In five-star hotels on Mumbai's seafront, children of the rich squeal joyfully as they play hide and seek. Nearby, at the National Theatre for the Performing Arts, people arrive for the Mumbai literary festival: famous authors and notables from India's Raj class. They step deftly over a woman lying across the pavement, her birch brooms laid out for sale, her two children silhouettes in a banyan tree that is their home.

It is Children's Day in India. On page nine of the Times of India, a study reports that every second child is malnourished. Nearly 2 million children under the age of five die every year from preventable illness as common as diarrhoea. Of those who survive, half are stunted owing to a lack of nutrients. The national school dropout rate is 40%. Statistics such as these flow like a river permanently in flood. No other country comes close. The small thin legs dangling in a banyan tree are poignant evidence.

The leviathan once known as Bombay is the centre for most of India's foreign trade, global financial dealing and personal wealth. Yet at low tide on the Mithi river, people are forced to defecate in ditches, by the roadside. Half the city's population is without sanitation and lives in slums without basic services. This has doubled since the 1990s when "India Shining" was invented by an American advertising firm as part of the Hindu nationalist BJP party's propaganda that it was "liberating" India's economy and "way of life".

Barriers protecting industry, manufacturing and agriculture were demolished. Coca-Cola, Pizza Hut, Microsoft, Monsanto and Rupert Murdoch entered what had been forbidden territory. Limitless "growth" was now the measure of human progress, consuming both the BJP and Congress, the party of independence. Shining India would catch up China and become a superpower, a "tiger", and the middle classes would get their proper entitlement in a society where there was no middle. As for the majority in the "world's largest democracy", they would vote and remain invisible.

There was no tiger economy for them. The hype about a hi-tech India storming the barricades of the first world was largely a myth. This is not to deny India's rise in pre-eminence in computer technology and engineering, but the new urban technocratic class is relatively tiny and the impact of its gains on the fortunes of the majority is negligible.

When the national grid collapsed in 2012, leaving 700 million people powerless, almost half had so little electricity they barely noticed. On my last two visits, last November and 2011, front pages boasted that India had "gatecrashed the super-exclusive ICBM [intercontinental ballistic missile] club", launched its "largest ever" aircraft carrier and sent a rocket to Mars: the latter lauded by the government as "a historic moment for all of us to cheer".

The cheering was inaudible in the rows of tarpaper shacks you see as you land at Mumbai airport and in myriad villages denied basic technology, such as light and safe water. Here, land is life and the enemy is a rampant "free market". Foreign multinationals' dominance of food grains, genetically modified seed, fertilisers and pesticides has sucked small farmers into a ruthless global market and led to debt and destitution. More than 250,000 farmers have killed themselves since the mid-1990s – a figure that may be a fraction of the truth as local authorities wilfully misreport "accidental" deaths. In one district of Maharashtra, farmers die by the dozen every week.

"Across the length and breadth of India," says the acclaimed environmentalist Vandana Shiva, "the government has declared war on its own people". Using colonial-era laws, fertile land has been taken from poor farmers for as little as 300 rupees a square metre; developers have sold it for up to 600,000 rupees. In Uttar Pradesh, a new expressway serves "luxury" townships with sporting facilities and a Formula One racetrack, having eliminated 1,225 villages. The farmers and their communities have fought back, as they do all over India; in 2011, four were killed and many injured in clashes with police.

For Britain, India is now a "priority market" – to quote the government's arms sales unit. In 2010, David Cameron took the heads of the major British arms companies to Delhi and signed a $700m contract to supply Hawk fighter bombers. Disguised as "trainers", these lethal aircraft were used against the villages of East Timor. The collapse this week of Cameron's attempt to sell attack helicopters to India, a deal now mired in bribery allegations, exemplifies his government's biggest single contribution to Shining India.

India has become a model of the imperial cult of neoliberalism – almost everything must be privatised, sold off. The worldwide assault on social democracy and the collusion of major parliamentary parties – begun in the US and Britain in the 1980s – has produced in India a dystopia of extremes that is a spectre for us all.

Jawaharlal Nehru's democracy succeeded in granting the vote (today, there are 3.2 million elected representatives), but it failed to build a semblance of social and economic justice. Widespread violence against women is only now precariously on the political agenda. Secularism may have been Nehru's grand vision, but Muslims in India remain among the poorest, most discriminated against and brutalised minority on Earth. According to the 2006 Sachar Commission, in the elite institutes of technology, only four in 100 students are Muslim, and in the cities Muslims have fewer chances of regular employment than the "untouchable" Dalits and indigenous Adivasis. "It is ironic," wrote Khushwant Singh, "that the highest incidence of violence against Muslims and Christians has taken place in Gujarat, the home state of Bapu Gandhi."

Gujarat is also the home state of Narendra Modi, winner of three consecutive victories as BJP chief minister and the favourite to see off the diffident Rahul Gandhi in national elections in May. With his xenophobic Hindutva ideology, Modi appeals directly to dispossessed Hindus who believe Muslims are "privileged". Soon after he came to power in 2002, mobs slaughtered hundreds of Muslims. An investigating commission heard that Modi had ordered officials not to stop the rioters – which he denies. Admired by powerful industrialists, he boasts the highest "growth" in India.

In the face of these dangers, the great popular resistance that gave India its independence is stirring. The gang rape of a Delhi student in 2012 has brought vast numbers on to the streets, reflecting disillusionment with the political elite and anger at its acceptance of injustice and extreme capitalism's pact with feudalism. The popular movements are often led or inspired by extraordinary women – the likes of Medha Patkar, Binalakshmi Nepram, Vandana Shiva and Arundhati Roy – and they demonstrate that the poor and vulnerable need not be weak. This is India's enduring gift to the world, and those with corrupted power ignore it at their peril.

• This article was amended on 3 January 2014. It originally referred to the BJP slogan "Shining India". The slogan was actually "India Shining" and this has now been corrected.