Globalization, Inequality, and Welfare in India

1. Introduction

The story of contemporary India is inextricably linked to the 1991 economic reforms, a fundamental inflexion point in the nation's economic and social trajectory that continues to shape the lives of over a billion people. To comprehend the complex interplay of globalization, inequality, and welfare in India today, one must first understand the world that preceded it and the crisis that shattered the old consensus.

1.2. The Pre-Reform Era and the Catalyst for Change

From its 1947 independence until 1991, India's economy operated under a state-guided, protectionist framework known as the "Licence Raj". Rooted in post-colonial objectives of self-reliance, this model emphasized import-substitution industrialization, with public sector enterprises (PSEs) occupying the "commanding heights" of the economy. Economic activity was heavily regulated through industrial licensing, price controls, and stringent controls on foreign trade and investment. This inward-looking strategy resulted in the "Hindu rate of growth"—a modest annual expansion of around 3% that struggled to reduce mass poverty. This consensus reflected an ideology that viewed private commerce with suspicion, subordinating it to state goals.

By the late 1980s, the model was cracking. Fiscal laxity widened government deficits, financed by borrowing. The trigger for the crisis came in 1990 with the Gulf War, which caused a sharp spike in oil prices, increasing India's import bill while reducing remittances. This spiralled into a crisis of confidence as foreign lenders grew wary, and capital began to flee. By January 1991, India's foreign exchange reserves had plummeted to below US$1 billion, barely enough to cover a few weeks of imports. The nation stood on the precipice of defaulting on its international payment obligations, making radical reform an absolute necessity. The crisis-driven origin of the reforms created a path dependency where policies aimed at attracting foreign capital and boosting exports took precedence, with distributional consequences often treated as a secondary concern.

1.3. A Paradigm Shift: The 1991 Reforms

In July 1991, the new government under Prime Minister P.V. Narasimha Rao, with Dr. Manmohan Singh as Finance Minister, initiated sweeping reforms. Immediate stabilization measures included an 18% devaluation of the rupee and a sharp cut in the fiscal deficit. These were followed by structural reforms that dismantled the old regime. The system of industrial licensing was virtually abolished, and the economy was opened to the world through a phased reduction of high import tariffs and the elimination of most quantitative restrictions on imports.

Perhaps most significantly, India rolled out the welcome mat for foreign capital. Foreign Direct Investment (FDI) of up to 51% equity was automatically allowed in many industries, and policies were introduced to attract foreign portfolio investment. The financial sector was also reformed, with the gradual freeing of interest rates and the empowerment of a new capital market regulator, the Securities and Exchange Board of India (SEBI). These policies marked the end of the import-substitution era and the beginning of India's integration into the global economy, a process known as Liberalization, Privatization, and Globalization (LPG).

1.4. The Central Paradox

The legacy of these reforms is a story of profound and often contradictory transformations. On one hand, they unleashed an unprecedented period of high growth that turned India into one of the world's most dynamic economies. This dynamism fuelled a historic reduction in absolute poverty, lifting hundreds of millions of people above the subsistence line. On the other hand, this same period has been characterised by a sharp and sustained rise in economic inequality. The benefits of growth have been captured disproportionately by a small elite, leading to a dramatic concentration of income and wealth. This has created a starkly divided nation, a "Tale of Two Indias." This essay seeks to dissect this central paradox, analysing how globalization has simultaneously driven growth and poverty reduction while deepening economic divides and reshaping the distribution of welfare.

2. The New Economic Engine: Growth, Investment, and Global Integration

The 1991 reforms re-engineered India's economic engine, replacing the state-controlled model with a market-driven one fuelled by global capital and trade. The macroeconomic transformation that followed was dramatic, laying the groundwork for both remarkable welfare gains and deep-seated inequalities.

2.1. An Unprecedented Growth Trajectory

The most visible success of the reforms was the break from the "Hindu rate of growth." In 1991, GDP growth had slumped to 1.06%. Following the reforms, the economy rebounded, and by the mid-1990s, it was consistently posting growth rates above 7%. This momentum continued, with GDP growth averaging between 7% and 9% in the early 2000s and 6% and 7% in the 2010s, transforming India into one of the fastest-growing major economies. This sustained high growth became the primary driver of economic expansion.

