India’s Economic Growth: The Market Boom and the Social Divide- The Shift in India’s Economic Model: Growth and Inequality in the Market-Driven Era

 

Summary 

India’s Economic Growth: The Market Boom and the Social Divide

Since 1991, India’s economic policies have shifted from state-led development to a market-driven approach, accelerating GDP growth but widening social and economic inequalities. While India is now the fifth-largest economy, the top 1% of the population holds over 40% of the country’s wealth, while nearly 90% of the workforce remains informal, lacking job security and social protections.

This essay critically examines India’s economic trajectory through the lens of philosophy, global comparisons, and empirical data. It contrasts the moral duty-based economics of Immanuel Kant, the fairness-driven model of John Rawls, and Amartya Sen’s Capability Approach with Milton Friedman’s neoliberal vision, arguing that free markets alone cannot ensure justice or broad-based prosperity.

Drawing lessons from China, South Korea, Japan, and the USSR, the essay highlights how social preparedness—investment in education, healthcare, and governance—is crucial for sustainable development. While economic liberalization has enabled India’s IT boom, financial inclusion, and global trade integration, it has also weakened labor protections, reduced welfare spending, and made quality education and healthcare unaffordable for many.

The Way Forward: Balancing Market Growth with Social Responsibility

India’s future growth must integrate market efficiency with strong state intervention to ensure equitable development. Inspired by Amartya Sen and Adam Smith’s dual vision, the essay proposes:

✔ Higher public investment in education and healthcare to expand opportunities for all.

✔ Progressive taxation on the ultra-rich to fund social security programs.

✔ Strengthening labor rights and financial inclusion to protect informal workers.

✔ Decentralized governance and transparency to improve service delivery.

India stands at a crossroads. Continuing neoliberal policies without social protections risks deepening inequality, while a balanced approach—combining economic dynamism with social justice—can create a truly inclusive growth model.

“True development is not just economic expansion but the expansion of human freedoms.” — Amartya Sen

India’s Economic Growth: The Market Boom and the Social Divide- The Shift in India’s Economic Model: Growth and Inequality in the Market-Driven Era

Rahul Ramya

01.02.2025

Patna, India

India’s transition from a socialist-type economy to a market-driven economy has resulted in remarkable growth in its economic size, but it has also generated profound social and economic inequalities. Prior to 1991, India’s economy was largely characterized by government-driven development, with significant investments in social safety net programs such as social security pensions, the National Rural Employment Guarantee Act (MNREGA, introduced in 2005), SGSY, Sarva Shiksha Abhiyan, the National Rural Health Mission (NRHM), and the Integrated Child Development Services (ICDS), among others. These programs aimed to support vulnerable populations, ensure basic rights, and promote inclusive development. However, with the shift towards a market-driven economy after the liberalization of 1991 and the subsequent policies after 2014, the focus on such social safety nets diminished, and many of these programs were either neglected or reduced in scope.

The Rise of Economic Growth

Despite these setbacks, India’s economy grew significantly. From 1991 to 2020, India’s GDP increased by over 500%, making it the fifth-largest economy in the world by nominal GDP (World Bank, 2020). This rapid growth was propelled by various market reforms such as trade liberalization, tax reductions, and privatization of state-owned enterprises. By 2023, India’s GDP stood at $3.7 trillion, a testament to its expansion in the global economic sphere (IMF, 2023). However, while the size of the economy expanded, the distribution of wealth remained highly skewed.

The Deepening Inequalities

Despite this growth, India’s rise to economic prominence was coupled with a staggering increase in economic inequality. According to Oxfam (2023), India ranks among the most unequal countries in the world, with the top 1% holding 40.5% of the country’s wealth, while the bottom 50% possess just 3.5%. This disparity is even more evident in the wealth distribution among the rich and poor, with the wealthiest 10% of India’s population owning 77.4% of the country’s wealth (Credit Suisse, 2022). These figures illustrate that the benefits of India’s economic growth have been disproportionately allocated, leaving behind a large segment of the population.

The rise in income inequality is accompanied by severe multidimensional poverty. The percentage of the population living below the poverty line in India was 21.9% in 2011-12, according to the World Bank (2018). Despite improvements in certain sectors, such as reductions in extreme poverty, a significant portion of the population has not been able to benefit from economic growth. The government’s failure to address the widening inequality gap has exacerbated existing social disparities, particularly between rural and urban areas.

