Appraisal of India’s Economic Reforms: Growth vs. Inequality

When India faced a severe balance of payments crisis in 1991, the government launched a sweeping package of economic reforms built around liberalisation, privatisation, and globalisation. More than three decades later, the verdict on these reforms remains divided. Supporters point to a dramatic jump in growth that pulled millions out of poverty. Critics argue that the gains were unevenly shared and that inequality widened sharply. Appraising the reforms means holding both truths together: the economy grew faster than ever, yet the social outcomes were complicated and contested. This post examines the growth record, the heated debate over poverty, and the uneven distribution of who actually benefited.

Growth achievements after 1991
What drove the faster growth
The poverty debate: did poverty really decline?
The numbers in question
Why the data became controversial
Two camps, one unresolved question
Rising inequality in the 1990s
Evidence of widening gaps
Urban-rural and inter-state divergence
The distributional impact: who benefited?
The winners
Those left behind
The balanced appraisal

Growth achievements after 1991

The most undeniable success of the reforms is the acceleration in national income. For decades before 1991, India was stuck at what economists nicknamed the “Hindu rate of growth” – a sluggish annual GDP expansion of roughly 3.5%. After the reforms opened up the economy, growth climbed to an average of over 6% in the post-reform period, with several years touching 8-9%.

This was not a one-year spike. An IMF study found that growth averaged around 7% between 1993-94 and 2009-10, accelerating to about 8.5% in the latter half of that period. The economy that had once teetered on the edge of default went on to become one of the fastest-growing major economies in the world, rising over time to become the fourth-largest economy by nominal GDP.

What drove the faster growth

Several engines powered this surge. The dismantling of the “Licence Raj” freed private firms from suffocating controls on production and investment. Trade barriers came down, import tariffs were cut, and rules on foreign direct investment were relaxed. FDI grew faster after liberalisation than before, bringing in capital, technology, and competition.

The services sector became the standout performer. IT and business process outsourcing turned globally competitive, and services eventually contributed more than half of GDP. Foreign exchange reserves, which had shrunk to less than a billion dollars during the 1991 crisis, swelled to hundreds of billions in later years. By the headline numbers, the reforms delivered exactly what they promised: a bigger, faster, more open economy.

The poverty debate: did poverty really decline?

Here is where the appraisal gets complicated. If growth accelerated so strongly, poverty should have fallen sharply. The official figures suggested exactly that – but the numbers themselves became the subject of one of the most famous controversies in Indian economics, often called the Great Indian Poverty Debate.

The numbers in question

Official estimates from the Planning Commission showed a steep drop. Using National Sample Survey (NSS) data, rural poverty appeared to fall from 36% in 1993-94 to 26% in 1999-2000. On the surface, this looked like proof that liberalisation was working. But many economists were not convinced the decline was real.

Why the data became controversial

The problem lay in how the survey was conducted. Poverty in India is estimated from consumption expenditure data, and the way questions are asked matters enormously. The period over which a household is asked to recall its spending is called the recall period. For decades, the NSS used a uniform 30-day recall period for food and other items.

In the 55th round (1999-2000), the NSSO changed the method. As the survey recorded food and tobacco spending over two different reference periods – a seven-day and a 30-day recall – the new figures were no longer directly comparable with the earlier 50th round. A shorter recall period tends to capture higher reported consumption, which can mechanically lower the measured poverty rate. Critics argued that part of the apparent decline in poverty was an artefact of the changed methodology rather than a genuine improvement in living standards.

Economists Angus Deaton and Jean Drèze attempted to fix this by adjusting the numbers to make them comparable. A change in survey methodology in 1999-2000 triggered a vigorous debate about how much poverty had actually fallen. Their reworked estimates still showed poverty declining, but they also concluded that the post-reform period had sharply widened the gap between rural and urban India.

Two camps, one unresolved question

The debate split economists into broadly two camps. One group, broadly supportive of liberalisation, accepted the official “thick round” survey numbers and argued that reforms had reduced poverty. The other group was sceptical, noting that national accounts showed rising growth while survey data showed stagnant per capita consumption. If the economy was growing so fast, why did household consumption surveys not reflect a matching rise in living standards for the poor?

