---
type: faq
question: >-
  Opening up made India richer. So why are hundreds of millions of us still
  poor?
topic: trade
topic_title: Trade
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---
# Opening up made India richer. So why are hundreds of millions of us still poor?

India after 1991 is a different country, and most Indians now live better than their parents did. Yet hundreds of millions still live on very low incomes.

Trade does its work through firms. It gave Indian companies machines and components they could not buy before, customers beyond India to sell to, and rivals who would take their business if they failed to improve. The record shows both effects. Across the first years of reform, productivity at Indian manufacturers rose by about 8%, and cheaper and better imported inputs drove more of that gain than foreign competition did. The gains were largest in the industries the state regulated least.

All of that helps a worker who works in such a firm. About nine in ten Indian workers do not. They work outside the organised sector altogether, in workplaces too small to be registered, let alone to buy an imported machine.

Why do Indian firms stay so small? Part of the answer is a staircase of thresholds. A firm using power that employs fewer than ten workers is barely regulated at all. At ten workers it enters the organised sector and the Factories Act, and a labour inspector arrives at the door. At twenty it must run a provident fund. At fifty it comes under the Industrial Disputes Act, which governs whether it may reassign a worker, lay anyone off, or ever close.

Economists dispute how much that staircase explains. Panagariya holds the Disputes Act to be the main barrier to large firms in labour-intensive industry. Anand, Subramanian, and Thomas call it a distraction, and point instead to constant uncertainty about next year's rules, which pushes firms to split themselves into several smaller units. Both accounts describe the same underlying problem from different sides: the Indian state makes bigness risky. Bangladesh, poorer than India, runs much larger factories and exports 95% of what they make, against India's 37%.

A firm hedging against its own government is not on its way to becoming an exporter.

The reforms also stopped short of what actually decides whether a firm can grow: affordable and uninterrupted power, smooth transport to ports that clear cargo quickly, courts that enforce a contract, credit for a company with no connections, and schools that turn out workers a modern plant can use. Trade lowered one barrier while the state left the others standing. Economic growth happens through productive firms, and India never built enough of them, so the benefits of growth never spread widely.