the playing field for those the market has bypassed.

Democracy has a critical role here. When citizens – especially the poor – can hold governments accountable, there is political pressure to direct resources toward public goods rather than elite capture. India’s democratic founders charted a way of thinking about nationhood where inclusion and participation were central. The ongoing challenge is to ensure that democratic accountability translates into the kind of long-term public investment – in people, skills, and infrastructure – that allows economic liberalisation to fulfil its original promise: not just growth, but growth for all.

India’s trajectory since 1991 is neither a simple success story nor a straightforward cautionary tale. It is an ongoing negotiation between the logic of markets and the imperatives of democracy – and the outcome of that negotiation will shape the lives of over a billion people for generations to come.

What do you think? Can economic liberalisation and genuine social equity coexist in a democracy like India, or does the logic of the market inevitably favour those who are already ahead? And what specific responsibilities should a democratic state retain – even in a liberalised economy – to ensure that growth reaches those at the bottom?

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Table of Contents

What liberalisation actually meant for India 🔗

The tension between markets and democracy 🔗

Growth without equity: The challenge of ‘just growth’ 🔗

Poverty has fallen, but inequality has widened 🔗

Regional and social disparities 🔗

The ‘jobless growth’ problem 🔗

The role of the state: Enabler, not bystander 🔗

Investment in education 🔗

Infrastructure as a democratic imperative 🔗

What ‘just growth’ would look like 🔗