A Missed Opportunity for Societal Development

The economic model adopted since 1991, and particularly since 2014, has been criticized for its elitist nature, which has ignored the importance of social preparedness for inclusive economic development. The transition to a market-driven economy, while successful in terms of GDP growth, has failed to bridge the gap between rich and poor. The rich have become exponentially wealthier, while a large portion of the population remains either in poverty or outside the mainstream economy. This model has not translated into societal development. The wealth generated from economic growth has primarily benefited a small segment of society, leaving the vast majority behind.

This trend is further compounded by the fact that India’s state capacity has not evolved at the same pace as its economy. According to the World Bank (2022), India’s ranking in terms of state capability—measured by indicators like the quality of governance, public service delivery, and the rule of law—remains low. In contrast, countries like the United States, China, Germany, and Japan have been able to leverage their economic power to strengthen state institutions. Over the past two decades, these countries have seen substantial improvements in their governance frameworks, which have contributed to more equitable development and better state capacity.

Comparative Analysis: Smaller Economies, Stronger States

Interestingly, countries with smaller economies than India’s, such as Singapore, South Korea, Norway, and Sweden, have demonstrated significantly higher state capacity despite having much smaller economic and military capabilities. For example, Singapore’s GDP per capita in 2022 was $78,000, yet it has become one of the world’s most capable states in terms of governance, healthcare, and education (World Bank, 2022). Similarly, South Korea, with a GDP per capita of $34,000 in 2022, ranks among the top in terms of public service delivery and human development indicators (UNDP, 2022). These nations show that economic growth, if not accompanied by a strengthening of social and governance systems, does not guarantee broad-based development or increased state capacity.

Even smaller countries like Luxembourg, Estonia, and Finland—whose economies and militaries are far less powerful than India’s—have become much more capable states. Luxembourg, for example, has a GDP per capita of over $125,000 (World Bank, 2022) and has developed highly effective public institutions that deliver quality services to its citizens. Similarly, Estonia’s small size has not hindered its capacity to innovate in digital governance, making it one of the most digitally advanced countries in the world.

The Need for Social Preparedness

The critical difference between India and these countries lies in the role of social preparedness. While India’s economic model since 1991 has favored elite groups, social preparedness—investing in education, healthcare, infrastructure, and the empowerment of marginalized groups—has been largely neglected. For comprehensive economic development that maximizes freedom and opportunities for all citizens, social safety nets and inclusive policies are essential.

The Role of Social Preparedness in Economic Growth: Case Studies from China, South Korea, the Former USSR, and Japan

Economic growth is not merely a function of market forces or capital accumulation; it is significantly influenced by social preparedness. Social preparedness refers to the investments a society makes in education, health, social security, infrastructure, and the establishment of robust governance systems, all of which help create an environment conducive to broad-based development. These factors enable individuals and communities to maximize their potential, enhancing not just economic output but also the overall quality of life. Several countries, including China, South Korea, the former USSR, and Japan, have demonstrated how social preparedness can be a crucial element in achieving sustainable economic growth.

China: From Poverty to Global Powerhouse

China provides one of the most striking examples of the importance of social preparedness in economic growth. After the economic reforms initiated by Deng Xiaoping in the late 1970s, China began transitioning from a centrally planned economy to a market-oriented one. However, what often gets overlooked in the popular narrative of China’s rapid economic rise is the country’s substantial investment in social infrastructure, particularly in education and healthcare.

The Chinese government focused on creating a workforce with the skills necessary to adapt to global markets. Since the late 1990s, China invested heavily in expanding higher education, and by 2019, China had become the world’s largest producer of graduates, with over 8 million university graduates annually (World Bank, 2020). The government’s strategic investment in public health also played a key role. By expanding access to healthcare, China improved its labor force’s productivity, which, in turn, helped the economy grow rapidly.

Moreover, the expansion of infrastructure, including transportation, technology, and digital infrastructure, ensured that China’s rural areas were integrated into the economic system. The successful rural-to-urban migration strategy, coupled with access to education and healthcare, allowed people to be more productive and integrated into the broader economy. These elements of social preparedness were instrumental in China’s ability to transform from one of the poorest countries in the world in 1978 to the second-largest economy globally by 2023 (IMF, 2023).

South Korea: The Power of Education and Technological Innovation

South Korea is another prime example of how social preparedness can fuel economic growth. In the aftermath of the Korean War (1950-1953), South Korea was a poor, war-torn country with few natural resources. Yet, the country has transformed into one of the world’s leading industrialized nations, largely due to its strategic investments in education and innovation.

The South Korean government, with the help of major corporations, initiated large-scale educational reforms in the 1960s and 1970s. A key aspect of these reforms was the prioritization of technical education, which laid the groundwork for the country’s industrialization. By the 1980s, South Korea had developed a highly skilled labor force, enabling it to become a global leader in industries like electronics, shipbuilding, and automobiles.

