Has India’s growth pulled people out of poverty?

In the four decades between independence and the 1991 reforms, India’s poverty rate barely moved. In 1951, roughly half of all Indians lived below the poverty line. The economy was growing just slowly enough to stay ahead of a growing population, and too slowly to make a dent in poverty. In the thirty years that followed, India’s extreme poverty rate fell from 45 per cent to just over 2 per cent. India went from over 400 million people in extreme poverty to around 30 million.

So, what caused this change? The instinctive answer is “economic growth.” But that needs unpacking. Growth is not a force that descends from above and hands people jobs. It is what happens when people do more productive things — when they spend their entrepreneurial energy on making and selling, rather than on navigating a government permission structure. When a farmer in Punjab finds a buyer in Delhi through her phone, when an engineer in Bengaluru starts a company without applying for nineteen licences, when a small manufacturer in Surat imports a machine that makes his workers three times more productive — that is growth. Add all these micro productivity improvements across the economy and we have what economists call economic growth. 

Before 1991, the License Raj ensured that most of that energy went toward navigating the state. Every significant business decision — what to produce, how much, where, with what equipment — required government permission. The result was the Hindu rate of growth: roughly 3.5 per cent a year, at which the economy doubled every twenty years. Between independence and 1991 — in forty-four years — India’s per capita income grew by less than 80 per cent in real terms. Since the reforms dismantled those barriers and made it far easier for people to start and grow businesses, the economy has grown at close to 7 per cent a year, doubling output every ten years instead. What once took over two decades now takes one.

More importantly, a productivity gain does not stay where it starts. When a software engineer in Bengaluru earns more, she spends more — on food, on transport, on services. That spending becomes someone else’s income. When farmers become more productive, they earn more and buy manufactured goods from towns they never traded with before. Agricultural wages across India rose 2.5x in nominal terms between 1993 and 2011. Electricity, clean cooking fuel, and improved sanitation reached hundreds of millions of households over the same period. 

The poor did not get richer because someone took from the rich and gave to them. They got richer because they gained access to opportunities they did not have before — to sell their produce at better prices, to find work in new industries, to send money home. That access, multiplied across hundreds of millions of people, is what shows up in the poverty data.

Having established that growth reduced poverty, the question that follows is whether it reached everyone equally — or whether the rich got so much further ahead that the gap between them and everyone else is now too wide to cross.