Here are two stories about Britain's relations with India, both from the past month. One has been rinsed in the news cycle dozens of times; the other barely got a once-over. Yet it's the obscure story that matters – and that should alarm anyone who cares how this country behaves abroad.

Like I say, you'll know the first one, about Britain scrapping aid to India. You'll know it, because despite Justine Greening only making her announcement a couple of weeks ago, the decision has been trailed for over a year.

Journalists have had plenty of time to chew over the pros and cons: Delhi's space programme versus the fact that India is home to more poor people than all of Africa; I'd go on but you probably know all the words to this tune better than me.

What comes up rather less often is that the amount given away is just "peanuts", as India's former finance minister Pranab Mukherjee used to say. At £280m a year, Whitehall's aid comes to 0.03% of India's annual income. Whatever the rights and wrongs, this issue is much more about the one-time Empire fallen on hard times, than its former colony.

Yet just last month dropped a genuinely surprising bit of news, far more suggestive of how David Cameron wants to do business with the rest of the world – and which barely rated a few hundred words in the papers.

The foreign office despatched its man in India to Gujarat, to meet the western state's chief minister, Narendra Modi. And if that doesn't sound like a big deal, consider some of the other names freely used by enemies of the politician: India's Hitler, its Milosevic, its Pol Pot. Or remember this: for the past decade, Britain, along with the rest of the EU and the US, has boycotted the Hindu extremist for presiding over one of the worst massacres of Muslims independent India has ever seen.

The size of the pogrom is still disputed: around 1,000 killed according to official estimates, 2,000 or more according to independent researchers. But what's not controversial is that it was huge and that Modi did very little to stop the slaughter. His critics allege that he actively encouraged it.

At the end of February 2002, a train carrying Hindu pilgrims caught fire in the Gujarati town of Godhra. At the time, it was widely reported that the blaze, which killed 59 passengers, had been caused by Muslims; it has since been suggested that it may have been an accident.

Bad as that was, what followed was some of the most horrific violence ever seen in contemporary India. Hindu mobs rampaged through nearly the entire state, besieging and torching Muslim homes. Pregnant Muslim women had their bellies slit open with knives, and the foetuses pulled out. One prominent Muslim former MP was forced out of his home by a mob, stripped naked and paraded up and down the street, before his fingers and legs were chopped off and his body tossed on an open pyre.

Some of the murderers poured chemicals on their victims, the better to ensure their flesh was thoroughly burned off.

Amid all this bloodletting, most of the police stood by. Officers told victims: "We have no orders to save you." Luke Harding was the Guardian's correspondent in India at the time: at one village, he reported that policemen actively co-ordinated the attacks, accompanying marauders as they torched fields and shooting at the Muslim farmers who tried to stop them. According to an extensive report filed in 2002 by the NGO Human Rights Watch: "The attacks were planned in advance and organised with extensive participation of the police and state government officials."

Head of the local government, then as now, was Modi. At the very least, he did nothing to stop the bloodshed: "A modern-day Nero" in the words of the supreme court. But he also went on TV at the time to describe the murders as effectively brought on Muslims by themselves, and later described the refugee camps that afterwards housed thousands of homeless Muslims as "baby-making factories". A court-appointed senior lawyer recommended that the chief minister be prosecuted for hate-mongering.

Beyond all of that is the allegation, still being pressed by campaigners in court, that Modi actually ordered his police officers to allow the genocide to take place.

Ever since, Modi has been persona non grata in the west. The US refuse him visas; European diplomats will not shake his hand. Yet last month, for no obvious reason, the British government broke ranks and brought him in from the cold. For Modi, who contests state elections next month and wants a shot at running for prime minister in 2014, this was a massive boost. No sooner had he got the news than he convened a rally to announce that the British had rehabilitated him.

Ask government officials why, and you're given the same list of reasons: there are tens of thousands of Gujaratis now in Britain, there are British businesses already trading in Modi's state, and that the state is booming. Almost by rote, they'll chuck in the fact that London still wants justice for the three Britons killed in 2002. So forget about questions of aid; the Modi case really tells you how Cameron wants to get on with the rest of the world. Sure, he'll grandstand about human rights, but in modern, cash-strapped Britain, he'll do business with anyone – even if they have presided over a pogrom.

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