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The Mumbai slums where Danny Boyle shot Slumdog Millionaire are a world of surprises. There are the gaggles of uniformed schoolchildren running through unpaved streets, satchels bouncing on their skinny backs - they study only in the morning or afternoon so they can work for a living the rest of the day. There are the Dickensian factories and workshops you come upon as you stumble down all but lightless alleyways. There is the general feeling of security - despite their scary reputation among middle-class Mumbaikars, and the rarity of policemen, the slums are as safe for outsiders to walk through as most other neighbourhoods of the city. Most of all, there is the strange way that the slums seem much less grim once you are actually inside them.

The population of Mumbai is at least 21 million, according to the last, inadequate census. More than half of them live in the city's 2,000-odd slums. Here, the term "slum" is a technical one. It does not just mean a poor or rundown area. It signifies a shantytown that has encroached on otherwise unoccupied public or private land. The slums are vast because they are made up of the hand-built homes of the millions who have come from all over India seeking work and a better life. Small new slums quickly grow around construction sites for buildings or new motorways to house the workers putting them up. Others appear suddenly on railway land or in areas left derelict by the closing of mills and factories that were once the economic engine of the city.

Though some well-heeled Mumbaikars resent the way many foreigners seem overly concerned with the slums, rather than impressed by the city's new skyscrapers, it is impossible not to notice them: the road from the airport goes past one of the worst, its shanties lining both sides of the highway. You can smell it long before and after you see it. Moreover, some of the city's smartest areas are abutted by slums.

The newer slums are like early-stage refugee camps: clusters of flimsy huts with blue tarpaulin roofs. The Mumbai-Hindi term for a slum - jhopadpatti - basically means a strip of huts (slumdwellers are jhopadpattiwallahs). In the older slums, mud huts have been replaced by brick houses, and floors added to make room for more workshops and bedrooms.

The worst corners are those that border on open land where the municipality dumps trash. I came upon one such corner on the edge of the Antop Hill slum, the area briefly seen in Slumdog Millionaire, when the hero meets his gangster brother at the top of a fancy new skyscraper. I walked from a newly-paved main street within the slum to a rubbish dump where children were picking rags. Here brick structures with corrugated iron roofs gave way to mud ones with tarpaulin covers. A municipal bulldozer sat motionless in a muddy, foul-smelling creek. Crowds of children ran out of the shacks to see the first foreigners to come to this part of the slum. All were clean-faced and wearing bright, clean clothes. One plump boy of about nine practised his English with me. I said to his aunt, who came from Uttar Pradesh in northern India, that the children were beautiful. She replied: "How can they be beautiful children when they are born and brought up in trash?"

The oldest and most infamous slum in Mumbai is Dharavi, the "Queen of Slums", which grew up around a fishing village on one of the city's original islands, beginning about 100 years ago. Sitting squarely in the centre of Mumbai, it is also the city's most prosperous slum; people actually commute to it for work.

Entering Dharavi via a narrow path, I found myself in a large complex of two- and three-storey workshops where young workers were recycling plastic rubbish. They were separating it by colour and quality, cleaning it, chopping it up and eventually melting it, all by hand. I climbed up to a rooftop spread with white plastic chips. The uneven roofs of the slum stretched out for what looked like miles, broken only by the minarets of mosques.

Further inside the slum, walking carefully along pathways less than two feet wide, I came to a small cavern with a furnace in the middle. Teenage boys were taking thin, tinsel-like aluminium strips from piles of sacks and turning them into ingots. The fumes were overpowering but the boys, their dark hair glittering with tiny specks of aluminium, wore no masks. Moving on, I came to a small open area with a tea shop, and then an alley that led on to a wider path and eventually to a road wide enough for a car. The people in this corner of the slum were Muslim: many of the men wore beards and white hats and there were women wearing full black burqas. While Muslims make up 17 per cent of the population of Mumbai, they probably account for 35 per cent of Dharavi's.

Since Slumdog Millionaire, the Mumbai press has rediscovered Dharavi, because the book on which it is based is set there (Boyle filmed in several slums around the city to create one that stands for them all). "Until the '80s, we used to write a lot about these things," says Kalpana Sharma, former Mumbai bureau chief of The Hindu and author of Rediscovering Dharavi. Then they simply dropped off the media's radar.

Dharavi is often called the largest slum in Asia, though several other Mumbai slums house just as many people - probably about a million - and stretch at least as far. It is crossed by two main roads, named according to their widths: "60 foot road" and "90 foot road". On one side it is bordered by huge pipes that lead into a canal carrying sewage. The oldest part is an area inhabited by potters from Gujarat who have been there for more than half a century. Not far away is a community of Tamil leather workers, Muslims and low-caste Hindus, who all come from the same area of Tamil Nadu. Their neighbourhood looks, feels and smells like a small south Indian village.

