Though I haven't been able to find a copy of Rushdie's essay to read for myself, I did find a review of the essay on an academic website for a university. If their summary is correct, then Rushdie is arguing that creating groups of literature like "commonwealth literature" is racist, and it segregates English literature by who wrote it. Commonwealth literature is a branch of the broader English literature (which is just literature written in the English language). It only includes literature written by citizens of the old British Empire (in other words, English literature from England and its previous territories). Even though the British empire included non-white citizens (people of India, for example, or Africa), Rushdie is arguing that most commonwealth literature experts don't include literature by Indian or African territory authors as part of that literature. He argues that this makes those scholars racist, and that it's the academic community trying to separate "white" literature from "colored" literature. The issues of nationality and discrimination in literature are very complicated. If you want to know more about them, there are some great internet resources out there!