At the same time, South Korea invested in building strong healthcare systems and infrastructure, which supported industrial growth by ensuring a healthy, productive workforce. The government also implemented policies to improve the living standards of ordinary people, enabling them to participate in the consumption-driven economy that spurred further growth. By the early 2000s, South Korea was one of the top economies in the world, with a GDP per capita that surpassed many Western nations (World Bank, 2022). This development was made possible by South Korea’s concerted efforts to prepare its society for economic transformation.

The Former USSR: Industrialization through Social Mobilization

The former Soviet Union (USSR) presents an example of how state-led social preparedness can play a role in economic growth, although with mixed results. After the 1917 revolution, the USSR implemented a planned economy with an emphasis on rapid industrialization and collectivization of agriculture. In its early decades, the Soviet government invested heavily in education, healthcare, and public services, ensuring that the population was able to contribute to the country’s industrial ambitions.

The USSR achieved remarkable industrial growth, particularly in heavy industries such as steel production, aerospace, and military technologies. Education was centralized and standardized, and the Soviet Union boasted high literacy rates (close to 100% by the 1970s). Additionally, healthcare was universal, and the government focused on improving the overall living standards of citizens in an effort to create a well-rounded labor force.

However, despite these investments, the lack of economic freedoms and the inefficiency of the centralized economic planning system ultimately led to stagnation. The collapse of the USSR in 1991 demonstrated that while social preparedness (especially in terms of education and healthcare) can lead to initial industrial and technological growth, the long-term sustainability of such growth is contingent on a flexible, market-oriented economy. The social infrastructure in the Soviet Union was strong, but the economic model lacked adaptability, which eventually contributed to the USSR’s decline.

Japan: A Model of Social Preparedness for Sustainable Growth

Japan’s post-World War II economic recovery provides another example of how social preparedness can underpin long-term economic growth. After the devastation of World War II, Japan focused on rebuilding its social infrastructure, particularly its educational system. The government invested heavily in technical education, which allowed Japan to develop a highly skilled labor force. This emphasis on education helped fuel the rapid growth of Japan’s manufacturing sector during the 1950s and 1960s.

The government also prioritized healthcare, ensuring that the workforce remained healthy and productive. Japan’s national health insurance system, established in 1961, provided universal healthcare access to its citizens, contributing to improved life expectancy and a lower infant mortality rate compared to other countries at the time (World Health Organization, 2020).

Furthermore, Japan’s investments in infrastructure, particularly in transportation (e.g., the Shinkansen bullet trains) and technology, allowed for the efficient movement of goods and people, facilitating the growth of both domestic and international markets. By the 1980s, Japan was one of the world’s leading economies, with its rapid growth sustained by its high levels of education, health, and infrastructure development.

The Importance of Social Preparedness for Sustainable Growth

The experiences of China, South Korea, the former USSR, and Japan show that economic growth is most sustainable when accompanied by substantial investments in social infrastructure. Whether it is education, healthcare, or the establishment of strong governance systems, social preparedness equips societies with the tools they need to maximize the potential of their people, thus driving economic growth.

While economic policies are crucial, the countries that have most successfully translated growth into long-term prosperity have done so by ensuring that their populations are not only able to participate in the economy but can also thrive. In the case of South Korea and Japan, for example, their robust education systems provided a skilled workforce that propelled industrial growth. Similarly, China and the USSR invested in social sectors, but the former was better able to align these efforts with market-oriented reforms, leading to its current success.

In contrast, the failure of the Soviet Union to combine social preparedness with economic flexibility serves as a cautionary tale. It underscores the importance of adapting economic models to the needs of the times while continuing to invest in the well-being and capabilities of the population.

For India and other developing economies, these case studies highlight the need for a more inclusive growth model that integrates social preparedness with economic policies. Only by investing in the social fabric can countries hope to achieve sustainable, equitable growth that benefits all citizens.

A more inclusive model would ensure that India’s growth is not just in economic terms but also in terms of the capabilities of its people. According to the Capability Approach developed by Amartya Sen, true development occurs when people’s abilities to live the lives they value are enhanced. For India to truly benefit from its economic growth, it must invest in the social preparedness of its people. This means prioritizing universal access to quality education, affordable healthcare, social security, and effective governance structures that ensure the equitable distribution of resources.

In conclusion, while India’s transition to a market-driven economy has spurred significant economic growth, it has also deepened existing inequalities. The failure to address the social preparedness needed for inclusive development has hindered the country’s ability to translate its economic success into broad-based societal progress. India’s economic model, though successful in terms of GDP growth, must undergo a fundamental shift to become more inclusive and to ensure that the benefits of growth reach all segments of society. Only by strengthening state capacity and investing in social preparedness can India hope to become a truly capable and just society, where the fruits of economic growth are shared by all.

