(FORTUNE Magazine) – LINED UP AGAINST the wall of General Electric's medical equipment factory outside Bangalore are seven ultrasound machines covered in plastic. The $25,000 devices are headed for France, Wipro GE Medical Systems' first export destination in Europe. It is another triumph for this joint venture, which surprised even GE's managers by speeding in 12 months from breaking ground to its first shipment. On the road outside, exhaust-spewing buses and trucks weave among carts pulled by oxen with brightly festooned horns. Within the sparkling factory, however, there is a laboratorylike calm as $250,000 to $400,000 CT scanners are tested by earnest technical workers. B.D. Vijaya, the plant manager, describes how cross-functional teams have brought down defects. He has just gotten off the phone with a colleague at Yokogawa Medical in Japan, an affiliate. The plant sports Japanese, American, and Indian flags -- and plenty of ambition. Annual sales are currently $25 million, but Wipro GE hopes they will rise to $200 million by the year 2000. To reach that target, exports will be critical. Says Vijaya, sounding decidedly Welchian: "It's not enough to be a quality manufacturer. We must be the low-cost producer as well." After decades of disappointment, India is beginning to fulfill its economic promise. Along with China (see box), it is becoming a magnet for Western investment, especially from the U.S. India's program of economic liberalization, now three years old, has cleared a thicket of regulations. At the same time, the country's rapidly growing middle class, estimated at between 100 million and 300 million, is creating a vast consumer market. General Electric, the busiest new foreign investor in India, has joint ventures in everything from financial services to household appliances, from lighting to industrial plastics. American companies seem especially comfortable in India. Unlike in much of Asia, where U.S. investment trails that of Japan, about half the $3.3 billion of foreign proposals approved in the year ended last March was American. Says E. Neville Isdell, a senior vice president of Coca-Cola, which has invested $70 million since the reforms began: "We did not believe the government would move as rapidly as it has.''

Indian companies aren't sitting back, either. Sundram Fasteners in Madras bought equipment from General Motors plants in England, shipped it to India, and has now become the primary supplier of metal radiator caps to GM North America. In the western Indian city of Ahmedabad, Arvind Mills is out to become one of the biggest denim manufacturers in the world. As its home markets become available to foreign competitors, India's once coddled companies are raising quality and looking overseas. Says C.K. Prahalad, a University of Michigan business school professor who lectured to 28 Indian CEOs in Bangalore last February: "Senior Indian managers are realizing that creating markets abroad is not different from defending markets in India." The results are dramatic. India's exports rose 20% for the fiscal year ended in March, despite sluggish growth in the developed world. Foreign investment over the same period increased eightfold, to $4.7 billion. About $4 billion of that has been put into shares traded on Indian stock exchanges or global depositary receipts by institutional investors around the world. Overseeing this monsoon of money is Indian Finance Minister Manmohan Singh, 61. A soft-spoken, self-deprecating Sikh, Singh looks like a cherub thrown among cantankerous old men when he parries thrusts from diehard socialists on the opposition benches of India's Parliament. Tariffs have been slashed from 200% to a maximum of 65% and are expected to come down to 25% in a few years. The rupee has depreciated by about 50% and been made convertible for trade transactions. Foreign investors can move money in and out at the prevailing market rate. In February corporate tax rates were reduced to an effective rate of 46%, and income tax now has a ceiling of 40%. Foreign institutional investors are now allowed to trade on Indian stock exchanges. Still smarting from 200 years of colonial rule, India until 1991 discouraged foreign direct investors by sitting on proposals for years. Now government officials make most decisions in a matter of weeks, and the answer is almost always yes. When Coca-Cola decided to go it alone in India after dissolving its joint venture with an overseas Indian partner, Coke got permission for a 100%-owned unit in India in eight weeks. Motorola recently received clearance in two days to add a new product line at its Bangalore factory -- all over the fax. Companies as varied as Procter & Gamble and Enron, Daimler-Benz and Whirlpool, have rushed to take advantage of the new climate. But it's not uniformly balmy. India is still an exceedingly underdeveloped country. By some measures, its infrastructure even lags behind that of China. The public sector continues to throw an imposing shadow across the economy, soaking up 50% of the country's capital while producing little more than a quarter of its output. And the zeal for reform is not as pronounced in many state governments as it is in New Delhi, nor has it percolated down to the mindlessly meddlesome lower echelons of the bureaucracy.