2.2. Opening the Floodgates: The Influx of Foreign Capital

Central to this new growth model was the courting of foreign capital. The pre-1991 regime had been deeply restrictive, but the reforms dismantled these barriers. From a negligible base of US$0.1 billion in 1991, annual FDI inflows surged, crossing US$4.28 billion by 2001. This trend accelerated dramatically, and between 2001 and 2025, India's FDI inflows increased approximately twenty-fold. By the mid-2020s, cumulative FDI had surpassed US$1 trillion.

However, this capital was not a uniform tide. Investment was highly concentrated, both sectorally and geographically. The services sector—particularly computer software and hardware—emerged as the primary magnet for FDI. Geographically, investment clustered in states with better infrastructure and a skilled workforce, such as Maharashtra, Karnataka, and Gujarat, largely bypassing many northern and eastern states. This uneven distribution of capital became a principal mechanism through which globalization exacerbated regional inequalities. The new economic engine was structurally biased towards a small, urban, educated elite, as the industries that flourished—IT, finance, and telecommunications—are capital-intensive and require a highly educated workforce.

2.3. India on the World Stage: The Expansion of Trade

The reforms also ended India's strategy of import substitution. The phased reduction of tariffs and removal of import licensing opened the Indian market, while export promotion schemes aimed to make Indian products more competitive. This led to a massive expansion in trade. The trade-to-GDP ratio doubled from around 15% in the mid-1980s to nearly 30% by the late 1990s. The composition of trade also transformed, with a rise in manufactured exports and, most significantly, the emergence of services exports, particularly in software and IT, which became a powerhouse of the Indian economy.

However, this increased global integration was a double-edged sword. It brought opportunities but also new vulnerabilities. The agricultural sector became exposed to volatile international commodity prices, with cheap imports often depressing domestic prices. The economy became more susceptible to international downturns and reliant on imported technology, creating new forms of external dependency.

In sum, the post-1991 period witnessed the construction of a new, globally integrated economic engine. Yet, the very design of this engine—its reliance on capital-intensive sectors, its concentration in specific regions, and its exposure to global volatility—contained the blueprint for the widening inequalities that would become the defining social challenge of India's era of globalization.

3. The Great Divergence: Deconstructing Economic Inequality

The era of globalization in India is defined by a paradox: it has been a period of both unprecedented poverty reduction and an explosive rise in economic inequality. While the new economic engine lifted a significant portion of the population out of destitution, the distribution of the newly created wealth became increasingly skewed.

3.1. The Paradox of Poverty and Plenty

The most celebrated achievement of India's post-reform era is its success in combating extreme poverty. The share of the population living in extreme poverty has plummeted, with hundreds of millions of people lifted out of this condition. The poverty rate, 22.5% in 2011, is estimated to have fallen to as low as 2.3% by 2022-23, representing one of the most significant episodes of poverty reduction in human history.

Yet, this progress is shadowed by a concurrent surge in inequality. The Gini coefficient, a standard measure of inequality, has been contentious. Some government-promoted data suggests a Gini index as low as 25.5, which would place India among the world's most equal societies. This contrasts with widely accepted World Bank data indicating a Gini index of 32.8 in 2021, a significant increase from the levels of the early 1990s.

The most unambiguous evidence of divergence lies in wealth distribution. Reports from organizations like Oxfam paint a startling picture. In 2017, 73% of new wealth flowed to the richest 1%, while the 670 million people in the poorest half saw their wealth increase by a mere 1%. The top 10% of the population now holds over 77% of the total national wealth. This period has also witnessed the rise of a "billionaire raj," with the number of Indian billionaires growing from nine in 2000 to 119 by the late 2010s, their collective fortune exceeding the entire annual Union budget. This extreme concentration indicates that the mechanisms of growth are systematically channelling rewards upwards. This has created a society where a statistical escape from poverty often fails to translate into economic security. A vast population lives precariously above the poverty line in informal employment, acutely exposed to economic shocks like the rising cost of privatized healthcare, which pushes an estimated 63 million Indians back into poverty each year.

3.2. The Widening Map: Regional Divergence

The story of rising inequality is also one of geography. Economic growth has been a regional phenomenon, concentrated in a few high-growth corridors. The post-1991 model, driven by private and foreign investment, follows market logic: capital flows where returns are highest. This has meant a concentration of investment in southern, western, and northwestern states like Maharashtra, Gujarat, and Karnataka, which already possessed better infrastructure and a more educated workforce.

The result has been a stark divergence in economic fortunes. In 1990-91, the average per capita State Domestic Product (SDP) of higher-income states was 1.7 times that of lower-income states. By 2019-20, this gap had widened to 2.5. This disparity is even more pronounced in modern sectors like manufacturing and services, effectively bifurcating the country into a prosperous, rapidly industrializing bloc and a lagging, largely agrarian bloc.

