The search for lost economic decades has brought us from Japan to the U.S. and Europe in recent years. It’s time to take it to India.

With its 5.3 percent economic growth, young population and vast potential, the world’s biggest democracy may not seem to be on the verge of a crisis. Look closer, though, at the political chaos in India and things come into focus: the odds of a lost decade are growing, with implications that would be ruinous.

Last quarter’s expansion was the weakest in nine years. That can’t be blamed just on Europe’s debt crisis, faltering U.S. growth or China’s slowdown. No, this slackening is the fault of Prime Minister Manmohan Singh and the inability of India’s leadership to bring about the needed reforms to an economy hamstrung by bureaucracy and entrenched interests.

Singh must get some credit for at least trying. He has backed efforts to allow foreign investment in supermarkets, airlines and other industries, and to reduce $8 billion of subsidies that contribute to the widest budget deficit among major emerging economies. These efforts have stalled, thanks mostly to his self-serving critics. And these days, that means Mamata Banerjee, who has rallied opposition to Singh’s plans. Among her more unhelpful achievements, she has made it harder for companies to buy land, setting back expansion plans by Tata Motors Ltd. and Infosys Ltd.

Alter Ego

If Joseph Schumpeter had an alter ego, one bent on halting the creative destruction that shucks off old stagnant industries to make way for the new, the chief minister of the West Bengal state would be it. She has emerged as the most strident opponent of the coalition government of which she’s a part. Not surprisingly, investors aren’t sticking around, sending Indian stocks down about 8 percent since the start of March.

Yet as wrong as Banerjee is on the economics, as retrograde as her ideas are in the age of globalization, she’s not the real problem. India’s political system is, and Singh’s failure to regain some semblance of control over it risks surrendering a decade of economic progress.

When will India’s leaders realize that growth alone isn’t enough? China’s authoritarian government can get away with ignoring structural flaws with impressive gross domestic product figures. The interesting thing about the scandal surrounding Bo Xilai, a former senior figure in the Communist Party, is that investors seem so nonplussed. The odyssey of rights activist Chen Guangcheng caused nary a ripple in markets. For all China’s troubles, investors have faith that policy makers are tending to the economy. India doesn’t have that luxury.

Asia’s third-biggest economy needs to constantly remind and convince investors that market liberalization is moving forward, even if progress is gradual and unsteady. Right now, India is failing miserably. With each passing day, Singh’s inability to marshal a consensus confirms the perception that officials in New Delhi are weak, distracted, indecisive and overwhelmed by divergent interests.

Banerjee is merely Singh’s most prominent headache at the moment. Her political star was burnished last month when U.S. Secretary of State Hillary Clinton visited Kolkata to pay obeisance to arguably India’s most powerful woman. That designation doesn’t go to Congress Party President Sonia Gandhi, which says much about how India’s unruly provincial interests are determining the debating terms while India’s government is in disarray.

Granted, Banerjee has her supporters. The forces of globalization are proving to be less benevolent and benign than once advertised. And it is true that India’s stability following the collapse of Lehman Brothers Holdings Inc. in 2008 was widely attributed to tight regulations and an economy that is more closed than those in East Asia. Yet the lack of reform isn’t just a drag on growth; it might forever tarnish the “India Shining” narrative promoted in a marketing campaign that looks more outdated than ever.

Economic Shakeup

A broad economic overhaul seemed plausible back in mid-2009 when Singh won re-election with a solid mandate. Many bright-eyed observers, including me, thought the former central-bank governor who masterminded a set of market changes in the 1990s that propelled India’s rapid growth would shake up the economy.

Three years later, India is behind schedule on reforms, imperiling the longer-term possibility that it might catch up to, or even trump, China some day. A reasonable argument can be made that based on demographics alone, youthful India with 1.2 billion people could surpass the growth rates of aging China a decade from now. Not if India’s dysfunction continues to sabotage its potential.

India needs some serious creative destruction, far beyond what Schumpeter had in mind when he championed market forces exacting the change that only unfettered competition can bring. None of it is occurring.

India even risks losing its investment-grade status. Standard & Poor’s cut India’s credit outlook to negative from stable in April, saying the political environment is “unfavorable.”

If India were more focused on broad reforms, Banerjee’s antics would be a sideshow. Singh needs to make sure that India has coherent policies and the political support to see them implemented. There’s no question that capitalism can be a harsh taskmaster, and that checks and balances are needed in a nation where two-thirds of the population lives in extreme poverty.

Yet without taking some risks that might lead India to a higher growth path, the economy will lose altitude, poverty will increase and, far from shining, much will be lost.

(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)

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To contact the writer of this article: William Pesek in Tokyo at wpesek@bloomberg.net

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net