An allusion is a reference usually in literature to another work of literature, generally from a source important to a culture. They tend to have a connection that is cultural, mythological, religious, literary, or historical.
Rashid's stories have the effect on his listeners of Orpheus the musician -- in Greek Mythology.
"Haroun went with his father whenever he could, because the man was a magician, it couldn’t be denied. He would climb up onto some little makeshift stage in a dead-end alley packed with raggedy children and toothless old-timers, all squatting in the dust; and once he got going, even the city’s many wandering cows would stop and cock their ears, and monkeys would jabber approvingly from rooftops and the parrots in the trees would imitate his voice."
After reading this passage, not everyone would say, "Oh, that reminds me of Orpheus..." but if you have studied Greek Mythology, you would hear the echo and recall Orpheus and his magnificent musical skills. Then you'd say, "Hey, that's an allusion to Orpheus." and you'd be right on.
Here's the beginning of the myth of Orpheus and Eurydice: (source)
Orpheus: "On his mother's side he was more than mortal. He was the son of one of the Muses and a Tracian prince. His mother gave him the gift of music and Thrace where he grew up fostered it. The Thracians were the most musical of the peoples of Greece. But Orpheus had no rival there or anywhere except the gods alone. There was no limit to his power when he played and sang. No one and nothing could resist him. In the deep still woods upon the Thracian mountains, Orpheus with his singing lyre led the trees, led the wild beasts of the wilderness. Everything animate and inanimate followed him. He moved the rocks on the hillside and turned the courses of the rivers....
Some might say Rushdie was not making an intentional allusion. If that's the case, he's perhaps reaching for extremes in his examples -- he was that good as a storyteller. And perhaps that's what archetypes are, "original patterns," or patterns of human behavior in the extreme. Others would say, of course Rushdie knows Greek mythology, that he is alluding to Orpheus consciously. Notice how "allude" was used as a verb, and that it is a different word from illusion!