Sources:

   •   World Bank, “India GDP Growth,” 2020.

   •   IMF, “World Economic Outlook,” 2023.

   •   Oxfam, “Inequality in India,” 2023.

   •   Credit Suisse, “Global Wealth Report,” 2022.

   •   UNDP, “Human Development Report,” 2022.

   •   World Bank, “China Education and Workforce Development,” 2020.

   •   World Bank, “South Korea GDP and Economic Growth,” 2022.

   •   WHO, “Japan Health System and Life Expectancy,” 2020.

   •   IMF, “China Economic Outlook,” 2023.

The Indian Growth Story: A Shift from Philosophical Foundations of Development to Neoliberalism

Since the liberalization of the Indian economy in 1991, the country’s growth trajectory has increasingly moved away from the philosophical ideals of development outlined by thinkers like Immanuel Kant, Jeremy Bentham, John Stuart Mill, John Rawls, and Amartya Sen, and has instead aligned itself with the neoliberal ideas of Milton Friedman. This shift has had profound consequences on economic policy, social justice, and the distribution of wealth in India.

Wages still below pre-pandemic level, while corporate profits soared to 15-year high in FY24

While the labour share of GVA (gross value added) shows a slight uptick, the disproportionate rise in corporate profits – predominantly among large firms – raises concerns about income inequality. A higher profit share and stagnant wage growth risk slowing the economy by curbing demand. Sustained economic growth hinges on bolstering employment incomes, which directly fuel consumer spending, spurring investment in production capacity,” the Survey said.

Among the salaried, real average monthly wage for male workers in 2023-24 was Rs 11,858, down by 6.4 per cent from Rs 12,665 in 2017-18. For female workers, real wages fell more sharply by 12.5 per cent to Rs 8,855 from Rs 10,116 in 2017-18.

Among self-employed male workers, real wages dropped by 9 per cent to Rs 8,591 in 2023-24 from Rs 9,454 in 2017-18. For self-employed female workers, real wages plummeted by 32 per cent, from Rs 4,348 to Rs 2,950. The real wages, which are adjusted for inflation, have been calculated by dividing nominal wages by retail inflation, the Survey said.

Wages lagged even as “profits surged”, with corporate profitability soaring to a 15-year peak in 2023-24 on the back of robust growth in financials, energy, and automobiles, the Survey said. “Despite Indian companies achieving a stable EBITDA margin of 22 per cent over the last four years, wage growth has moderated. This uneven growth trajectory raises critical concerns. Wage stagnation is pronounced, particularly at entry-level IT positions,” it added.

striking disparity has emerged in corporate India: profits climbed 22.3 per cent in FY24, but employment grew by a mere 1.5 per cent. State Bank of India (SBI) analysis reveals that 4,000 listed companies recorded a modest 6 per cent revenue growth. At the same time, employee expenses rose only 13 per cent – down from 17 per cent in FY23 – highlighting a sharp focus on cost-cutting over workforce expansion,” the Survey noted.

In nominal terms, wages for salaried male workers grew by 27.7 per cent between 2017-18 and 2023-24 to Rs 22,092. For salaried women workers, it grew by 19.4 per cent to Rs 16,498.

Nominal average wages for self-employed male workers grew by 24 per cent to Rs 16,007, whereas for self-employed female workers, it dropped by 7.4 per cent to Rs 5,497 from Rs 5,935.

(https://indianexpress.com/article/business/budget/wages-still-below-pre-pandemic-level-while-corporate-profits-soared-to-15-year-high-in-fy24-9810581/)

Philosophical Foundations of Development and Their Departure in India’s Growth Story

India’s initial economic framework, particularly during its socialist-inspired phase from 1947 to 1991, was shaped by ideas that emphasized moral duty, collective welfare, justice, and capability enhancement. However, after economic liberalization, India moved toward a market-driven model, which, while accelerating economic growth, has also led to increased inequalities, a weakening of social safety nets, and an erosion of public goods.

1. Immanuel Kant: Ethics, Human Dignity, and Moral Duty

Kant’s philosophy, particularly his categorical imperative, emphasizes that economic policies should be designed in a way that treats individuals as ends in themselves and not merely as means to an economic goal. This means that economic development should prioritize human dignity, moral responsibility, and fairness.