This gap between the macroeconomic story (rapid GDP growth) and the household story (slow consumption gains) is the heart of the appraisal problem. It suggests that growth did not automatically “trickle down” to the poorest as smoothly as reform advocates had hoped.

Rising inequality in the 1990s

While the poverty numbers were disputed, there was far more agreement on a second trend: inequality rose during the reform decade. The benefits of growth were not flowing evenly across society.

Evidence of widening gaps

The Gini coefficient, the standard measure of income or consumption inequality, tells part of the story. Different studies use different data and arrive at different exact figures, but the direction is consistent. One analysis notes the Gini rising from roughly 0.32 in the early 1990s toward higher levels in later years, indicating a worsening spread of income.

The picture was especially stark at the top of the income distribution. Research using income tax records found that the real incomes of the top 1% of earners rose by about 50% during the 1990s, while the bottom 80% of the rural population saw their consumption stagnate or fall behind. Growth was concentrating its rewards among those who already had capital, education, and access to markets.

Urban-rural and inter-state divergence

Inequality did not just rise between rich and poor individuals – it grew between regions and sectors too. Inequality increased markedly during the 1990s in several forms, including a strong divergence across states. Richer states pulled ahead while poorer states lagged. Within cities, urban inequality climbed, and the gap between urban and rural living standards widened.

An academic study on whether liberalisation helped reduce poverty concluded that the post-reform period was marked by a sharp rise in urban inequality and only a marginal decline in poverty. Crucially, the study argued that rising inequality actually weakened the poverty-reducing power of growth. In other words, the faster the economy grew, the more those gains were captured by the better-off, leaving less benefit to flow down to the poor.

The distributional impact: who benefited?

Putting growth and inequality together brings us to the central question of any appraisal: how were the benefits of reform distributed across society? The honest answer is that they were distributed unevenly.

The winners

Urban, educated, and skilled Indians gained the most. The IT and services boom created lucrative careers for those with the right qualifications. A large new middle class emerged, with rising incomes and access to global consumer goods. Owners of capital benefited as the share of national output going to capital rose relative to labour. For these groups, the reforms were genuinely transformative.

Those left behind

The benefits reached others far more slowly. Agriculture, which still employs a huge share of the workforce, was largely bypassed by the first wave of reforms. Small farmers, rural communities, and informal workers saw limited gains. A persistent concern was “jobless growth” – high GDP expansion that did not generate proportionate employment, leaving the vast informal sector without job security or social protection.

Research on the poverty debate offered a structural explanation for why growth helped the poor so little. The disappointing pace of poverty decline despite high growth was linked partly to weak growth in agricultural output and low productivity in that sector. Because so many of the poor depend on agriculture, a boom concentrated in services and capital-intensive industry simply did not reach them.

The balanced appraisal

So how should we judge the reforms? The fairest conclusion is a mixed one. The reforms unambiguously raised the rate of growth and, over the long run, contributed to a substantial fall in extreme poverty. They modernised the economy and integrated India into global markets. But the same reforms widened inequality, deepened the rural-urban divide, and allowed the wealthiest to capture a disproportionate share of the gains, especially in the turbulent 1990s.

This is why the appraisal of economic reforms is rarely a simple “success” or “failure.” It depends heavily on what you measure and whose experience you centre. Aggregate growth tells a triumphant story. Distribution and equity tell a far more cautious one. A complete appraisal must hold both in view – recognising the real achievements while taking seriously the question of whether growth that bypasses the poorest can be called fully successful.

What do you think? If rapid economic growth widens the gap between rich and poor, is it still the right priority for a developing economy – or should reducing inequality come first? And when official statistics are themselves disputed, how much weight should policymakers place on headline numbers like the poverty rate?

References

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Appraisal of India’s Economic Reforms: Growth vs. Inequality

Table of Contents

Growth achievements after 1991 🔗

What drove the faster growth 🔗

The poverty debate: did poverty really decline? 🔗

The numbers in question 🔗

Why the data became controversial 🔗

Two camps, one unresolved question 🔗

Rising inequality in the 1990s 🔗

Evidence of widening gaps 🔗

Urban-rural and inter-state divergence 🔗

The distributional impact: who benefited? 🔗

The winners 🔗

Those left behind 🔗

The balanced appraisal 🔗