Mumbai is India's richest city. It handles 40 per cent of the country's maritime trade; has most of the merchant banks and two stock exchanges and Asia's biggest slum. Delight and shock are simultaneous responses. Raise your eyes and the magnificent Gothic edifices of the British Raj seem hardly real: the Rajabai Clock Tower, which once chimed 'Rule Britannia' on the hour, and epic indulgences like Victoria Terminus, the greatest railway station in the world, through which a million workers pass every day, and the Prince of Wales museum (it is still called that on the streets, as Mumbai is still Bombay) with its remarkable collections and perfect dome dominating the Crescent Site, leading to the Gateway of India.

Then lower your eyes to the concave human forms under rattan and hessian, aliens to the beaming faces on the billboards, and the question is always the same: why should such a rich, resourceful and culturally wise society, with its democracy and memories of great popular struggle, live like this?

When I was last in Bombay, a generation ago, I asked the great Bollywood film director, Raj Kapoor, why poverty was so resistant in India. "Outsiders misjudge us," he said. "We are a dynamic society. But most of us are forced to live a life preordained by powerful groups for their benefit. The point is, they need the poverty, which is good for their enrichment, for raising political hopes, for passing out food parcels, so to speak, and for reinforcing divisions of religion and caste. However, all that is distraction: just like my movies. When people fully understand this and act, things will change in India."

A few years earlier, in 1971, I asked Indira Gandhi, then prime minister, the same question. She and the Congress party had just been re-elected by a huge majority. Her campaign had been one of promises, and the poor voted for her. "After independence," she said, "I realise that somewhere along the way our direction changed. We had a choice. Either we bought foreign goods or we helped the industrialists grow rich. So, now we have a middle class and we have poor people who know they are poor. That is the beginning of our great change."

The "great change", apart from her disastrous imposition of martial law followed by her own assassination, never happened. Rather, it happened with the arrival of a strain of extreme capitalism, designed in England in the early 19th century and known today as neo-liberalism. With the defeat of Congress and the rise of the Hindu nationalist BJP-led government in the 1990s, the divided society was shorn of its paternalism and licensed by the IMF. The barriers that had protected Indian industry and manufacturing were demolished; Coca-Cola entered what had been forbidden territory, along with Pizza Hut and Microsoft and Rupert Murdoch. 'India Shining' was invented by the illusionists of its beneficiaries: the expanding middle class (a misnomer in India; there is no effective middle) and transnational capital. They said India would catch up with China as an economic power, and that poverty would be eradicated.

Indeed, official figures appeared to show that, at the close of the 20th century, the number of Indians living in absolute poverty had fallen by 10 per cent. However, in his study, Poverty and Inequality: Getting Closer to the Truth, Abhijit Sen says the Indian poor actually increased and that, for them, the 1990s were a "lost decade". In 2002, those in absolute poverty made up more than a third of the population, or 364 million people. "Inadequate nutrition is actually far more widespread than either hunger or income poverty," Sen wrote. "Half of Indian children are clinically undernourished and almost 40 per cent of all Indian adults suffer chronic energy deficiency."

Certainly, India's growth rate has leapt above six per cent, but this is about capital, not labour, about liberated profits, not people. All the talk about a new high-tech India storming the barricades of the first world is based largely on myth. The new technocratic class is tiny. The famous call centres, where educated young Indians affect knowledge of Britain and American "lifestyles" in order to service the likes of American Express, employ only 1,00,000 people, or 0.01 per cent of the population. Since 1993, the so-called consumer boom in India has embraced, at most, 15 per cent of the population; and for the majority of these people the new prosperity has meant the acquisition of basic modern living amenities, rather than cars and mobile phones.

For most Indians, the "new market" has another meaning that is familiar across the "globalised" world. As the images of role models with white skin and good teeth have gone up, public services have deteriorated.

According to UN figures, India, today, spends less than one per cent of its GDP on health and, in the health services available to most people, ranks 171st out of 175 countries, just ahead of Sudan and Burma. And yet, spending on private health, which only the well-off can afford, is one of the highest in the world.

