Why is India still Poor?

This is a big misconception a lot of South Asians have, that India is still poor mainly because the British left behind bad infrastructure and broken systems. Yes, British rule did enormous damage, and there was nothing “helpful” about it no matter how the British try to sell it. But that explanation is not enough.

What really matters is what happened after independence, who held power, and what they used the state for.

After 1947, the countryside was still dominated by big landlords, and the political elite largely came from the old social hierarchy. 

Independence did not break that structure. It mostly reorganized it. The same classes that had influence under colonialism kept influence after colonialism, just now under an Indian flag. So the policies and institutions that were built were not neutral. They were shaped to protect the interests of the powerful landlords, upper caste rural elites, and an urban elite coalition tied to them.

And this is why it’s not enough to say India tried planning or India tried socialism. The real question is, what kind of state intervention happened, and who controlled it. Because states intervene in economies all the time without it being development. Industrial policy in the strict sense is not just the government did stuff. It’s when the state deliberately shifts investment into particular manufacturing sectors, picking targets, protecting them, financing them, and then forcing them to become productive.

The British played an important role in this continuity. Colonial rule depended heavily on local elites, and many feudal and semi feudal property relations were left intact precisely because these groups helped govern and suppress popular unrest. So it is misleading to say that India was colonized by the British alone. In practice, it was British power operating through Indian elites. Independence therefore involved a transfer of power from a foreign colonizer to a native ruling class that had every incentive to preserve the existing social order.

This is where political economy becomes central. A state dominated by landlord and elite power will struggle to industrialize, not because development is impossible in theory, but because the classes that dominate the state have no interest in the kinds of changes that real development requires. Land reform, higher rural wages, mass education, strong labor rights, and the disciplining of capital all threaten elite control. When those at the top can block these reforms while maintaining political stability, economic transformation becomes slow, uneven, and shallow.

One way to see this is through the history of import substitution and protection. Like many postcolonial countries, India built tariff walls, restricted imports, and tried to grow domestic industry behind protection. In theory, this was supposed to be the first stage. Give domestic firms breathing room, give them cheap credit, let them build capability, and then push them into export markets where they either innovate or die. That second part is the whole point, because protection and subsidies remove market pressure. If you insulate firms and pour money into them without cracking the whip, you don’t get development. You get monopolies living luxuriously.

Some people describe this as feudalism holding India back, but the problem is deeper than old traditions surviving. The real issue is class power. Even when landlords act in capitalist ways, producing for markets, investing in business, or participating in electoral politics, they still function as a brake on development because they benefit from cheap, insecure labor and weak working class organization. Capitalism by itself does not guarantee progress. Capital will often choose low wage, low investment paths unless it is forced, by organized labor or a disciplined state, to behave differently.

And this is exactly where class power shows up. Because once you create protected markets and cheap state support, you are also creating rents. Those rents become political. The business groups and landed elites who benefit from them then fight to keep the policy stuck at the handout stage and block the discipline stage. So industrial policy has a built in tendency toward failure unless the state has both the capacity and the political backing to withdraw support, enforce conditions, and force firms into competitive pressure.

This also explains India’s massive informal sector. Informality is not a cultural failure or a temporary stage of development. It is a political outcome. Keeping labor fragmented, insecure, and weak suits elite interests. Without labor discipline imposed from below or above, capital faces little pressure to invest productively or raise wages. As a result, democracy exists, but within narrow limits that do not seriously threaten elite dominance.

And it’s worth stressing something that people constantly miss. India’s big domestic market was never big in the way that matters. A country can have a huge population and still have a small market if most people are poor. What matters is purchasing power, not headcount. So the post independence bourgeoisie wasn’t choosing the domestic market because it was some gigantic engine of demand. They chose it because it was politically protected demand, where profits were safer, competition was weaker, and the state could be pressured to keep the taps of protection and credit open.

The roots of this problem go back to the nationalist movement itself. The leadership of the independence struggle relied on elite cooperation and avoided deep class confrontation in the name of unity against colonial rule. That strategy may have helped win independence, but it meant that elites were never politically subordinated. When independence arrived, the balance of class power was already set, and it favored continuity over transformation.

Comparisons with East Asia make this clear. Countries like South Korea and Taiwan also emerged from colonialism and poverty, but they broke landlord power early through land reform and built states capable of disciplining capital. India did not fail because of culture or lack of talent. It failed because its ruling classes were never forced to accept reforms that threatened their interests.

But disciplining capital is not just a slogan. It had a concrete form in the countries that succeeded. Subsidies and protection were made conditional on performance, especially export performance. Export markets functioned as an external test. You can fake competence at home behind tariffs, but you can’t fake it in the US or Europe. And that’s why so many import substitution regimes stalled. Firms loved protected profits and used their political power to avoid being pushed into shark infested waters. They lobbied for more protection, more subsidies, more licenses. Anything except the one condition that would force learning.

India’s trajectory fits that pattern because the state was not politically autonomous from the classes it was supposed to discipline. The industrialists weren’t just private sector. They were embedded in the ruling coalition. When the state tried to push outward, it lacked the coherence and power to override business resistance.

Foreign linkages mattered here too, in a way that connects back to colonialism but doesn’t reduce everything to it. South Korea benefited from partnerships with Japanese firms that already had sales networks and footholds in the American market, so Korean producers could piggyback into exports. India had partnerships with British and American firms, but those firms often had every incentive to block Indian exports in the very markets India needed to enter. They wanted India as a protected domestic market and a site of controlled production, not a competitor in global export chains. That difference, who your external partners are, and whether they enable or forbid export access, interacts with domestic class power. If your own ruling class is already comfortable with protected domestic rents, then the external structure reinforces the inward turn instead of breaking it.

Finance is another piece people ignore. Industrialization is not just factories and policy speeches. It’s credit. Poor countries face high cost of capital because banking is underdeveloped and loans are expensive. The successful developmental states built systems, often state directed banking, that pooled domestic savings and provided cheap, long term credit to targeted firms. But again, credit allocation is political. If the state is captured, cheap credit doesn’t become a developmental tool. It becomes another channel of patronage and rent distribution. Instead of financing productivity, it finances power.

This is why the post independence leadership calling itself fabian socialist often feels hollow. The problem was not just hypocrisy or bad intentions. Socialism without mass class power is impossible. Planning without transforming property relations, welfare without breaking elite dominance, and democracy without working class leverage all result in a system that manages inequality rather than challenges it.

And it also complicates the lazy "authoritarianism is why East Asia developed" argument. Dictatorships don’t give the state more power over the rich. They give it more power over the poor. The rich always have access. What matters is not whether elections exist, but whether the state has the internal capacity and the political backing to impose conditions on capital. In principle, democracy can help, because public money going to private firms can be made transparent and accountable, and the public can mobilize around whether that money is being used for the collective good. In India, democracy existed, but the working classes were fragmented, labor organization was weakened, and the state remained insulated from popular pressure on the key economic questions. So democratic form did not translate into democratic power.

Colonialism mattered enormously. But India’s continued poverty cannot be explained only by what the British left behind. It has to be explained by what India’s ruling classes preserved after independence, and how their control over the state blocked deeper reforms, weakened labor, and prevented working people from becoming a real force in politics.

PS- For anyone who wants a deeper and more rigorous analysis of these dynamics, Vivek Chibber’s Locked in Place and Postcolonial Theory and the Specter of Capital are essential reading.