>the reality is that we are a dirt poor country with not just deep institutional problems, but also moral and psychological ones.
I was searching for the words to express this for more than ten minutes before I read your comment. The key here is 'moral and psychological problems'.
To cite just one example, there was a lot of ruckus about the 2G Scam and the Lokpal bill recently. We believe that the guy who got 17200 Crore rupees in kickbacks is a corrupt SOB and should be punished to the maximum extent, but when it was revealed that a leading anti-corruption crusader was actually stealing money from the sponsors who invited her for talks, we dismissed it as a 'small amount'. This kind of 'it's not a crime if its done at a small scale but it's a crime if its done on a large scale' mentality is present among nearly everyone.
Also, another huge problem with Indians is that we as a people do not wish to risk anything. As a result we will never fight for something that should be rightfully ours (like a Government that does it's job). Urban voters are generally brainwashed by the charisma of our politicians or are bought wholesale with a few thousand rupees and a bottle of liquor. Rural voters don't really care who they vote for. As a result we keep alternating between the same two sets of thugs. Will we get out on the streets and protest for better governance like the arabs did? Never.
So, the West can paint many pretty picture and call it India, but this is a country in massive disarray, and the fact that it hasn't already collapsed is purely by chance.