Dharavi has long had a reputation for gangsterism, largely because it was a headquarters for illegal distilling and liquor smuggling during the three decades when alcohol was prohibited. The city's mafias were decimated by police death squads and inter-gang warfare in the mid-1990s. Liberalisation dealt the coup de grâce: people no longer had to go to bootleggers to buy DVDs or Scotch. Within Dharavi, rates of petty crime are very low. There are too many eyes on the street for strangers to come in unnoticed or for muggers and thieves to get far.

Krishna Poojavi, my guide, told me that 71 per cent of the people here are said to have access to public lavatories; the rest use open ground. He said this was particularly hard for the women, who have to perform their ablutions before sunrise.

 

Krishna and his British partner at Reality Tours run a school in Dharavi. He told me that the children liked Slumdog Millionaire - they saw the Hindi version - but hated the name "slumdog", as do slumdweller organisations. This is understandable. The term was invented by the screenwriter, Simon Beaufoy, who seems to have ignorantly assumed that it would be believable as a derogatory but semi-affectionate nickname for young slumdwellers. But even "slumrat" might have been less offensive. You won't ever hear the word "dog" used affectionately in India. Unlike monkeys, elephants and of course cows, dogs have no religious significance and are disliked by both Muslims and Hindus. There are stray dogs everywhere you look in most Indian cities; though rarely dangerous, they are feared and persecuted. In 2007 the city of Bangalore sponsored the mass killing of tens of thousands of them.

The land beneath Dharavi is potentially enormously valuable. The municipality has a multibillion-dollar plan to demolish it, sell it to developers and rehouse those inhabitants who can prove they were living there before 2000. There is considerable opposition to the plan within the slum: the government promises to provide only 265 square feet per family and many jobs will be lost if all the factories and workshops are demolished.

The "legal" slums - those squatter camps and shantytowns that existed before 1995 - have a theoretical right to basic services, including water, sanitation, policing, the fire brigade and rubbish disposal. These services may be provided only fitfully and inadequately, but in places like Dharavi, water flows to the standpipes for four hours a day and electricity powers the TVs found even in the tiniest huts. These shantytowns cannot be demolished or moved without warning and compensation. This is not the case for the hundreds of thousands of pavement shacks put up by recent arrivals in the city, or the even poorer people who sleep on rags without any shelter. For them, to live in the slums is a dream.

This is not to say that the slums are not physically squalid and oppressive. They are. If anything, they are worse than you might imagine from the film. Its slum scenes, powerful and painful though they are, simply cannot convey the feel of the grit on your skin and the acrid smoke and fumes that assault your eyes. Most of all, you cannot imagine the smells. I found that the prevailing odour was not that of excrement, except when I passed an open drain or one of the evil-looking sewage-filled canals. It was the overpowering stench of rotting rubbish. In an older, more established section of the Antop Hill slum, a young bearded man in a clean white kurta pyjama introduced himself as Taj Mohammed, a local leader and third-generation resident. He showed us around his neighbourhood, beginning with the public lavatory and ending with one of three back-street cinemas. All the concrete or brick buildings were raised a few feet above the ground to protect the inhabitants from monsoon flooding. "The toilet costs two rupees. The video costs 10 rupees," he said. (A standard bus fare is three rupees - and there are about 70 rupees to the pound.) There were many signs advertising mobile phones. Echoing the film, which he had not seen, he said: "This is the heart of India."

The ubiquity of the slums and their importance to the city's economy makes it all the more bizarre that their brief and sanitised depiction in a successful, award-winning Indo-British film should have provoked howls of protest as well as enthusiastic reviews. One academic was widely quoted as saying that Slumdog was "the white man's imagined India. It's not quite snake charmers, but it's close." Film producer Arindam Chaudhuri wrote that it is "just every scrap of dirt picked up from every corner and piled up together to try and hit back at the growing might of India."

It is of course true that the film "distorts reality". Latika, sold to a pimp at 12, would be unlikely to remain a virgin so far into her teens. While it is no distortion to depict homeless children becoming the slaves of beggar-masters, and the blinding of children to become more effective beggars certainly happened in the past, such maiming is said to be much less common today. Perhaps the ultimate distortion of the film is the standard movieland way it shows good triumphing over evil.

As Kalpana Sharma points out, many elite Indians are deeply ignorant of the slums and their inhabitants. "They are the ones who need to see this film. Many people have no idea where their servants live. They don't know that their driver, comes from a slum every day." Certainly, I found that people who have some experience of the slums tend to be less offended by the film than those who have never entered one.

Unlike previous films by foreigners or Indians touching on sensitive subjects, Slumdog has not been banned; nor has it provoked riots. Indeed, it has done relatively well for a foreign film in India, especially given the massive availability of pirate DVDs in the weeks before it opened, the preference of Indian mass audiences for escapism, and the familiarity of a poverty that seems much less exotic and colourful when it is part of everyday life.

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