(FORTUNE Magazine) – THE BULLS are raging in Bombay's once-sleepy stock market. Gillette Co. suddenly has the Indian government's permission to set up a razor blade plant after some eight years of asking. Honda and Nissan are negotiating deals to produce cars in India. Control Data of the U.S. and CII-Honeywell Bull of France are vying to provide India with know-how and components for making mainframe computers, potentially a $500-million deal. General Electric has big plans to peddle its power plant expertise. After a generation of protecting inefficient industries from foreign competition and strictly limiting foreign investment, India is putting out a welcome mat. Prime Minister Rajiv Gandhi -- like China's Deng Xiaoping -- wants to use market forces to invigorate a sluggish socialist economy. Gandhi, 41, who took over a year ago after his mother, Indira, was assassinated, is a soft-spoken computer buff and former Indian Airlines pilot. A self-described pragmatist, he's been pushing policies that sound a lot like Reaganomics. He is easing government controls, cutting taxes, encouraging private enterprise, and promoting technological innovation. ''India probably has made more change favorable to business this year than in the past 25 years,'' says Walter Wapel, GE's Singapore-based regional manager for Asia. Indian businessmen are ecstatic. ''The entire environment has changed. We're no longer a Robinson Crusoe island, isolated and backward,'' says Rahul Bajaj, 47, a Harvard MBA and chairman of Bajaj Auto, India's biggest maker of motor scooters. Shares on the Bombay stock exchange have been bid up 83% in the past year by investors who figure that Gandhi's new stance is bound to stimulate corporate growth. Even before Rajiv Gandhi became prime minister, India had made remarkable progress in many areas. The country can finally feed itself, and it produces two-thirds of the oil and gas it needs. India builds nuclear power plants and rockets and satellites that work. But nearly half of India's 750 million people still live on an average of $100 a year. And India's economy has been growing at just 3.5% a year for the past 25 years, vs. an average of 5.6% for Japan and 16.4% for South Korea. Americans are wary of doing business in India. IBM and Coca-Cola, for instance, pulled out in the 1970s because of what they saw as severe government meddling. Union Carbide was trying to sell its money-losing Bhopal plant even before last year's tragic accident. Says Orville Freeman, a former U.S. Agriculture Secretary and chairman of the India-U.S. Business Council, which promotes dealing with India: ''American companies are showing a cautious shift in attitude, a greater willingness to explore India's potential. But they're not as euphoric as they have been over China.'' One thing in India's favor: it has a middle-class population, defined as individuals with incomes of at least $2,000 a year, of up to 50 million. That may not seem middle class by Western standards, but at least those Indians can save up to buy TV sets and other consumer goods. China as yet has no comparable group of that size. Skeptics wonder whether Gandhi can straighten out India's economy, a bewildering mix of government corporations and private companies rigidly controlled by state planners. The giant state enterprises, most of which lose money, have absorbed three-fourths of the country's industrial investment over the past three decades. Government-owned steel mills, protected by super-high tariffs, charge up to 168% more than steel producers in the U.S., Europe, and Japan. The cost of steel alone makes Indian products uncompetitive in world markets. The system creates artificial shortages. ''Planners in New Delhi work out how many cars, locomotives, and everything else should be made,'' says J. K. Chandna, 52, deputy chief executive of Advani-Oerlikon, a private company that uses Swiss technology to make welding equipment. ''It never comes out right.'' Gandhi's program is divided into two broad categories: policies designed to build a fire under Indian companies and policies to encourage foreign investment and technology imports. Gandhi has no intention of selling off nationalized companies, as the Thatcher government is doing in Britain. But he has exempted 25 industries from government control over production. That means companies producing structural steel, auto components, and office equipment can crank out as much as they think the market will bear. And he has eased stringent antimonopoly laws to allow companies to expand into new fields. ( Gandhi has cut taxes 5% across the board, and has promised more cuts later. Rates are still high: the top personal rate is 50%, the corporate