This regional divergence has created a self-perpetuating feedback loop. Investment is drawn to states with superior infrastructure and skilled labour, generating further growth and tax revenues, which are then reinvested, making them even more attractive. Meanwhile, lagging states are caught in a vicious cycle of low investment and slower growth. Globalisation did not invent regional disparities, but by replacing state-led planning with market-driven logic, it has dramatically amplified them.

3.3. The Fractured Workforce: Labour Market Dynamics

At the heart of India's inequality story is a fractured labour market, unable to translate high GDP growth into broad-based, quality employment. The dynamics are characterized by a rising premium on skills, the persistence of a vast informal sector, and "jobless growth."

First, globalisation has led to "skill-biased technological change" (SBTC). New industries like IT and finance require a workforce with higher education, increasing the demand for and wages of skilled workers while demand for unskilled labour stagnates, widening the wage gap.

Second, despite rapid growth, the formal sector has failed to absorb the millions entering the workforce, leading to "jobless growth". Consequently, around 90% of India's workforce remains in the informal economy, defined by a lack of contracts, job security, or social benefits. Globalization has exacerbated this "informalization" as formal firms outsource to smaller, informal units or hire on contract to remain competitive.

Finally, these dynamics have led to widening wage inequality. While some argue trade liberalization may have benefited low-skill sectors, the broader evidence points to large and persistent earnings gaps between formal and informal sectors, different education levels, urban and rural workers, and genders. The post-1991 economy has created a tiered labour market, with a small group of high-skill formal workers reaping significant rewards, while the vast majority contend with low wages and precarious livelihoods.

4. Sectoral Fortunes: Winners and Losers in the Globalized Economy

Globalization acted as a force of creative destruction, catapulting new, globally oriented industries to prominence while exposing traditional, labour-intensive sectors to immense pressure. This sectoral divergence created a clear divide between winners and losers.

4.1. The Agrarian Crisis: Agriculture as a Casualty of Globalization

For most of the India's population, globalization's impact has been filtered through agriculture. The sector, which provides a livelihood for nearly half the workforce, has been in a protracted crisis since the mid-1990s, a crisis linked to liberalization. India's integration into the global economy, particularly its WTO commitments, necessitated a reordering of agricultural policies.

The crisis was driven by several factors. First, trade liberalization exposed Indian farmers to volatile global markets and competition from heavily subsidized producers in developed countries. The removal of import restrictions led to a surge of cheap agricultural products, causing domestic prices for crops like cotton and edible oils to crash. Second, the emphasis on fiscal discipline led to a reduction in state support. Public investment in irrigation and rural infrastructure declined, stagnating productivity, while subsidies for inputs like fertilizers were curtailed, increasing cultivation costs. Third, globalization encouraged a shift from traditional food grains to cash crops, making farmers more dependent on expensive inputs and vulnerable to international price fluctuations.

The cumulative effect has been a deepening agrarian distress characterized by falling profitability, stagnant incomes, and a crushing cycle of indebtedness, tragically manifested in a wave of farmer suicides. The economic non-viability of small-scale farming has also pushed millions off the land, forcing them to migrate to cities. This exodus from the countryside fuels the precarity of urban labour markets. As farming becomes untenable, rural migrants pour into cities, but the formal economy's failure to generate sufficient jobs funnels them into the vast urban informal sector, creating a direct causal link between the crisis in the fields and the expansion of insecure, low-wage labour in the cities.

4.2. The Squeezed Middle: Small-Scale Industries and Traditional Sectors

Alongside agriculture, India's Small-Scale Industries (SSIs) have faced immense challenges. Historically the backbone of manufacturing employment, they were subjected to "unequal competition". Lacking the scale and capital of large multinational corporations (MNCs), many SSIs struggled to compete. The influx of cheaper imported goods, particularly from China, forced many small units in sectors like toys, electronics, and footwear to shut down.

The Indian handloom industry serves as a poignant case study. As the largest employer after agriculture, the sector is a repository of immense cultural heritage. The post-liberalisation era brought both opportunities and threats. While global markets offered new export avenues, the sector faced intensified competition from cheaper, mass-produced textiles. Weavers have been squeezed by rising input costs, a lack of access to credit, and a fragmented marketing system. The sector continues to struggle, emblematic of the broader challenge faced by traditional industries.

