India looks set for lift-off as Western eyes start to roam away from China

There is a standing joke about the Indian development story which goes something like this: What's changed about India? Answer: the telephone system is much better, the traffic congestion is much worse, but otherwise, nothing very much.

It is almost exactly 20 years since I was last in India and I can confirm the first two observations to be absolutely correct.

The last time I was here, as a backpacker between jobs, you could expect to stand in line for hours at the local post office just to make a call and even then you were lucky if it succeeded. But it was still possible to travel, even in Delhi, safely by rickshaw, unhindered by anything more than auto three-wheelers and Morris Oxford taxis.

The joke, on the other hand, is only partially true. For the great bulk of India's teaming masses, things may not yet have changed very much, even in 20 years. Drive into the hinterland of India's rural economy and you seem have gone back centuries in time.

Yet alongside this old India, becalmed in a bygone age, there is a new one. This is the India of booming IT services, outsourcing, Bollywood, state-of-the-art communications, and the legion of service industries that support these fast-growing areas of income generation.

With its huge, aspirational middle class - highly skilled, self-confident and determined to succeed - this is an India which seems to have more in common with the first world economies of America and Europe than its own subcontinent.

In the property hot spots of Delhi, Mumbai and Bangalore, there's a house price bubble to match anything that has taken place in the developed West. This is an India already fully integrated into the global economy, a smart, entrepreneurial, go- getting India which defies the chaos from which it has sprung. Sheer weight of numbers make it big, vibrant and already capable in many instances of outcompeting its Western counterparts.

Bizarrely for a country whose cities are now known for some of the worst traffic congestion in the world, it is an Indian software company which is behind the technology used in London's pioneering congestion charging system.

The £4bn bid by India's Tata for Corus, the Anglo-Dutch steel maker, is powerfully symbolic of the ease with which the new India is now able to tap into Western capital markets to undertake transforming deals and investment. The future of this India, already a part of the global business elite, is not in doubt. It is in the rest of India - the 40 per cent of a population of nearly one billion living on a dollar or less a day, and the still further magnitude living on not much more - that the problems lie.

Where better to learn about the challenges facing this extraordinarily diverse country, and the business opportunities it presents, than the World Economic Forum's annual India Summit, held in partnership with the Confederation of Indian Industry - a hugely instructive exchange of ideas, hopes and aspirations among the leading lights of Indian business and public policy.

The past three days of insights, observations and initiatives on modern India has this year attracted a record number of foreign participants, all drawn by the palpable sense of excitement that surrounds India's vast market potential and its accompanying legion of business opportunities. The international zeitgeist which once centred on China has moved unmistakedly over the past year to India, which with its youthful and fast growing population, its robust legal system, rule of contract, respect for intellectual property rights, and above all its proud democratic tradition, is thought by many business people to be a greater opportunity for profitable growth than its bigger and now more-developed Asian rival.

In many industries, from modern retailing and logistics to utilities and automobiles and even agriculture, India is thought virgin territory there for the taking. There are also powerful lessons Western companies hope to draw from the low cost and highly inventive business models being developed in India to meet the country's own particular challenges.

Over the past three years, India has already achieved a step change in economic growth which, fed by success in IT and outsourcing, has ratcheted up from the 6 per cent of earlier years to more than 8 per cent per annum.

Yet to deal with the coming demographic bulge, as well as the demand for jobs and prosperity that comes from rising levels of literacy and education, India needs much more - 10 per cent and higher, sustained over several decades. More holy man than politician in the way he comes across, India's prime minister, Dr Manmohan Singh, preaches the mantra of "inclusive growth".

"Unless we can create jobs and opportunities for the backward regions so they feel they are getting the benefit of India's new found growth and prosperity," he told participants at the WEF summit, "we will have failed." Other ministers warned of the possibility of a social backlash if growth were seen to be inequitable.

It was a message repeated by Sonia Gandhi, chairperson of the United Progressive Alliance and still undisputed first lady of Indian politics. The country was moving ahead with economic growth, but formidable challenges remained. She identified education, health and nutrition as the primary tasks, as well as tackling the growing problems of HIV/Aids and terrorism. Yet her comments were perhaps more instructive for the challenges she missed out than the self-evident ones she alluded to.

Prime among these are still crippling levels of government bureaucracy, both at a federal and regional state level, intrusive regulation and hidden forms of patronage and taxation, for which read corruption. Despite the government's programme of reform and deregulation, these impediments to free trade in goods and services are still so overpowering that some Western business leaders with commercial interests here refer, only half in jest, to it being more difficult to do business in India than Iraq.

Kamal Nath, minister of commerce and industry, drew enthusiastic applause when he said that the best the government could do to ensure development was to stay out of the private sector's way, yet his sentiments could hardly be further from the reality, where vested interest and political constituency dictate that bureaucratic and corrupt obstruction of business remains rampant.

This gap between aspiration and practice is perhaps the biggest impediment to the "inclusive development" that political leaders seek. India needs access to vast amounts of foreign capital to push through the Public Private Partnerships the government sees as the chief mechanism for improving transport, utility, educational and healthcare infrastructure.

Yet powerful restrictions on foreign direct investment into India remain in place. Nowhere is this more obvious than in retailing, which is in the dark ages in terms of its development and yet is effectively barred to foreign participation, this in the supposed interests of protecting the subsistence farming on which hundreds of millions depend for their living and the even more questionable merits of the eight million corner shops and legion of markets that make up the backbone of the country's existing retail infrastructure.

The news this week is that Wal-Mart has outmanoeuvred Tesco in the race to partner with Sunil Mittal, one of India's leading industrialists, in the race to establish a Western-style supermarkets chain in India.

On the fringes of the meeting, Mr Mittal told me that it was one of the toughest business choices he had ever had to make, but in the end, Wal-Mart was able to give the project a size, scale and speed which Tesco was unprepared to match.

The perceived need to move swifty had been given added urgency by news that Mr Mittal's greatest commercial rival in India, Mukesh Ambani, chairman of Reliance Industries, is planning to go it alone with an extraordinarily ambitious programme of store openings.

These are exactly the sorts of developments India needs to drive change. The step change in supply chain management that modern retailing can deliver will drive lower costs, lower prices, more consumption, more jobs, better hygiene, improvements in transport infrastructure, less wastage, better agriculture, and perhaps even a dismantling of the inter-state trading restrictions which hamper so much of what business tries to achieve.

Yet though India is plainly in a hurry, Tesco may have been right to show caution. Things change slowly and incrementally in India, not in great leaps and bounds, and to enter into a business partnership which you don't control and yet are expected to provide all the capital and expertise for, as Wal-Mart apparently has, may not be entirely wise.

Azim Premji, chairman of Wipro, one of India's leading IT services companies and very much a part of the new India, perhaps put it best when he warned foreign investors not to get carried away by the apparent attractions of the Indian market. "Our American friends in particular," he said, "are either in honeymoon or divorce mode. There is nothing in between. There is a huge groundswell of interest in India, and rightly so, but please don't come here with unrealistic expectations". Quite so.