rate 52%. Gandhi thinks lower taxes will stimulate the economy, and he also hopes to curb what Indians call black money. Hidden from tax collectors, black money represents 22% of the economy, according to a recent study by a nongovernment Indian research institute. Other estimates put the figure closer to 50%. Getting a telephone, an apartment, a car, or a major government permit usually requires black money. Since the largest currency note is 100 rupees (about $8), courier services have sprung up to cart around all the black cash. To encourage foreign investment, Gandhi has put some regularity into what had been a capricious system -- the size of foreign stakes allowed in Indian companies varied according to who struck the deal and when. In general, foreigners now can own up to 40% of Indian companies. Many international corporations would prefer to have control of joint ventures, but the government hopes to appease them with clearer guidelines and quicker decisions. In special cases, when the venture exports its entire output, a foreign company is permitted to own up to 100%. Gandhi has also opened more industries to foreign investors. Saying that India ''has to run to catch up with the bus,'' the prime minister has cut and in some cases abolished import tariffs on some industrial equipment. The tariff on fertilizer-making machinery, for instance, went from 65% to zero. Still, the welcome mat is sometimes abruptly pulled away. The government recently rejected a proposal from PepsiCo to build bottling plants in India; it wants to protect domestic soda makers. Gandhi is more open to companies that want to explore for oil, make advanced pharmaceuticals, or produce such consumer items as microwave ovens and videocassette recorders. And he is especially eager for computer companies. By some estimates, the computer market in India will be $800 million in annual sales within five years. BURROUGHS has a head start. For the past five years the company has had a joint venture in Bombay with Tata, India's largest private business group. Tata Burroughs has manufactured printer components for export and produced software for such clients as the World Bank and Swissair. Last year Tata Burroughs earned over $2 million on sales of nearly $13 million. To comply with Gandhi's foreign investment policy, Burroughs had to reduce its stake in what had been a 50-50 venture. With India's stock market booming, that proved no problem. Tata Burroughs floated 20% of its stock, leaving the original partners with equal shares of 40%. The Tata Burroughs issue -- oversubscribed more than 80-fold -- raised $3.4 million. The capital is going into a new factory to produce magnetic ink character recognition devices used for clearing checks. The state-owned banking system's 40,000 branches still enter accounts into ledger books by hand. Roger G. Stone, a Briton who is general manager of Tata Burroughs, thinks the company can get 30% of the banking computer market. Gandhi is encouraging competition in India's once highly regulated auto industry. For three decades two private companies, Premier Automobiles and Hindustan Motors, have been turning out Indian versions of outdated European cars. Premier has a backlog of 80,000 orders for its version of a 1950s- vintage Fiat, produced under license from the Italian automaker, that sells for $6,500. ''To an American the price is attractive, but not the car,'' says Vinod Doshi, 53, chairman of the Walchand Group, parent company of Premier. Buyers have had to wait so long for delivery because the government limited the companies to absurdly low production. Last year India made just 76,000 passenger cars -- fewer than Taiwan. Japanese automakers have longed for a crack at the Indian market. Suzuki Motor was the first. Even before Rajiv became prime minister, a state-owned auto company called Maruti Udyog brought in Suzuki as a minority partner with a 26% stake. Last year the joint venture began turning out a version of a Suzuki minicar in a gleaming plant just outside New Delhi festooned with Japanese-style slogans like ''Don't Waste Time.'' Maruti Udyog grew out of a fledgling auto company started by Rajiv's younger brother, Sanjay, in the late 1970s. After Sanjay was killed in an airplane crash in 1980, Indira Gandhi's government took over the company almost as a memorial to him. Encouraged by Rajiv, Maruti Udyog plans to spend $200 million over the next few years on facilities to produce up to 150,000 cars a year. Premier has signed a licensing agreement with Nissan and is introducing a ''new'' model. It has an up-to-date Nissan engine, but the body is based on a 1967 Fiat. Some 100,000 Indians have made down payments for the hybrid car, priced