However, India’s economic policies post-liberalization have increasingly treated individuals, particularly workers, as cogs in the market-driven machinery, focusing on economic output rather than moral imperatives. The rise of precarious labor conditions, informal employment (which accounts for nearly 90% of India’s workforce), and lack of social protections (ILO, 2022) contradicts Kantian ethics. Policies that prioritize GDP growth over worker welfare, such as the relaxation of labor laws in states like Uttar Pradesh and Gujarat, reflect a utilitarian, output-maximizing approach rather than a Kantian focus on moral and human dignity.

2. Jeremy Bentham and John Stuart Mill: Utilitarianism and the Greatest Happiness Principle

Bentham and Mill’s utilitarianism focuses on maximizing happiness for the greatest number of people. The early phase of India’s development, particularly through large-scale public sector initiatives and social welfare programs, embodied this principle. Programs like the Green Revolution, nationalization of banks, and early poverty alleviation schemes aimed to benefit large sections of society.

However, the post-1991 economic model has increasingly prioritized corporate profitability and investor-friendly policies over broad-based public welfare. The corporate tax cuts of 2019, which reduced rates from 30% to 22%, led to revenue losses of over ₹1.45 lakh crore (Finance Ministry, 2020), limiting the government’s ability to fund social programs. At the same time, spending on education and healthcare as a percentage of GDP has stagnated at around 3% and 1.5% respectively, significantly lower than countries with similar economic capacities.

This shift has meant that while the economy grows, the benefits are disproportionately captured by the top 10% of the population, who hold over 77% of the nation’s wealth (Oxfam, 2023). This contradicts Mill’s principle of liberty-based utility, which argues that individual freedoms should be balanced with ensuring the economic well-being of all citizens.

3. John Rawls: Justice as Fairness and the Role of the State

Rawls’ theory of justice as fairness emphasizes that any economic system should be structured in a way that benefits the least advantaged. His “difference principle” argues that inequalities can only be justified if they improve the conditions of the poorest sections of society.

However, India’s growth model has increasingly moved in the opposite direction. While GDP has risen dramatically, income and wealth inequalities have widened. The Gini coefficient (a measure of income inequality) in India has increased from 0.45 in 1991 to nearly 0.50 in 2021 (World Bank, 2022), indicating worsening disparities. Policies such as the dilution of land rights laws, reduced public investment in rural development, and the privatization of public sector units have disproportionately benefited corporate entities over the rural and marginalized poor.

Additionally, Rawls’ emphasis on social primary goods—such as education, healthcare, and political participation—has been undermined. While neoliberal policies have encouraged economic dynamism, they have also led to rising costs in education and healthcare, making these basic rights increasingly inaccessible to the poor. Privatization of medical care has led to 63 million people falling into poverty annually due to healthcare expenses (Lancet, 2023), highlighting the erosion of Rawlsian ideals of fairness and justice.

4. Amartya Sen: Capabilities Approach and Human Development

Amartya Sen’s capability approach argues that true development is not just economic growth but the expansion of human freedoms and capabilities. This means that development should enhance people’s ability to access quality education, healthcare, social security, and economic opportunities.

India’s pre-liberalization model had a stronger focus on state-driven interventions to enhance these capabilities. Post-1991, however, neoliberal policies have led to widening educational inequalities, poor health infrastructure, and jobless growth. Despite rapid economic expansion, India’s human capital index remains at 0.49 (World Bank, 2022), significantly lower than countries like China (0.65) and South Korea (0.80).

The diminishing role of public universities and the rise of expensive private education has further deepened inequality. The government’s reduction in real-terms spending on public universities (Economic Survey, 2023) has restricted access to quality higher education for economically weaker sections, contradicting Sen’s idea that development should expand freedoms rather than create new exclusions.

The Embrace of Neoliberalism: The Influence of Milton Friedman

Milton Friedman, a leading proponent of neoliberal economic policies, championed free markets, minimal government intervention, and individual economic freedom. Since 1991, India’s economic trajectory has increasingly aligned with these principles, prioritizing market liberalization, privatization, and reduced state involvement.

1. Privatization of Key Sectors:

      •   The disinvestment of public sector enterprises has been a key focus, reducing the role of the state in industries like banking, energy, and telecommunications. The government’s target to privatize ₹1.75 lakh crore worth of assets in 2021 alone (Finance Ministry, 2021) highlights this shift.

2. Corporate-Centric Policies:

      •   India has reduced corporate taxes and deregulated labor laws, making it easier for businesses to operate while reducing worker protections. For instance, the new labor codes (2020) significantly dilute worker rights, making layoffs easier and social security optional.

3. Financialization of the Economy:

      •   The focus on stock market growth, foreign investment, and financial speculation has overshadowed real sector growth. India’s stock market capitalization crossed $3.6 trillion in 2023 (BSE data), yet rural distress and farmer suicides remain major crises.

