FORTUNE — It’s a sunny day in Jaipur, a 300-year-old north Indian city famous for its historic forts and palaces, and a popular destination for tourists. Just the same, that sunshine doesn’t stop Ruchir Sharma from pointing out the rainclouds looming over India’s economy.
Sharma, the head of the emerging markets equity team at Morgan Stanley, is speaking before an audience of more than 200 at the annual Jaipur Literature Festival, a five-day long event in late January that brings together authors from all over the world.
Sharma is in Jaipur to discuss his book Breakout Nations, in which he argues that the slipping GDP growth rates among the large emerging economies — popularly known as the BRICs — are unlikely to stage a comeback this decade.
In suggesting this, Sharma joins a growing chorus of doubters of the great BRICs story, which was first introduced by Goldman Sachs economist Jim O’Neill in 2001 to describe the four nations — Brazil, Russia, India, and China — predicted to become the economic superpowers of the 21st century. The idea is that these four large emerging economics will overtake the large developed countries of the West in a blaze of economic glory. Over the past decade, the notion of the monolithic BRIC nations has become one of the most popular concepts in global political circles. Investors, companies, and policymakers have developed BRICs strategies. But recent economic data is on Sharma’s side, suggesting that a closer look might be called for.
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In Brazil, which has long been reliant on commodity exports, the current account deficit reached record levels at the end of 2012. China’s aging population suggests an end to the supply of cheap rural labor that powered its manufacturing boom. And in Russia, economic growth remains heavily dependent on oil, and wealth is still concentrated in the upper strata of its society. In India, where Sharma was born, the obstacles to growth appear even more difficult. GDP growth has slipped to 6% in 2011 from 9% in 2010.
India: Black sheep of the BRICs?
Even within the mismatched BRICs family, India is a redheaded stepchild. Ratings agency Standard & Poors puts India’s sovereign rating at BBB-, the lowest possible investment grade and the lowest among the BRICs. The country faces almost every challenge an emerging economy can face. A narrow elite riven by squabbles that stall almost all attempts at economic reform leads its government. The country’s population grows ever younger and more connected, while its politicians, by contrast, seem older and more out of touch, as the government’s recent attempts to curtail Internet freedom indicate.
Much of the country’s population still lives on farms, where yields languish far behind those in developed countries. Unlike the economies of the industrial revolution, where growth was propelled by booms in mechanization and manufacturing, India’s economy floated on the back of services exports and technology outsourcing, but this growth was hardly broad.
Sharma’s book suggests that the heady initial phase of India’s growth was not unique. The pre-recession availability of capital was a “rising tide that lifted all boats.” Almost all emerging economies experienced impressive growth. Now that the tide is out, India’s economy could go along with it.
Economic development is neither easy nor assured, for any nation. Of the 188 economies tracked by the IMF, only 35 have achieved “developed” status. The rest have struggled to sustain growth above 5% for more than a decade. Sharma points to Japan, which in the 1980s looked set to become the world’s foremost economic power, or Malaysia and Thailand before the Asian financial crisis of the late 1990s. “Failure to sustain growth has been the general rule, and that rule is likely to reassert itself in the coming decade,” he wrote in a recent article in Foreign Affairs.
As for India’s odds of defying this trend, “I give it about a 50/50 chance,” Sharma says.
It’s significant that Sharma attended the Jaipur Literature Festival. The growth of the festival over the past seven years — from 100 to 100,000 attendees — is as good a metaphor as any for the rising appetite among Indians for what was once out of reach, as well as the world’s increasing willingness to come to India. The challenges — and the necessity — of continued economic growth formed a recurring theme at this year’s festival.
In search of solid leaders
Of all the uphill battles that India faces, the search for solid political leadership will be the most challenging. On a national level, the past several years have been a disappointment. The appointment of Prime Minister Manmohan Singh triggered hopes that India might see another era of economic reform, similar to the one overseen by Singh and others in the early 1990s, which opened up the economy and catapulted India onto the global stage. Instead, recent legislative measures meant to rein in corruption and open up India’s retail sector to foreign investment have languished as Singh faced resistance from India’s parliament as well as from allies and leaders within his own party. Singh’s government became embroiled in one high-profile scandal after another, from 2G spectrum to coal mining allotments, leading to popular resentment and frustration.
With a round of elections coming in 2014, India’s political parties are searching for candidates who might appeal to the country’s young voters. But here, also, they’ve struggled to capture India’s diverse voter base, which is outgrowing the traditional divisions of caste and class. The dominant Congress Party has turned to Rahul Gandhi, son of the influential Gandhi-Nehru political clan, as its rising star. But Gandhi failed to deliver votes in a crucial state campaign he led last year.
Nor are things much better for the Bharatiya Janata Party (BJP), the Congress party’s primary opponent. As popular sentiment against corruption boils over, the party’s president — until very recently — was Nitin Gadkari, who was embroiled in a tax scandal. One of the BJP’s most prominent possible candidates for Prime Minister — Gujarat Chief Minister Narendra Modi — has overseen rapid economic growth in his state but remains tainted by the claim that he encouraged a series of anti-Muslim riots in Gujarat in 2002 that left hundreds dead.
Perhaps India’s breakout leaders will be local, not national. On the state level, India’s local parties play a far bigger role than either of the national parties, often winning the majority of votes. State politicians wield enormous power and control more than half of government spending, “an unusually high share,” Sharma writes. Economic growth rates among states vary widely.
“There’s too much obsession with national leaders,” says Sharma in his session. He gives the example of Gujarat, which has grown rapidly under Modi’s policies. Others point to the formerly underdeveloped state of Bihar, which has logged high growth (although off a small base) after years of stagnation, the credit for which is often given to Bihar Chief Minister Nitish Kumar. William Antholis, managing director of the Brookings Institution, once referred to Kumar as “India’s Man From Hope” and praised Kumar’s achievements in promoting development.
After the session, Sharma refines his local theory. “Perhaps what we’ll see in India are breakout states,” he says.