Women in India conventionally fall into one of two categories: those born into "good" families, and those who aren't. Beautiful Thing, Sonia Faleiro's brilliant investigative foray into the dance bars of Mumbai (or Bombay, as the author prefers), is both a coming together of those categories and a blurring of them. When Faleiro was researching the book she lived in the "Manhattan of Bombay"  the southern part of the city  definitely the right side of the tracks. Many of the bar dancers she interviewed were poor, uneducated young women who were either sold by a blood relative or raped by one, before running away to Bombay to make their own destiny. For a book that's so short, Faleiro manages to pack a lot in: pimps, gangsters, transvestites, cops and madams. But its most outstanding quality to my eye is the window it offers on the widespread sexual repression that exists in India today, and the murky middle-class morality that rules it.

Meet Leela, Faleiro's protagonist: "When you look at my life, don't look at it beside yours. Look at it beside the life of my mother and her mother and my sisters-in-law who have to take permission to walk down the road. If my mother talks to a man who isn't her son, brother or cousin, she will hear the sound of my father's hand across her face, feel fists against her breasts. But you've seen me with men? If I don't want to talk I say, 'Get lost, Oye!' And they do."

Leela is the highest-paid dancer at Night Lovers, one of the many dance bars on Bombay's Mira Road. She is 19, with a heart-shaped face and a foul mouth. Partial to Royal Challenge whisky, padded bras and kleptomania, Leela won't abide anyone "being bore". Her motto is: "Kustomer is cunt." Leela and her best friend, the beautiful Priya, think that because they make money dancing for men, they have something their mothers never had: freedom. But theirs is a curious kind of emancipation. They dream of being housewives and mothers even though they know no decent man will have them as they aren't "good" girls. Despite all the horrors they've been subjected to in their lives, they're still suckers for a happy Bollywood ending. They fantasise that one day a "hensum" man from a "bijniss family" will walk into the bar, fall instantly in love and say: "Your past is your past!"

Faleiro conducted hundreds of interviews over the five years she spent researching and writing about the world of dance bars, but the main subject of her narrative is Leela, and rightly so. Leela is an ideal character: witty, sharp, generous with her memories, and amazingly devoid of self-pity. It is Leela who helps Faleiro navigate the nuanced hierarchy of the sex trade: from the waiters at the Silent Bars who only give hand jobs, to the floating sex workers and call girls, to the massage parlour girls advertised on flyers and telephone poles. Among them the bar dancer reigns supreme, because selling sex is not her primary occupation; dancing is. The bar dancer is not a stripper or a lap dancer. She takes as her cue the courtesan, who charms and titillates in reward for money. Although the bar dancer's clothes may be revealing, they are no more scandalous than those of Bollywood's latest "item girl", with her plummeting cleavage and raunchy moves. Sex, if it happens, takes place outside the establishment, at the bar dancer's own discretion.

Faleiro shadows Leela and her friends to birthday parties and trips to the HIV clinic. She meets their clients and lovers, is privy to their secrets and tribulations. She even receives relationship advice from them: "Men want better than real life." For the most part, she's a subdued presence in her own book, recording lives and conversations with great sensitivity, allaying somewhat the reader's voyeuristic guilt. Occasionally, she passes judgment  on Leela's mother, Apsara, for instance: "Her idea of beauty was a plate of bhajjias or a new ball of wool." Or on the proprietor of Night Lovers: "Shetty thought soft toys stylish and he saw nothing peculiar about a man his age driving a car with a dancing chimp and a back window full of candy-coloured playthings."

Throughout, Faleiro maintains a wonderful ear for dialogue and a tone that is almost pitch-perfect, jarring only when she injects bar-girl-ese such as "bootiful" and "bijness" into her narrative. The real triumph of Beautiful Thing is how Faleiro dismantles the grand tradition of marriage in India, exposing it for what it is  a form of slavery for a large percentage of women who are bound to their husbands for food and the roofs over their heads, but rarely ever for love. Between the hypocrisy of the middle-class Maharashtrian housewives who let the local pimp and his girls in as soon as her husband leaves for work so they can use her premises in exchange for pin money, and the many middle-class men who offer false promises of marriage when they are already married, the voices of the marginalised are what ring most true in this book. "To be held," Priya says, "even in the arms of a thief, is worth something."

In August 2005, Faleiro writes, there were murmurings of a ban on Bombay's dance bars. By August 2005, an act was implemented, which prohibited dance performances in eating houses, permit rooms and beer bars, effectively forcing 75,000 bar dancers into unemployment or prostitution. The official reason for the closures was that places like Night Lovers were "dens of criminals likely to deprave the public morality". Dance performances in luxury hotels, though, continued uninterrupted, implying that the poor aren't entitled to the same fantasies as the rich, or the same moral code. The current situation of Bombay's dance bars is unclear. The ban was repealed by the high court in 2006 on the grounds that it violated the dancers' right to equality and the freedom to practise their profession. This judgment was appealed against by the state government in the supreme court, which issued a stay order. Recent news seems to suggest that the bars are making a comeback, subject to heavy policing and licence fees. Either way, the fate of bar dancers remains perilous.

Beautiful Thing is not an easy book to read. It will take you through dark, disturbing places without offering any real solutions for negotiating those territories. In a sense, this is the great limitation of nonfiction, which has the power to entice you with the truth, but lacks the ability to help you transcend it. Ultimately, you're left with the uncomfortable knowledge that when you close the covers of this book, you have the freedom to carry on with your own life, leaving the characters trapped in the contradictions of theirs.

Tishani Doshi is the author of The Pleasure Seekers (Bloomsbury)