4. Minimal Welfare Spending:

      •   The decline in spending on key social sectors, particularly education (3% of GDP) and healthcare (1.5% of GDP), highlights the state’s retreat from its responsibility, in line with Friedman’s belief that welfare programs distort market efficiency.

Conclusion: The Dangers of a Neoliberal-Only Approach

While India’s adoption of neoliberalism has led to higher GDP growth and integration into global markets, it has come at a severe cost to social justice, equality, and the expansion of human capabilities. The country has increasingly moved away from the moral duty of Kant, the welfare-focused utilitarianism of Mill, the fairness-driven justice of Rawls, and the capability expansion of Sen, and has instead endorsed market-first policies rooted in Friedman’s neoliberal vision.

If India continues to prioritize market efficiency over human development, it risks deepening economic disparities, weakening social mobility, and creating an unsustainable model of growth. A course correction—one that balances economic liberalization with social responsibility—is essential to ensure a development path that benefits all citizens rather than just the privileged few.

Reorienting India’s Growth Story: The Case for Amartya Sen’s Capability Approach

India’s post-liberalization growth has been marked by high GDP expansion but deepening inequalities. While market-driven reforms have increased economic output, they have failed to ensure broad-based human development, leaving behind marginalized groups, informal workers, and rural populations. As a corrective measure, India must adopt Amartya Sen’s capability approach, which emphasizes expanding human freedoms, ensuring access to essential services, and fostering inclusive growth.

The Limitations of the Current Growth Model

India’s neoliberal economic model, influenced by Milton Friedman’s market-first philosophy, has led to:

1. Jobless Growth – Despite rapid GDP expansion, employment generation remains weak. The unemployment rate in India stood at 8.2% in December 2023 (CMIE, 2023), with youth unemployment exceeding 23%.

2. Education and Skill Deficits – While India has a large workforce, only 4.7% of workers are formally skilled (NSDC, 2022), compared to 96% in South Korea and 52% in the US.

3. Healthcare Inequalities – Public health spending remains at 1.5% of GDP (Economic Survey, 2023), far below the WHO-recommended 5%, leading to high out-of-pocket expenses and limited access for the poor.

4. Rising Wealth Gaps – The top 10% of Indians control over 77% of national wealth (Oxfam, 2023), while income inequality has worsened (Gini coefficient at 0.50).

India-Specific Socio-Political Nuances

While economic inequality is a key concern, the Indian context is uniquely shaped by caste-based social stratification, regional disparities, and informal labor markets. Unlike Western economies, where class primarily defines economic mobility, India’s economic inequalities are deeply intertwined with caste and social hierarchies. Studies by Pratap Bhanu Mehta and Suraj Yengde highlight how economic liberalization has disproportionately benefited upper-caste elites, while marginalized communities, including Dalits and Adivasis, continue to struggle for access to education, employment, and financial resources. Even within urban labor markets, discrimination persists in hiring practices, access to credit, and business opportunities. Incorporating such caste-based disparities into the analysis would provide a more nuanced understanding of why economic liberalization alone has failed to achieve broad-based development in India.

Moreover, regional inequalities remain stark. While states like Maharashtra, Gujarat, and Tamil Nadu have reaped the benefits of economic reforms, northern states such as Bihar, Jharkhand, and Uttar Pradesh continue to lag in key human development indicators. The divergence in governance models, industrial policies, and public investment levels among states demonstrates that economic growth is not uniform across India. A deeper examination of how regional governance influences economic outcomes could strengthen the paper’s argument.

Empirical Validation with India-Specific Data

A stronger empirical focus on India-specific wealth distribution, and sectoral shifts would enhance understanding . For instance, India’s Periodic Labour Force Survey (PLFS) 2023 highlights that despite GDP growth, youth unemployment remains alarmingly high, with urban youth unemployment exceeding 23%. This contradicts the notion that market liberalization has created sufficient employment opportunities for India’s growing workforce. Further, India’s Economic Survey 2023 notes that 90% of the workforce remains informal, with little to no job security, social protection, or upward mobility—an issue rarely addressed in standard neoliberal growth models.

Additionally, income concentration in India has grown significantly. Data from the World Inequality Report (2022) shows that India’s top 1% controls over 40% of national wealth, a stark increase from 33% in 1991. The share of the bottom 50% in total national income has declined from 22% to 13% in the same period. Such figures provide direct empirical validation for the argument that liberalization has failed to distribute wealth equitably.