The Indian newspapers reflect this in striking ways. The Indian Express presents a searing investigation into appalling hospital conditions, then trumpets India's inclusion in a facile "best countries in the world" list drawn up by Newsweek and based on the rise of the "new market". Maharashtra's director of health, reported The Times of India, was off on "a plum assignment" with the World Health Organisation. He was away several months, conducting a survey in Southeast Asia. During 2003-04, in his domain, some 9,000 tribal children—the poorest—reportedly died from malnutrition and lack of medical care. The acting chief justice criticised him for "negligence" of duty. "The deaths are common," the director replied, "and I have done enough in the past 10 years. Now why should I sabotage my career for this issue?"

There is much about this story that explains why the majority of Indians voted as they did in the general elections in May last year. Though aimed specifically at the BJP-led government, the principal sponsor of the "new market", their anger was described by one commentator as "a scream against an elite that has made them all but invisible since independence".

Like Indira Gandhi, her mother-in-law, Sonia Gandhi spoke against poverty, but rarely against the elitism controlling it. The man who replaced her and became PM, Manmohan Singh, has made clear there will be "no rollback" of the "new market"; like new Labour, Congress will be as neo-liberal as its rivals, if not more so. After all, wrote Jawaharlal Nehru in 1936, "Congress's outlook is essentially petty bourgeois," adding prophetically, "It is not likely to succeed that way."

More than 70 per cent of the population live off agriculture. Not only is malnutrition and discrimination rife among the minorities, the 70 million tribal people and 150 million Dalits, small farmers from all ethnic groups have suffered during the "lost decade". Suicides among sharecroppers "now run into many thousands", the environmentalist and writer Vandana Shiva told me. "Governments dare not admit the true figure." Debt, often owed to moneylenders at interest rates of up to 120 per cent, is aggravated by an open market in the patenting of seeds, plant life and natural fertilisers by foreign bioscience companies: "the piracy of our life source," as Shiva calls it.

Alternatives exist. Since the 19th century, mass movements in India have demonstrated that the poor need not be weak. Since it was elected in 1978, the popular socialist government in West Bengal (officially, Communist) has operated Operation Barga, a campaign to keep track of and register every one of the state's 2.3 million sharecroppers. Each tenant farmer is sought out and his rights are explained, and the state government's political organisation in his village ensures that he can get long-term loans and is not intimidated by landowners. Operation Barga is regarded throughout India as a success, especially as rice production in West Bengal has soared.

The antithesis of this is to be found on the fringes of the cities, a spectre for much of the world as small farmers are driven off their land. It was sheeting rain when I visited the "railroads" area of Bombay. Many of the people here have fled their land tenancies and hunger, and barely subsist. Once, the city offered work in and around its textile mills, but these have been replaced by "ites parks" (IT-enabled services). Even the lowly messenger is being superseded by the computer.

The conditions these people live under are barely describable: an extended family of 20 is packed into a packing case, the sewage ebbing and flowing in the monsoon; in the dry season it stays. The fat crows ride on people's skeletal umbrellas; pariah dogs chew at nothing. Yet, glimpse inside this stricken Lilliput and there is new-pin neatness and clothes wrapped in plastic, and the children in vivid colours. It is both haunting and humbling, always, to see such dignity. I met a man from Bengal who had been saving weeks for the equivalent of £6, which would buy him a shoe-shine stool; he discussed his predicament with me; he asked for nothing. Along Chowpatty Beach, where the Quit India movement once held its great freedom rallies, is property said to be worth more than in London or Paris. The speculators call it "brown gold".

At the Oxford book shop in Churchgate, I went to the launch of a book by Rajmohan Gandhi, the Mahatma's grandson. He has written a biography of Ghaffar Khan, the inspirational "Muslim Gandhi" who opposed Partition. "India is, in many ways, a violent country," he told me. "The fact that we have democracy today is largely due to the non-violence of the main freedom movement." Democracy perhaps, but freedom waits. 4 Copyright John Pilger.

(Award-winning Australia-born investigative journalist and filmmaker, Pilger is the author most recently of Tell Me No Lies: Investigative Journalism and Its Triumphs. This article will be the basis for a chapter in Freedom Next Time to be published next June.)