4.3. The Rise of the New Economy

In stark contrast, a new set of industries thrived. The services sector, particularly the Information Technology (IT) and Business Process Outsourcing (BPO) industry, experienced an explosive boom. Leveraging a large pool of skilled, English-speaking engineers, Indian firms began providing software and back-office services to corporations worldwide. This sector, almost non-existent before 1991, grew at a phenomenal pace, becoming a major contributor to GDP and a leading export earner. It created millions of high-quality, formal-sector jobs and gave rise to a new, affluent global middle class, particularly in cities like Bangalore and Hyderabad.

The success of the IT sector, however, highlights the dualistic nature of India's growth. This high-productivity, globally integrated sector has remained largely an "enclave," with limited connections to the rest of the domestic economy. This disconnect limits the "spillover effects" of its growth; it has not been able to pull the vast, low-productivity agricultural and informal sectors up with it. This structural separation between the thriving modern sector and the struggling traditional economy is a profound legacy of India's path of globalization and lies at the core of its inequality challenge.

5. The Distribution of Well-being: State, Market, and Social Welfare

The economic transformations driven by globalization have profoundly reshaped social welfare in India. This period has seen tangible progress in human development indicators, yet these improvements mask widening disparities. The state's role has evolved from a primary provider to a facilitator of markets, particularly in health and education, leading to a surge in privatization with inequitable consequences. In response, the state has also created new, targeted social safety nets.

5.1. Progress and Disparity in Social Development

On the surface, India's social development indicators have shown remarkable improvement. Life expectancy has crossed the 70-year mark, and the national literacy rate has climbed to over 77%. Infant and maternal mortality rates have seen steep declines. However, these national averages conceal deep disparities. A significant gender gap persists in literacy (84.7% for men vs. 70.3% for women), and a rural woman's literacy rate is around 65%, far below the 83% for her urban counterpart. The divergence between states is stark: in Kerala, over 90% of rural women are literate, a figure that plummets to just 49% in Bihar. These gaps are also strongly correlated with caste and socioeconomic status.

5.2. The Privatization of Welfare

A defining feature of the post-1991 era has been the explosive growth of the private sector in education and healthcare. This was driven by an ideological embrace of market solutions, chronic under-investment in public services, and growing demand from a population dissatisfied with the quality of government institutions.

In education, private household expenditure has outpaced government spending, fuelling a boom in private schools. For the affluent, high-end private schools offer international curricula. More significantly, a massive market for "low-fee" private schools has emerged, catering to poor and lower-middle-class families desperate to escape the failing public school system. The case of Andhra Pradesh illustrates this, with a rapid shift of students to private schools drawn by the promise of English-medium instruction. However, research indicates that learning outcomes in these schools are often only marginally better than in government schools, and access is heavily stratified by income, with the poorest households trapped in the residual public system.

A parallel story has unfolded in healthcare. Decades of underfunding have left the public system ill-equipped, forcing even the poor into the unregulated and expensive private sector. This has transformed decent healthcare from a public good into a "luxury good". Out-of-pocket health expenditure is a leading cause of poverty, pushing an estimated 63 million people below the poverty line each year. The rapid privatisation of medical education has also raised concerns about exorbitant fees and questionable training standards. This marketization of essential services is a powerful mechanism for entrenching inequality across generations, as economic advantage is directly converted into superior human capital.

5.3. The Evolving Social Safety Net

In the face of these social strains, India's social safety net has evolved. The pre-reform model of universal subsidies has been replaced by a more targeted, rights-based framework. The transformation of the Public Distribution System (PDS), India's food subsidy program, is emblematic. For decades, the PDS was a universal scheme. In 1997, it was restructured into the Targeted PDS (TPDS), dividing the population into "Below Poverty Line" (BPL) and "Above Poverty Line" (APL) categories. This culminated in the National Food Security Act (NFSA) of 2013, which created a legal entitlement to subsidized food grains for a targeted segment of the population.

Another cornerstone is the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), launched in 2005. This law provides a legal guarantee of 100 days of unskilled manual wage employment per year to every rural household that demands it. MGNREGA functions as a vital safety net, providing income during lean agricultural seasons and times of economic distress, reducing distress migration, and empowering marginalized groups, particularly women. The coexistence of these safety nets with pro-market policies reveals the dual role of the Indian state: it acts as a promoter of corporate growth while providing minimalist, targeted safety nets to manage social discontent, making a fundamentally unequal economic system more politically sustainable.