The privatization of healthcare and education has further widened socio-economic divides. A study by The Lancet (2023) found that 63 million Indians are pushed into poverty annually due to out-of-pocket healthcare expenses. Similarly, National Sample Survey (NSS) data highlights that private school enrollments have surged, while public schools face declining infrastructure and teacher shortages, exacerbating educational inequality. Citing these empirical trends would make the argument against market fundamentalism more robust.

A More Balanced Take on Market Liberalization

There can not be any denial to the fact that lberalization has played a crucial role in integrating India into the global economy, creating a booming middle class, and driving sectoral transformations in IT, pharmaceuticals, and manufacturing. The rise of India’s IT sector, which now contributes nearly 8% of GDP and employs over 5 million people, demonstrates how market-friendly policies have enabled domestic enterprises to compete on a global scale.

Further, India’s liberalized FDI policies have fueled growth in infrastructure and telecommunications. The rapid expansion of mobile internet services, driven by private sector investments, has significantly improved digital access, enabling financial inclusion through platforms like UPI and Aadhaar-linked banking. The success of India’s startup ecosystem, which has produced over 100 unicorns, also stems from policies that encourage private investment and ease of doing business.

The challenge, therefore, is not to reject market liberalization entirely but to balance it with strong state intervention to correct market failures. Countries like Germany and Sweden have successfully combined free markets with social welfare policies, ensuring that economic growth translates into equitable development. India must adopt a similar approach, where the state plays a proactive role in providing quality education, healthcare, and labor protections while maintaining the benefits of an open economy. This balanced perspective would strengthen the argument and make it more suitable for academic and policy discourse.

These trends highlight the urgent need to shift towards a development model that prioritizes human capabilities over mere economic expansion.

Amartya Sen’s Capability Approach: A Path for Inclusive Growth

Sen argues that development should not be measured by GDP alone but by the expansion of people’s real freedoms and capabilities. This requires a focus on health, education, social security, and economic empowerment. India must integrate this approach by implementing policies in the following key areas:

1. Strengthening Public Education and Skill Development

   •   Increase Education Spending: Allocate 6% of GDP to education (as recommended by NEP 2020) to improve public schools, teacher training, and access to higher education.

   •   Expand Vocational Training: Develop regional skill hubs, inspired by Germany’s dual education model, ensuring that at least 50% of youth receive formal skills training by 2035.

   •   Bridge the Digital Divide: Provide free digital access in rural schools to address the education gap exacerbated by online learning inequalities (ASER Report, 2023).

2. Universal Healthcare and Social Protection

   •   Increase Health Budget to 5% of GDP: Countries like Thailand and Brazil have achieved near-universal healthcare with similar spending levels. India must expand Ayushman Bharat and strengthen primary healthcare centers (PHCs).

   •   Ensure Universal Social Security: Expand MNREGA and implement a guaranteed urban employment scheme to provide job security for informal workers, who make up 90% of the workforce (ILO, 2022).

3. Inclusive Economic Policies and Women’s Empowerment

   •   Strengthen SME and Rural Industries: Increase credit access for MSMEs and cooperatives to foster decentralized economic growth.

   •   Enhance Women’s Workforce Participation: India’s female labor force participation rate is only 24% (PLFS, 2023). Policies like paid maternity leave, workplace safety, and financial inclusion can bridge this gap.

   •   Progressive Taxation and Redistribution: Increase taxation on ultra-wealthy individuals and corporate windfall profits to fund social programs. The top 1% holds 40% of India’s wealth (Oxfam, 2023), indicating room for redistribution.

4. Strengthening Democratic and Institutional Capacities

   •   Decentralize Governance: Strengthen Panchayati Raj institutions to improve last-mile delivery of public services.

   •   Improve Transparency and Accountability: Enforce Right to Information (RTI) Act protections and expand citizen-led audits of government schemes to curb corruption and inefficiencies.

Moving Towards a Capability-Driven Growth Model

India’s future economic trajectory must balance market efficiency with social justice. While the current neoliberal model has delivered economic expansion, it has failed to ensure equitable distribution of wealth, human capital development, and institutional robustness. By adopting Sen’s capability approach, India can move beyond GDP-centric growth and focus on real human progress, ensuring that development reaches not just the elite, but every citizen in the country.

Achieving Balanced Growth: Integrating Amartya Sen’s Approach with Adam Smith’s Economic Theories

India’s economic growth has often swung between state-driven welfare policies and market-led liberalization. While the 1991 economic reforms unleashed rapid market expansion, they also led to deepening inequalities, weakened social security, and limited access to essential public goods. To address this, Amartya Sen’s capability approach offers a middle path that harnesses market efficiency while ensuring equitable development through state intervention. This approach aligns with Adam Smith’s twin philosophies—the Wealth of Nations, which emphasizes the power of markets, and The Theory of Moral Sentiments, which underscores the role of ethics and social responsibility in economic systems.

