BANGALORE, INDIA -- When Udayant Malhoutra graduated from college in Bombay seven years ago, his father sent him to this south Indian city to revive the family's ailing hydraulic equipment plant. His dad got a bargain.

Malhoutra computerized the company, introduced strict quality controls, adopted Japanese management techniques and implemented other improvements that boosted sales 500 percent and transformed the company into the largest such manufacturer in India. In his spare time, he started a biotechnology firm that clones genetically superior plants. The first crop of 3 million trees, shrubs and flowers, due later this year, is already sold.

Malhoutra -- Toby to his friends -- represents a new breed of Indian entrepreneur, dedicated to free-market principles, eager to compete in international markets and enthusiastic about India's new economic outlook.

Some of the world's largest state-run economies -- particularly India and its huge Communist neighbor, China -- are embracing free-market practices to persuade the West they are not hostile to capitalism. Their long-term aim is to tap into global markets and attract foreign aid to upgrade local infrastructure, develop new industries and eventually improve the standard of living and quality of life for more than a third of the world's people.

It is no coincidence, Malhoutra said, that his companies and other high-tech businesses like them -- particularly American computer giants -- are establishing operations in Bangalore, known here as the Silicon Valley of India and considered a prototype for the country's future.

"I can hire the best people in India simply by saying, 'You're going to work in Bangalore,' " said Malhoutra, 27, who aims to make his two companies, Dynamatic Technologies Ltd. and Greenearth Biotechnologies Ltd., the largest of their kind in the world. "It represents a vision of people who are non-parochial and non-fanatical."

Island of Affluence, Stability

Bangalore, a city of 4.2 million with bustling shopping boulevards and gleaming office towers blazoned with Fortune 500 logos, is an island of relative affluence and social stability in this ancient land. India has a long way to go before overcoming its international reputation for civil disorder, hostility to foreign investment, shoddy workmanship and poor quality of life. Poverty, pollution, overcrowding and corruption are pervasive.

Bangalore, however, is debunking such images. For the Indian elite, it is a model of success that could be repeated as the country liberalizes its economy and enters the world market.

For a growing number of multinational companies -- drawn by Bangalore's temperate climate and low-wage but well-educated labor pool -- the city is the best place to do business in India: IBM, Texas Instruments, Motorola, 3M, Digital, Hewlett-Packard, Citicorp, VeriFone and numerous other high-tech firms have opened offices here.

"There are some power problems, but there are no demonstrations, no violence, no turmoil," said Michael D. Klein, president of IBM's new Bangalore-based joint venture, Tata Information Systems Ltd.

"Bangalore is the most developed city I've seen in India," said Jonathan Bensky, commercial counselor for the U.S. Embassy in New Delhi, which recently opened a commercial office here because so many American firms are setting up shop. "It's got a lot of salaried people making a lot of money. It's got 150 to 200 pubs. There's no other city with that type of night life and upwardly mobile yuppies making that kind of money."

Situated on a 3,000-foot plateau 200 miles west of Madras, Bangalore needs little air conditioning. Dust storms are unheard of. Known as the Garden City because of its tropical plants and lush shade trees, Bangalore was a popular colonial cantonment, and many British and Indian army officers retired here.

British Times Not Forgotten

As a result, the city was bequeathed a strong education system and a nostalgia for things British that seems odd in a country that has spent much of the 46 years since it gained independence trying to nurture an Indian identity. A statue of Queen Victoria stands in the city's main park. Many streets are named after British commissioners rather than Indian patriots. The elite 125-year-old Bangalore Club, which elected its first Indian president in 1962, remains the pinnacle of Bangalore society.

"This isn't a throwback, it's a throw forward," said M. D. Nalapat, editor of the Bangalore edition of The Times of India. "In Bangalore, the old traditions of the empire are still intact. "This is a city totally unapologetic about its ties to the West, and that's why the West is so at ease here. It's a mood that promotes development."

Driving through sections of Bangalore, visitors can forget, momentarily, that they are in India. Police officers wearing white gloves and cowboy hats direct traffic; women in short skirts ride motor scooters. Cocktail lounges serve imported liquor.

Shopping, American Style

There is a love affair with things American. On the shopping boulevards, Charlie Brown and Dennis the Menace posters advertise children's clothing. There is a Park Avenue Retail Shop, Guzzlers Inn Pub, Wise Guy Clothes and Yankee Doodle Ice Cream Parlour.

On a recent evening, one of India's few compact-disc outlets blared "House of the Rising Sun" through the 5th Avenue Shopping Mall. In a second-floor window display, mannequins modeled coats and ties in front of a huge American flag, and a sign urged shoppers to "Create the American Look!"

At a pub called NASA -- "Bangalore's high-tech pub," according to the sign outside -- waiters in space suits with American flags sewn on the sleeves serve "liquid inflammables" -- drinks such as the "Tom Cruise," "ICBM" and "Stealth Bomber," a concoction of five liquors. "The whole thing is very American, and the crowd doesn't mind that rubbing off on them," said owner Ashok Sadhwani.

Despite the affluent sheen, however, there is still much here to remind visitors that no city in India is immune from poverty and backwardness. The population is exploding, beggars still plead for money, slums are spreading, land prices are rising. As in the Washington suburbs, pollution and traffic congestion are fueling an anti-development backlash.

Most troubling for Western firms are poor telephone communications and an erratic power supply that forces many companies to install generators. Water is sometimes in short supply, and the airport does not provide international service.

For the most part, however, Bangalore is proof that success begets success. Drawn by the city's moderate climate and excellent schools, research institutes began sprouting here as early as the 1920s. Electronics firms that needed a dust-free environment arrived.

When India nationalized many of its most important industries after independence in 1947, Hindustan Aeronautics Ltd., manufacturer of all the country's air force planes, opened up plants here. Engineering schools bloomed. The state telephone industry moved in, and so did the country's nuclear and space research industries. Suppliers in the private sector followed.

As Bangalore's stock was rising, Bombay's was falling because of its skyrocketing land prices, malignant slums, rising crime, industrial pollution and, most recently, bloody clashes between Hindus and Muslims.

Free Market Triggers Growth

When India launched its economic liberalization program in 1991 -- shifting from from a government-regulated system to free-market policies, dropping trade barriers and permitting foreign companies to own a majority share of ventures here -- Bangalore blossomed.

"Bangalore has succeeded because, like New York and the entire United States, it welcomes people with both arms," said Vijay Kumar, an official with Hinditron Tektronix, an Indian company that launched a joint venture with Oregon's Tektronix computer firm five years ago. "Today, I imagine that any U.S. computer company wanting to come to India will move to Bangalore."

Richard Gall, managing director of Texas Instruments (India), which opened an office in Bangalore in 1985, well before the current trend, is also positive about the city. "Bangalore has been on the leading edge from the very beginning," he said.

Gall said that a main advantage of operating here is the 11 1/2-hour time difference with Texas, which allows his office to patch into supercomputers in Houston and Dallas when they normally would be idle.

But while high-speed satellite relays now permit Western companies to tap into the expertise of Indian software engineers, the gradual dismantling of India's protective trade barriers is also making the domestic market a tempting target.

"India is a billion-dollar-a-year information-technology market with 15 to 25 percent annual growth," said IBM's Klein. "That's small for a population of this size. . . . I am convinced that as liberalization continues and the worldwide recession ends, India is going to be on the leading edge of the {computer} boom."

Nalapat, the Times of India editor, agreed. "In the 1990s, people are making fun of India, but in another 10 years, they're going to wake up."