Infrastructure deficiencies pose the biggest challenge to the retail sector plans of Indian conglomerates like Reliance and the Rahejas, says Simon Long, the author of The Economist 's 12-page report on doing business in India. He says that when he was hearing Mukesh Ambani spelling out his vision to establish a nationwide retail network of 1,000 hypermarkets and 2,000 supermarkets in the next four years, he couldn't help thinking about the terrible state of the cold chain.

"So defective is India's cold chain and so arduous its inland transport that, at present, as much as 35-40 per cent of fruit and vegetables grown in the country rot before they can be eaten," says Long in his well-researched report. He goes on to point out that even a "huge venture such as that planned by Reliance would leave most of the 600,000-plus villages untouched."

Citing an example to illustrate the supply-side constraints confronting India's economy, Long tracks the progress of a truck carrying cargo from Kolkata to Mumbai, a distance of 2,150km. It takes the lorry eight days to negotiate the journey, progressing at the speed of 11km an hour, spending 32 hours waiting as 26 toll booths and checkpoints.

Even though the Golden Quadrilateral project linking India's four extreme corners has taken off, only 9% of India's 65,000km of highways have two lanes in each direction and a third of the population doesn't have access to all-weather roads.

Electricity supply, according to Long, is the most acute crisis confronting the Indian infrastructure sector. Almost daily, the peak supply falls 11% short of demand, despite the huge suppressed appetite for electricity - 56% of households do not have connections.

"In the interests of justice, more and more people will have to be provided electricity in their homes. Where will it come from? How will capacity be built that quickly?" Long asked, as our car drove past the chimneys of power-hungry Delhi's principal supply stations.

To be able to sustain an annual growth of 8-9%, according to a Morgan Stanley study that Long quotes, India will have to spend US$100 billion a year on infrastructure. But where will this money come from? The Survey doesn't have an answer. No one else seems to have a clue.

The survey also points out that the country's greatest strength - a vast pool of well-educated talent - may be under tremendous pressure.

Quality and numbers are the issues central to the looming crisis, which, says Long, "may not be a constraint now, but could become an obstruction within the next five years."

The country's education system produces 441,000 tech graduates, nearly 2.3 million other graduates and more than 300,000 post-graduates every year, but Nasscom President Kiran Karnik is quoted by the survey as saying that just "one-fifth of them are world class, one-fifth passable and three-fifths lamentable."

Two essential qualities - teamwork and oral communication skills - don't find any place in the education system. And as Pramod Bhasin, boss of the biggest BPO firm, Genpact, explained to the report's author, "the college curriculum bears no relation to real work, and new graduates lack even the discipline to turn up on work on time."

As the demands on the country's outsourcing industry mount because of the shortage of people qualified to do white-collar job in developed nations like the US, this disconnect is going to hurt. The companies are on a hiring spree. "Wipro and Infosys each employ more than 50,000 people, and this year are planning to recruit, respectively, 15,000 and 25,000 more. TCS has 63,000 and plans to hire 30,500 more," writes Long, an Oriental scholar from Trinity who worked as an investment banker in Singapore before joining The Economist and becoming its China expert.

Much of this hiring is also to offset the phenomenally high - 30% - churn rate of the industry, which means one in three BPO workers settles for a new career altogether. It's hard for any educational system to respond to these demands. Nasscom-McKinsey forecasts a shortfall of nearly 500,000 capable graduates by 2010, with the BPO sector much worse affected than the IT-enabled services. Already, IT companies are facing a serious shortage of experienced project managers, resulting in the problem of a high attrition rate - managers are changing jobs faster because the demand for them is far higher than the supply.

This quality crunch will be felt increasingly as the world comes knocking on the country's door for jobs requiring more than the basic skills that keep the average call centre staff going.

The world spends more than US$250 billion on legal services a year, two-thirds of it in America . The market for outsourced legal services, from filing patents to documenting contracts, as a result, is growing rapidly.

In pharmaceuticals, the market for outsourced clinical trials is expected to reach US$1 billion a year by 2010.

These new areas require technical knowledge of a high degree. In the new international marketplace, although, to quote the Boston Consulting Group, the typical annual salary for an Indian IT engineer is US$5,000 and for an MBA US$7,500 - about one-tenth of their American equivalents - Indians are not expected to be less qualified just because they're paid less.

It's not enough for India , as a Nasscom-McKinsey study points out, to have 28% of the world's pool of suitably qualified people. The emphasis is moving increasingly to the words "suitably qualified". Long said that the talent crunch was likely to get worse in the other rapidly expanding sectors, particularly retail and hospitality, because more and more talented young people were being drawn into the BPO and IT industries, which are perceived to be more glamorous.

Baba Kalyani, the man behind Bharat Forge, the world's second-largest manufacturer of forgings for car engine and chassis components behind Thyssen-Krupp of Germany, pointed out to Long that in Pune, "more than twice as many engineers were hired last year than those who had graduated from the many colleges - and attrition among employees in their first two or three years, at 25-30%, is as high as in the service industries."

Add restrictive labour laws to the problem of a scarcity of suitably talented people and you have an explosive double whammy hitting the manufacturing sector, which, despite its low profile, "contributes a much higher share of GDP (16 per cent) than IT does; it is the source of 53 per cent of exports (compared with 27 per cent from services); and it's the destination for four-fifths of foreign investments."

The bad news for a country that's adding 70 million people to its labour force in the next five years is that big manufacturing companies are now employing large-scale automation to unburden themselves from Chapter 5B of the Industrial Disputes Act, 1947, which bars companies with more than 100 workers from laying off workers without the permission of the state governments.

In a country that has become the magnet of the world because its labour force is perceived to be both cheap and talented, the manufacturing industry is opting for capital-intensive automation because of labour laws designed to protect the interests of the working class.

Long quotes Atul Kirloskar, boss of the Kirloskar Oil Engines Limited, which, apart from adding 100 people in 1994-95, hasn't hired since 1982. The average age of its workforce, numbering 2,000, is 47; such is the degree of automation that one of the workers manages 27 machines.

Likewise, the country's top garment exporter, Bangalore-based Gokuldas Exports, has 42,000 workers and is adding 5,000-6,000 more every year. Were the laws changed, it might add an extra 2,000. "These are precisely the sorts of jobs that India needs in the greatest number," says Long. He quotes the Confederation of India Textile Industry (CITI), which pointed out that even though the government's national rural employment guarantee scheme promises only 100 days' work at minimum wages to households in the poor districts, the industry was being prevented from hiring workers on contracts of five or six months.

In 12 information-packed pages, The Economist's report diagnoses the problems that don't seem apparent to a casual observer of the country's economy. It comes as a reality check at a time when, to quote Long's phrase, India's "gung-ho" business media is playing up success stories, without looking at the warts that get ignored in the resultant euphoria.