Adam Smith’s Dual Vision: Wealth Creation and Moral Responsibility

Adam Smith, often mischaracterized as a proponent of pure laissez-faire capitalism, actually argued for a balanced economic system where markets thrive but do not undermine social welfare. His two seminal works highlight this dual vision:

1. The Wealth of Nations (1776) – Advocates for free markets, division of labor, and competition as key drivers of economic growth. However, Smith also recognized that unregulated markets alone cannot ensure equitable wealth distribution.

2. The Theory of Moral Sentiments (1759) – Emphasizes the moral foundation of economic interactions, where justice, sympathy, and social norms prevent markets from becoming exploitative. He argued that markets should serve humanity, not the other way around.

In India’s case, neoliberal policies have leaned excessively on The Wealth of Nations while ignoring The Theory of Moral Sentiments, leading to jobless growth, weakened public services, and rising inequality. A Sen-inspired approach would correct this imbalance by ensuring that markets and state intervention work together rather than at cross purposes.

Sen’s Capability Approach: Bridging Market Efficiency with Social Justice

Amartya Sen argues that economic growth must be assessed not just by GDP, but by the real freedoms and capabilities people enjoy. This requires a strategic role for both markets and government:

   •   Markets drive economic expansion – Private enterprise fosters innovation, efficiency, and global competitiveness.

   •   The state ensures equitable access to opportunities – Public investment in health, education, and social security prevents exclusion and empowers people to participate in the economy.

This hybrid model aligns with Smith’s vision, where markets create wealth but do not operate unchecked, and state intervention expands human capabilities without stifling private enterprise.

How Sen’s Approach Can Optimize India’s Growth Model

India’s economic trajectory since 1991 has created a large but unevenly distributed economy. While India is the fifth-largest economy by GDP ($3.7 trillion, IMF 2024), it also has the highest number of people living in extreme poverty (176 million, World Bank 2023). The following policy shifts, inspired by Sen and Smith, can ensure India benefits from both market growth and state intervention:

1. Public Investment in Human Capital to Complement Market Growth

   •   Expand education spending to 6% of GDP (as recommended by NEP 2020) to improve literacy, vocational skills, and innovation capacity. South Korea’s strategic state investment in education (5.1% of GDP) fueled its transition from an agrarian economy to a tech powerhouse.

   •   Strengthen healthcare infrastructure by increasing public health expenditure from 1.5% to 5% of GDP (Economic Survey, 2023), similar to Thailand, which achieved universal healthcare with a 4% GDP allocation.

2. Correcting Market Failures Through Regulation

   •   Reforming labor markets to ensure fair wages and protections for informal workers (who make up 90% of India’s workforce, ILO 2022). Countries like Germany and Sweden have successfully combined market flexibility with strong labor rights.

   •   Ensuring financial inclusion by expanding microfinance and digital banking, especially for women and rural entrepreneurs, following the Bangladesh Grameen Bank model.

3. Equitable Redistribution of Wealth Without Harming Market Incentives

   •   Implementing progressive taxation: India’s top 1% holds 40% of national wealth (Oxfam 2023), while corporate tax cuts in 2019 reduced government revenue. A wealth tax on billionaires (similar to the Scandinavian model) could fund social investments.

   •   Enhancing direct benefit transfers (DBT) to ensure subsidies reach the poor without distorting market prices. Brazil’s Bolsa Família program successfully reduced inequality while maintaining fiscal discipline.

4. Strengthening Institutional Capacities for Sustainable Growth

   •   Decentralizing governance to empower Panchayati Raj institutions, ensuring better service delivery in rural areas.

   •   Strengthening transparency mechanisms like the RTI Act and Lokpal, preventing crony capitalism and corruption, which weaken economic efficiency.

India’s Future: A Synthesis of Smith and Sen

A Sen-inspired approach, incorporating Smith’s dual vision, would allow India to:

✔ Sustain high economic growth through market efficiency and innovation.

✔ Ensure equitable development by expanding capabilities and access to opportunities.

✔ Strengthen democracy and institutions, making governance more participatory and responsive.

While Milton Friedman’s neoliberal model prioritizes market expansion with minimal state intervention, both Smith and Sen recognize that markets alone cannot ensure justice and broad-based prosperity. India’s future economic strategy must balance market forces with proactive government intervention, ensuring that growth translates into real human development. This synthesis will allow India to tap the best of both worlds—economic dynamism and social justice.