6. Social Fault Lines in a New Economy

The economic currents of globalization have churned through a society already stratified by caste and gender. The new economic order has interacted with these old social fault lines in complex ways, sometimes eroding traditional barriers but more often reinforcing them.

6.1. Globalization's Interplay with Caste

The impact of globalization on India's caste system has been dualistic. In enclaves of the new economy, like the high-tech sector, there is evidence of an erosion of traditional caste-based discrimination. In these globally oriented workplaces, merit and skills have become the primary currency, as one executive noted, "we don't give a damn about any of these differences in caste or religion". This has opened new avenues of upward mobility for educated individuals from marginalized Dalit and other lower-caste communities, leading to "Dalit capitalism".

However, this meritocratic opening has been accessible to only a tiny, educated fraction. For the vast majority, the economic changes have reinforced their structural disadvantages. Lacking the educational qualifications and social networks to compete, millions from weaker castes have been pushed into the most precarious segments of the informal sector. Economic data confirms this persistent hierarchy; Scheduled Castes (SCs) remain the most disadvantaged social group. Rather than rendering caste irrelevant, the new capitalism has often exploited these divisions, creating a segmented labour market where workers from certain communities can be paid lower wages. This has created a "meritocratic illusion," where the visible success of a few obscures the formidable structural barriers that remain for the majority, particularly the unequal access to quality education and healthcare.

6.2. Globalization's Impact on Gender Inequality

The experience of Indian women has been similarly contradictory. The opening of the economy has created new opportunities, with the growth of the services and export-oriented industries drawing millions of women into the paid workforce, providing them with a degree of economic independence. The demand for an educated workforce has also provided an impetus for female education.

On the other hand, this integration has created new forms of vulnerability. The search for "cheap" labour has often meant that women are concentrated in low-wage, insecure jobs with poor working conditions. The decline of traditional industries like handlooms, where women were heavily employed, has led to significant job losses. Most troublingly, India has witnessed a paradoxical trend: despite rapid economic growth and rising female education, the overall female labour force participation rate has stagnated and, in many years, declined. This suggests that structural barriers—including patriarchal social norms, the burden of unpaid care work, and a lack of suitable jobs—continue to prevent women from fully participating in and benefiting from economic growth.

6.3. Social Cohesion and Political Consequences

A society with extreme and rising inequality is inherently unstable. In India, this is particularly dangerous as economic inequality is layered upon a society already fractured by the "lethal cocktail" of caste, religion, and gender. The widening gap between rich and poor, combined with public anger over corruption, creates fertile ground for social tension.

Rising inequality has also had profound consequences for India's democracy. There is a risk that as the rich become more powerful, they can "capture" the political process, leading politicians to favour their interests over the needs of the poor majority, a tendency pronounced in areas with low political competition. However, India's democracy has also shown resilience. The poor and disadvantaged groups vote in proportionally higher numbers than the rich, making them a formidable political constituency. This democratic pressure helps explain the paradox of India's political economy: the simultaneous pursuit of pro-market policies and the enactment of ambitious, rights-based welfare legislation like the NFSA and MGNREGA.

This has led to a distinctive political equilibrium. The political system has largely shied away from structural reforms that would fundamentally alter the unequal distribution of market outcomes, such as progressive wealth taxes or strengthening labour rights. Instead, the response has been to offer palliative care. The state allows the market to generate wealth with minimal redistributive interference, then uses a fraction of the revenues to fund social safety nets that provide a basic floor of security. This approach has been politically astute, managing social discontent and making the high-inequality model sustainable in the short term. However, it is a strategy that treats the symptoms of inequality rather than its root causes, institutionalizing the "Tale of Two Indias" as a permanent feature of the nation's development path.

7. Conclusion

India has seen tremendous dualities since 1991, showcasing both notable advancements and widening disparities. High growth rates brought upon by economic reforms effectively saved the nation from default and antiquated government, significantly lowering absolute poverty. A "Tale of Two Indias," however, has emerged because of this expansion, which has exacerbated inequality by favouring capital-intensive industries and certain regions. Both the gap between the formal workforce and the large informal sector, as well as between thriving and suffering regions, has grown because of the concentration of wealth among a small elite. Traditional industries, especially agriculture, have experienced crises and privatization, which might continue to harm future generations.

This model clearly shows social and political conflicts, with long-term stability at risk due to a decline in social cohesiveness and an increase in public discontent. The next stage must concentrate on fostering inclusive growth rather than considering inequality as a byproduct, as the current high-inequality growth model is considered unfair and unsustainable.

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