at $8,750. Premier's next car is expected to be a version of the Nissan Sunny -- Sentra in the U.S. Hindustan plans to sign a similar licensing deal with Isuzu. Honda is teaming up with Tata Engineering & Locomotive Co., known as Telco, another arm of the Tata group, to produce a version of the Honda Accord. Telco is India's biggest truck manufacturer, but it has never made cars. Daimler- Benz of West Germany owns 12.4% of the company. Honda plans to take a 10% interest. The venture hopes to produce 40,000 cars a year by 1992. Visiting Japanese have been impressed with Telco's dedication to efficiency and productivity. Machines at the company's immaculate plant near Poona, a city of 1.7 million in western India, are set far apart, says a manager, ''to keep workers happy, which increases efficiency.'' To break down caste barriers that often bedevil labor relations in Indian factories, Telco makes apprentices who live in company dorms clean their own bathrooms -- a chore usually left to low-caste workers. Still, the government hasn't given up all its meddlesome ways. The Suzuki cars built by government-owned Maruti Udyog contain mostly Japanese parts. But the government requires Premier to make most parts locally. ''Competition is fine,'' Doshi says, ''but the rules should be the same for all.'' Young Indian entrepreneurs are particularly excited by Gandhi's new policies. ''Rajiv is providing an opportunity for smaller companies to become larger,'' says Abdullah Fazalbhoy, 32, an MBA from the Wharton School who has launched a company called Photophone to make cameras under license from Minolta. He expects to benefit from lower taxes, fewer controls, and easier imports of foreign know-how. His company also makes film-developing equipment for small businesses under an agreement with Ciba-Geigy. Photophone, with $15- million sales last year, went public in October. Some entrepreneurs are hooking up with U.S. computer firms. The Hinditron Group, for instance, markets computers and has created business software for Digital Equipment Corp. Hemant Sonawala, 48, who worked in the U.S. for Tektronix, an Oregon maker of precision instruments, started Hinditron, a private company in Bombay, 19 years ago. Its annual sales are $45 million, but Sonawala says that because of Gandhi's policies ''we're poised for growth.'' He's looking forward to a manufacturing venture with his old employer Tektronix. Gokul Agarwalla, 37, has invested in several small California companies and set up plants for two at Jamshedpur, a city of 700,000 in northeastern India. Cal DC makes switching power supplies for computers, and Composite Tool turns out precision microdrills used to produce circuit boards. Agarwalla, a Berkeley MBA and veteran of a dozen years at a U.S. business consulting firm, says: ''We bought plant buildings in India for the equivalent of a year's rent in Orange County. And we got well-trained, English-speaking workers for one- third the cost in Taiwan.'' He admits, though, that keeping in touch with his Indian plants when he's in California is a hassle. He telephones an associate in Delhi, which has relatively good phone service; the associate then spends hours phoning Agarwalla's messages on to Jamshedpur. For all the enthusiasm and rhetoric, Gandhi faces plenty of obstacles in changing the business climate in India. One is an army of 19 million government paper shufflers. By contrast, the U.S., with 2.9 million federal workers, seems downright Jeffersonian. Indian administrators have little reason to welcome reform -- the system provides them with jobs and sometimes bribes. As an American banker puts it, ''Rajiv says he wants change, but down in the bureaucracy they like everything the way it is.'' A VISITOR coming back to India after 20 years is struck by how little the country has changed. Airport immigration counters have computer terminals, but entry formalities still take far longer than anyplace else because three officials labor over each passport. Local phone calls are a roulette game: dial enough times and you may get through -- often to a puzzling tape-recorded message: ''This number is not existing.'' Traveling by car outside cities means creeping along narrow, potholed roads crowded with trucks, bicycles, bullock carts, and ambling pedestrians. Having missed the export boom that made many East Asian nations prosperous, India has a lot of catching up to do. Rajiv Gandhi lectures Indians about their lack of discipline and weak production technology, while trying to keep government from stifling enterprise. The country's first leader with practical experience outside politics, Gandhi is heading in the right direction -- but he's got a long way to go.