Taking It Easy; Indian leaders are enjoying the boom times by putting off more painful reforms. The mistake could cost them.(Cover Story)

Byline: Ruchir Sharma (Sharma is the co-head of global emerging markets at Morgan Stanley Investment Management.)

The buzz in the financial circles a few months ago was that every man and his dog could raise money to invest in India. Now the thinking is that a man is no longer required.

India lies at the heart of a boom. Of the $150 billion that has flowed into the stock markets of developing nations since 2002, nearly a fifth has gone to India. It is now one of the most expensive emerging markets in the world, with an average price-to-earnings ratio of 15. India is thus the hottest of the hot markets.

For sure, it has critical mass. India ranks as one of the three largest emerging markets in terms of economic size and stock-market capitalization, with both breadth and depth on offer. There are about 100 companies in India with a market value of more than $1 billion. Foreigners have invested in more than 1,000 Indian companies--a record for any country outside the United States. These investors think the opportunities presented in South Asia's biggest economy are unlimited, given its potent mix of brainpower and large scale.

The working assumption among many foreign investors is that India will continue to crank out growth rates of 7 to 8 percent, which the very efficient corporate sector will translate into earnings growth of 15 percent a year for eternity. Analysts vie to predict how fast India will rise as an economic power, and how soon it will regain the might it wielded two centuries ago, when it accounted for 20 percent of world economic output.

The only problem is that the future rarely plays out as predicted, particularly in the developing world, where countries have systematically overpromised and underdelivered. These societies tend to push reform in hard times and fritter away gains when the pressure abates. This cycle has played out repeatedly in commodity-dependent countries, and helps explain why per capita income in many Latin American and African countries has not risen for decades.

India is unlikely to suffer any such fate. It has unleashed enough entrepreneurial energy to ensure that even in the worst-case scenario, economic expansion will slip back only to its past 25-year average of 5.5 percent. However, given the expectations, that growth trajectory would feel like a recession to many investors.