Rushdie employs magical realism in his development of the novel's hero, Saleem Sinai, and the characteristics of the other children born in India between midnight and 1 am on August 15th, 1947, the precise date and time at which India is freed from British colonial rule. The reader is meant to accept that the children born at this time are all gifted with magical powers, which meets the fantastical elements required of magical realism in literature.

One character named Parvati-the-witch is an example of one of these midnight's children who has magical powers. She is a real witch, but she is unable to use her powers successfully to encourage Saleem to love her. Once it is clear Saleem is not in love with Parvati, she has an affair with another character named Shiva. Rushdie blends magical realism with theology in this particular element of his story-telling because in Hinduism, Parvati is the name of Shiva's consort, and both individuals figure promininently in the Hindu religion.

I think that one can see magical realism best displayed in Rushdie's protagonist.  Saleem's unique ability of being able to possess a strong sense of smell helps to allow the idea of magical realism to present itself.  When Rushdie brings out the magical realism through Saleem, it can also be seen through Saleem's own narration.  The magical realism present can be understood as a sense of errata, or mistakes in narration.  It helps to evoke Rushdie's idea that consciousness is not totalizing, not something that is perfectly unified and thoroughly coherent.  The magical realism that is brought out through Saleem is a way to comprehend the idea that there is a certain amount of fragmentation within human consciousness.  Contrary to politicians and leaders who profess to present a thoroughly unified vision of reality, Rushdie's, and Saleem's, the magical realism present helps to challenge and question authority.