EVEN SO, investors' concerns have changed significantly over the past few years. The question is no longer whether the reforms might be reversed, but how fast they will go forward. That's no small matter when a country is just coming off the starting blocks and its competitors are halfway down the track. No wonder then that India's lively business press keeps demanding a faster pace, to the irritation of officials trying to provide it. Prime Minister P.V. Narasimha Rao told FORTUNE: "Each country has to find its own rhythm and pace. As a person trying to keep my finger on the pulse of the people, I am depending on sound judgment rather than induced fantasies.'' For an indication of how much India is changing, leave behind the garish fast-food joints (McDonald's won't arrive until next year) with names like Hurry Curry and Hasty Tasty in the big cities to see the money being made in rural markets. Pooyransh Saini's 8-by-6-foot store is in the village of Kotputli in the northwestern state of Rajasthan. Rural consumers once made do with anything, but TV is making them brand conscious. Grumbles Saini, sitting cross-legged on the floor of his store: "If you don't stock what people see on television, you lose customers. It's a real nuisance.'' Minutes later an elderly gentleman, his forehead smeared with ash in the manner of a devout Hindu, ambles up to the store. He asks for Surf, the detergent made by Unilever's subsidiary Hindustan Lever. Saini is deferential enough but brings back a one-kilogram pack of a cheaper, local brand called 555. When his customer insists on Surf, with some reluctance Saini produces a pack. Today, even in this Indian village where you compete for parking space with grouchy camels, brand loyalty is taking hold. Observes Titoo Ahluwalia, who heads India's largest market research firm, MARG: "Purchasing power is only partly a function of affluence. It is also a function of attitude.'' American companies, reveling in an environment where business is conducted , in English, have been especially adept at forming alliances with the best local firms to tap the Indian market. Says Paolo Fresco, GE's vice chairman: "We begin with the acknowledgement that we can learn as much from them as they from us.'' GE's appliances and industrial-plastics joint ventures are headed by managers from their partner companies. A similar flexibility applies to brand names. Although GE's every move is breathlessly reported in India's financial press, the company is virtually unknown to the Indian consumer, while Godrej, its partner in appliances, is a household name. Says Scott Bayman, head of GE's Indian operations: "That brand has a 40% market share in refrigerators. Why would we change it?" Intellectual capital -- Wall Street smarts -- was what Industrial Credit & Investment Corp. of India was after when it approached J.P. Morgan & Co. in the spring of 1992. The resulting investment-banking joint venture raised $2 billion in the primary markets last year and advised American clients on power projects and General Motors on its joint venture with the local Hindustan Motors. Charles Alexander, the tall Englishman who is deputy managing director of the joint venture, regards Indian financial markets as relatively well developed but sees a special need for Morgan's valuation skills as mergers and acquisitions bloom. For all its recent progress, India is unlikely anytime soon to achieve the super growth rates of the Tigers of East Asia or of China. The government's reluctance to fully privatize India's huge, inefficient public sector, and the tortuous process by which it is opening up infrastructure development stand in the way of faster growth. For the next few years growth will average just above 6%, which is only a little ahead of the pace of the 1980s. India's population growth rate of 1.9% annually means that per capita incomes will increase only about 4% a year. Still, India's overall GDP growth rate masks the dynamism of its corporate sector, which is growing at about 10% a year. Companies also benefit from the concealed purchasing power of India's underground economy. A legacy of the country's high taxes in the 1970s that made tax evasion a national pastime, the underground economy adds anywhere from 20% to 50% to the official GDP. The bloated public sector will continue to hobble the economy, in part because it controls much of the country's inadequate infrastructure. Power shortages are widespread. Ports are pitifully slow. Says GE's Bayman, whose ambitious target of $2 billion in annual sales in India from $250 million today rests in part on a flurry of proposed private power projects: "We can build world-class products here, but will we be able to get them to our customers? The answer is privatization.'' The government seems to agree, but there is a notable lack of speed and cohesion. Typically, the Finance Ministry forges ahead while other ministries lag behind or throw up obstacles. Given India's rowdy yet relatively resilient democracy, some businessmen seem satisfied, even supportive of the government's lumbering gait. Says Madhav Dhar of Morgan Stanley, which has 20% of its emerging-market portfolio investe in India: "It is difficult to do tough, antipopulist things in a country where nearly everyone is poor and everyone votes." That about sums up the Sisyphean struggle India has ahead of it. Any investor must count on some harrowing lurches along the way. The ruling Congress Party now has a majority in Parliament and looks stronger than it has in the past three years. Should it be upset in general elections in 1996, the leading opposition party, the militant Hindu Bharatiya Janata Party, will be pro-business too, though it might prove less receptive to foreign investment. A recurrence of the kind of bloody religious rioting that brought Bombay to a standstill more than 18 months ago is a perennial risk. Even as a flood of foreign money helped push up the Bombay stock market last February, carpenters were finishing repairs as a result of a massive bomb blast 11 months earlier.

AT THE SOUTHERN END of the city is a pier where 16th-century travelers got their first glimpse of Bombay. After the Portuguese gave Bombay to Charles II as part of his bride's dowry, the tradition continued. The last British soldiers departed from the same pier when India became independent in 1947. Today, from the charming old hotel that overlooks the Arabian Sea, many foreign businessmen look out on an odd disarray of small yachts in the muddy water. Last spring the water was so brown and the tide so imperceptible that the boats looked as if they were mired in mud. This strangely static scene seemed a melancholy metaphor for the Indian economy, straining against its legacy of colonialism and socialism, heaving under the weight of a teeming population. Then a couple of boats cast off their mooring lines. Their sails caught the wind, and they quickly sailed into the morning sun. It was difficult not to feel hopeful, at least for the moment.

BOX: PROMISING SIGNS

-- The world's fifth-largest economy based on purchasing-power parity is courting foreign investors. -- American companies, who account for about half the foreign direct investment in India, are snapping up the best local companies as joint-venture partners. -- Government approvals for new ventures that once took years now come in weeks. -- The middle class, estimated at 100 million to 300 million, is eager for Western products.