This is going to be a long one, so try to stay with me.
First and foremost, do not get information on India from Western, Muslim, or Communist sources (that includes so-called Indians themselves who are disillusioned with their identity).
The NYTimes, among other publications from the West, are awfully lazy when it comes to reporting on India; they rely on stereotypes, superficial analysis, and an archaic mindset (of many Cold War bureaucrats from the West) when analyzing India which is extremely complex and unequivocally the most diverse civilization on the planet.
Anyway, on to a short "primer" of (recent) Indian history.
India, since ancient times, developed an advanced civilization that gave rise to many of the foremost discoveries of mankind. Philosophy, astronomy, mathematics, and statecraft among many other things.
If we are to look at India in epochs, we can classify it in four distinct stages; initially a diverse society of various kingdoms that were bound by the common thread of Hinduism that included present-day eastern Iran, Afghanstan, Pakistan, Nepal, Bangladesh, Bhutan, Myanmar, and of course, present-day India. The second stage in Indian history is the Jain/Buddhist period (from circa 6th century BCE). This, although considered as "part" of Hinduism (as an umbrella), represented divergent philosophies from the ones prevalent at that time (there are 6 main schools of thought within Hinduism, Jain and Buddhist form two more and the last one is atheist called Carvaka).
The Buddhist period saw a rapid rise in "soft" expansion - Buddhism being spread from the far corners of Afghanistan to southern India and of course, all of South-East and East Asia. During this "Buddhist" period, India saw tremendous growth in all sectors of society; it was the foremost place on the planet as far as human potential was concerned. The first university in the world, called Takshashila (in present-day Pakistan), was the center of learning for scholars around the world. Nalanda was another well known university that was created in the latter half of the 6th century CE.
The third period in Indian history begins with the Muslim invasions in the beginning of the 8th century CE (712CE by Muhammad bin Qasim from the Ummayad Caliphate from Damascus, Syria). This began the cataclysmic decline of India over a long and bloody millenium.
The fourth period in Indian history is the British invasion India through the East India Company (East Empire Company of Skyrim? LOL). Their rule was officially from 1858 to 1947 but the East India Company dug its claws into India from the early part of the 17th century CE.
It is not a coincidence that the two main industries of the "Industrial Revolution" started with steel and textiles; both of which were the forte of India (metallurgy and textiles of various kinds).
Christopher Columbus, after the expedition of Vasco da Gama to India, was desperate to find India. In those days, all roads led to India. That is why India was invaded repeatedly (by Alexander of Macedonia, then the Muslims, then the Portugese and British).
I will leave this video here for you to watch:
http://youtu.be/xRloJjKQa70
A well-known journalist, S Gurumurthy describes not only the accurate history of India, economically speaking, but the lacunae in the mindset of Indians themselves today - hence the hilarious title of the video.
The simple fact is that for the past 150 years or so, India more or less has been an economic basket case primarily due to the repeated invasions starting from the 8th century to the 20th century as well as centrifugal forces that were exacerbated by the British in making Indians severely divided and disunited. For instance, prior to the British' arrival, Indian society was comprised of around 300 "castes" (jati is the correct word for occupational based division of labor/lifestyle). The British conducted the first census in India in 1871 and created more than 6000 castes. They had a caste for robbers called "Cullers". LOL..
Couple this with an eviscerated economy, Indian society was ripped apart, its educational system in tatters, and its so-called intelligentsia modeled after foreign systems not only alien to India, but actually inimical to it.
According to Angus Maddison, India's economic output from 1 CE to 1600 CE was more than 1/4th of the world's output. China was ahead for about a century until around 1700. Then India again overtook China and led the world economically until 1830. This study, btw, was conducted under the auspices of the OECD countries (26 richest nations on the planet today).
The industrialization of Europe was directly proportional to the deindustrialization of India (and China to some extent).
India has always been a decentralized society; decentralized religion (Hinduism), and decentralized governance - "panchayat" style where each village was a self-sustaining entity and the suzerainty of the monarchs had little direct effect on the villages themselves.
It is impossible to capture the wonder that is India in a few posts or even a few books. One must do one's own research and arrive at one's conclusions.
Some books I recommend are:
1.) Breaking India by Rajiv Malhotra -
http://www.breakingindia.com/
2.) Being Different by Rajiv Malhotra -
http://beingdifferentbook.com/
Indian society today, formulated laws based on foreign societies (England) and its sense of self leads to confusion for most Indians.
Many Indians have no clue as to the history of their country; they have been told what to think of themselves and their society and history by foreigners who have neither known India nor ever visited it!
Watch the video I linked to above - it presents a succinct answer of the very question you asked.