India is doing very well. For the first time in 200 years, India is back in the world as an economic power. There are Indian products-outsourcing, Bollywood, auto parts, pharma-which are world beaters. No longer do Indians have to lament Dacca muslin and the horror stories about the severed limbs of weavers. India is alright and growing at 7-8 per cent, thank you. Barring small delays while Manmohan Singh gets Prakash Karat's head around FDI (what is good for West Bengal and Kerala is good for the rest of India, too!), we could be looking at 10 per cent.

Yet, there are vast areas and populations of India untouched by the growth miracle. Far too many children die before they are one-year-old, far too many are malnourished, a politician accused of a misdemeanour who checks himself immediately into a hospital to escape trial, consumes more resources for his fake health problem than many villages get in a year. The primary schools in villages don't have teachers since they got their jobs as a political gift and so, they are busy fighting battles for their political masters. The politicians themselves are too partisan to legislate and rush up to the Well of Parliament chamber to protest. At least, it saves doing any serious work. They cost an enormous amount in salaries and perks and unpaid bills and still want money up front for asking questions.

Yes, India is a democracy, the largest and the most successful, but despite much that has been achieved, it has disappointed us. In terms of what the fighters for Independence dreamt of, India has barely scratched the surface of its enormous problems. The first 30 years after Independence were wasted in slow, hesitant growth and the setting up of highly capital-intensive industrial units which were designed to flatter the ego of the ruling elite than to benefit the masses. These are not navratna; they are the fake diamonds reminiscent of Guy de Maupassant's short story. These expensive baubles represent a massive waste of scarce capital. They are the reason why India can detonate a nuclear bomb but cannot provide clean water or decent roads. Above all, they are the reason why there is still a lot of poverty in India after 58 years of independence.

Statistics about India's poverty are much disputed. Yes, poverty has come down, from the high 40s (in percentage terms) in the early 70s to the high 20s in the late 90s. Growth during the 90s did make a serious dent on poverty. But the 28 per cent or so who are poor by the official poverty line do not exhaust the poor. There are poor above the line as well. While statisticians and economists endlessly quarrel about the methodology of gathering the data, survey techniques and so on, few have questioned the poverty line itself. It was fixed during the early debates in the late 60s and by 1973, it was around Rs 50 per month at 1973-74 prices (the levels are different for rural and urban areas, but those are details). Since then, it has been updated for inflation.

So, what is good about that sum. In 1938, Subhash Chandra Bose appointed a National Planning Committee of the Congress party to prepare for Independence. Jawaharlal Nehru was its Chairman. In The Discovery of India, Nehru wrote that the committee arrived at Rs 15-25 per month at 1940 prices as the poverty level. It also thought that India's national income needed to be increased by five to six times (within 10 years!) if poverty was to be eliminated.

So what happened after Independence? National income took 20 years to double at first and then again took another 19 years to double again. Only in the last 15 years has it seen an acceleration of growth, so the third doubling came in 11 years. What the Nehru generation thought could be done in 10 years-a five-to-six fold increase in 10 years-took 45 years!

But the real scandal is the poverty line. Take Rs 15 at 1940 prices. With 1939=100, the Wholesale Price Index was 385 by 1952-53. Re-normalised at 1952-53=100, it was 165 by 1968-69. Again, taking that as 100, by 1973-74 it was 283, when all of a sudden it was Garibi Hatao. But the level should not have been Rs 50, but roughly 14 times 15 or Rs 210-250. Since 1973, the index has risen 14 times. So, the level should be Rs 3,000 at current prices. Even the per capita GNP is not this high today. So, several layers above the "officially poor" there are the "Nehru's poor". They are still waiting to be acknowledged, if not given some help.

So, enough of the euphoria! India may have a middle class of 200-300 million whom the banks are flooding with consumers credit with which to buy apartments, cars, computers and what not. But the poor are not 280 million but more like 500 million. The only conclusion can be that the democratic polity has looked after the elite groups of high caste and then some aggressive backward caste elites and neglected the majority. What was created as socialism was just outdoor relief at inflation-proof salaries and pensions and tenure security for the better-off.

Along the way, India's policy makers browbeat and nearly destroyed a healthy private sector, one of the largest of any post-colonial country, managed to scuttle a world class textile industry and made businessmen dependent on permits and licences. Only after 40 years, when this model collapsed in ignominy, has the private sector in India dared raise its profile. But even now it is too passive. It tolerates bad, inefficient politics. It has allowed third-rate criminals to enter the legislatures and done nothing to hold up the system to account. In the process, a first class city like Bombay has been reduced to the level of war-destroyed Beirut with filthy drains and collapsing illegally built structures and a bankrupt municipal authority which can only take pride in changing its name to Mumbai. The disease has now spread to Bangalore, which will change its name in lieu of improving the roads or water supply or drainage. No sooner as a city attains a global image, India's politicians are at hand to destroy it.

So, what must we do? It would be nice to think that India's businessmen will get off their backs and clean up its politics, or at least make it efficient. But I have grave doubts about that. Like all other inconveniences Indians have agreed to live with, corrupt inefficient politics will continue. At least, we can proudly assert that the Prime Minister-though only he alone-is not corrupt.

So, let us leave politics to politicians. Can we do something about the economy if poverty is to be tackled? A massive employment creation programme, not employment guarantee is needed. No country has grown rich without taking its rural population off the farms and putting it into factories. India has to tackle that urgently. The stagnation in manufacturing has to be reversed. This can only be done if manufacturing is growing at high double-digit rates. China doubled its manufacturing labour force from 53 million to 103 million in 20 years from 1981 to 2002. Its manufacturing value-added grew eight times over that period at 25 per cent per annum, while India managed only 6 per cent. India can double its manufacturing employment in the next 20 years, if not faster. The resources can be raised if policies are improved. It requires:

• A drastic cut in budget deficits of the Centre and states. Cut non-plan expenditure, which was at Rs 3,52,748 crore by 2003-04, while plan expenditure was only Rs 1,21,507. There was more non-plan expenditure on the capital account than plan expenditure!
• A simpler and faster FDI entry procedure; and
• A drastic change in labour laws to make hiring workers less expensive.

Domestic savings of 25 per cent plus a net government saving of another five per cent and FDI of 10 per cent can lift the economy to those heights. This is something the business community can get its teeth into. Only employment growth in manufacturing offers unskilled rural labour any hope of a permanent route out of poverty. It is time to grasp it.

The author is an internationally reputed economist and a member of UK's House of Lords