Effects of Economic Liberalization on Poverty and Inequality in India – A Case Study of Pre-COVID-19 Period

Abstract

The purpose of this research is to study the effects of neoclassical trade liberalization policies enacted in India in 1991 to determine the effect on levels of poverty and income inequality. This research predicts that poverty and economic inequality will be reduced due to implementation of economic liberalization policies. The research uses empirical data from the National Sample Survey Organization (NSSO), in India and develops a regression model to determine the effects of economic liberalization on income inequality and absolute poverty. The results of the regression model suggest that income inequality and poverty decreased during the year liberalization policies were enacted, but is not statistically proven with enough confidence that liberalization is strongly correlated with a reduction in inequality and poverty. There is a weak statistical correlation that suggests inequality increased in the Indian urban sector, and decreased in the rural sector due to liberalization. In conjunction with a literature review where more robust data and econometric models are applied, the empirical analysis by complimented with the fact that in general income inequality decreased due to economic liberalization policies alone, holding all exogenous factors that affect income inequality constant. The literature review also confirms that poverty levels decreased with economic liberalization, holding all other exogenous factors that affect poverty constant. The implication of this research is that liberalization polices have been successful for overall development in India, and suggests that implementation of liberalization policies may be desirable in nations under similar circumstances as India in the era before its liberalization.