India’s recent fall from macroeconomic grace is a lamentableturn of events. After many years of outperformance, GDP growth has slowedsharply. Annual output will most likely rise by less than 5% this year, downfrom 6.8% in 2011 and 10.1% in 2010.

Reform has stalled amid profound political paralysis. All of the major emerging economies faceweakening external demand, but India’s slowdown has been exacerbated by a drop in investment that reflects adeeper loss of official direction and business confidence. Even the International Monetary Fund’s forecastof a modest improvement in 2013 is predicated onthe government’s ability to breathe life into a spate of stalled economic reforms.

India’s recent torpor has underpinned aremarkable shift in global opinion. Just a couple of years ago, India wasdeveloping a reputation as the cool place to invest. Heads of state trippedover one another to meet business leaders in Mumbai, hoping to pave the way for a significant expansion of trade andinvestment. Now their interest has faded, along with the macroeconomic numbers.

And yet changes currently afoot might justturn things around. India’s octogenarian prime minister, Manmohan Singh, hasrecently awakened to the desperate need for renewed momentum. Economists aroundthe world have taken note of the arrival of Raghuram Rajan as chief economist in the financeministry. Rajan is a superstar academic researcher, a brilliant writer onpolitical economy, and a former chief economist for the IMF. But it is far from obvious that Sonia Gandhi, President of theIndian National Congress and the country’s most powerful politician, sharesSingh’s reform agenda.

True, the cabinet is being reshuffled toelevate younger ministers. But the process points to a continuationof the tradition whereby most ministers are appointed on the basis of their loyaltyto the Gandhi family rather than their merit and accomplishments.

Unfortunately, for a country as poor as India, only sustained rapid growthcan lead to enduring development gains. India’s poverty rate (an indicator thatis admittedly both conceptually and practically difficult to measure) fell byhalf between 1981 and 2010, to just under 30% – a remarkable achievement. Butfaster-growing East Asia has experienced significantly greater progress, withthe poverty rate falling from 77% to 14% over the same period.

Why has India’s growth acceleration fizzled?For many years, India benefited from the long-lasting impact of economicliberalization in the early 1990’s. Back then, Singh, as finance minister,played a central role. He could count on the IMF – which had real policyleverage, owing to India’s need for a bailout program in 1991 – to provideexternal support to counter the huge internal obstacles to reform. Today,however, there is no external counterweight tothe domestic political pressure that is stalling further liberalization.

True, India’s government must now consider growing threats to thecountry’s investment-grade credit rating. The major ratings agencies are increasinglycomplaining about the country’s lack of a growth strategy and its outsize budget deficits. But the impact has beenlimited, owing to the authorities’ ability to stuffdebt down the throats of captive localbanks, insurance companies, and pension funds.

Indeed, this “financial repression” tax on domestic savers remains a huge opaque source of funding for India’s debt-riddengovernment. It also prevents funds from being channeled to private-sectorinvestment projects with far higher rates of return than the government canoffer.

The good news is that, from an economic perspective, there is still plentyof low-hanging fruit for restoring growth.Although India is right to avoid taking financial liberalization to the extremethat the United States did in the decades before the recent meltdown, it can doquite a lot without assuming inappropriate risks, as a commission headed by Rajandetailed a few years back.

The retail sector is a huge source of inefficiency that effectively placesa massive tax on India’s poor by driving up prices. Instead of suing foreignretailers like Wal-Mart, India should be finding ways to emulate and benefitfrom their hyper-efficient methods. Infrastructure is slowly improving, butroads, ports, water access, and the electricity grid are still horrific across large parts of the country.

Of course, India’s democratic government cannot simply bulldoze through people and the environment to createinfrastructure. But the obstacles also include layers of corrupt bureaucratsand politicians – a vast network of resistance to reform.

Some argue that central-government paralysisis inevitable in a democracy of 1.2 billion people, and that the only way tore-energize India is to establish a looser confederationof its constituent states. Devolution would unshackle the economically more successful states.And, by combating the culture of aid dependency in economically weaker states,India’s poorer regions might benefit in the long run as well.

As dysfunctional as a decentralized Europe seems to be these days, Indiamight benefit from moving a few steps in that direction, even as Europe itselfstruggles to become more centralized. Devolution might sound unrealistic, but once upon a time so did the European Union. If Singh’snew reform agenda is again blocked, perhaps it will be time for a more radicalassessment.