Editor's note: Ravi Agrawal is the Senior Producer of "Fareed Zakaria GPS." You can follow him on Twitter @RaviAgrawalCNN.



By Ravi Agrawal, CNN

What's happened to India? Seemingly every day, new reports emerge of its slide. Growth has dropped to 5.3% – half the rate it was in 2010, and the lowest in nearly a decade. The rupee has hit a record low against the dollar, depreciating more than 25% in one year. Inflation is rampant; the deficit is growing; reforms have stalled.

Worse is to come, if you believe the ratings agencies. Standard & Poor's and Fitch have both given India their lowest investment grade and are on a negative watch.

What happened to "Incredible India," the capital "I" of the BRIC countries?

One explanation is the prevailing fiscal climate. Europe's protracted crisis has cast a shadow around the world. China and Brazil have slowed, too.

But India's chief economic adviser says New Delhi is the victim of a "pessimism spiral." In a phone interview this month, Kaushik Basu told me that critics are focusing on the bad news and overlooking the good. For example, exports have grown more than 20% on average for the last eight years, he says. India has also become a large exporter of investment, ranking fifth in the world behind the U.S., Canada, Japan and India. Meanwhile household savings have stayed above 30%, six times more than it is in the U.S.

But if India is indeed stuck in a pessimism spiral, it is not without reason: it is merely see-sawing from what was earlier an optimism spiral.

India's high growth numbers in the last decade have masked just how far behind it really is. It may be the world's 11th biggest economy, but that has more to do with the number of people it packs in, not the relative wealth of its 1.2 billion inhabitants. Consider per capita incomes: Indians on average make $3,700 a year – half that of the average Ukranian, nearly a third that of the average Chinese or Brazilian, and less than a fourth that of the average Russian. Germans make 10 times as much.

So even when India was growing at a rapid clip, the reality is that it had a lot to catch up on. Hundreds of millions of Indians remain impoverished: 46% of Indians earn less than $2 a day. India's advocates often cite the growth of mobile phone usage as an indicator of success: from 20% of the population in 2007 to 60% by 2010. And yet India has more mobile phones than toilets. Even as New Delhi makes a case for it having a permanent spot on the U.N. Security Council, millions die each year of disease, malnutrition and neglect. For all India's technological advances, a better statistic to look at is internet access. Only 10% of Indians are able to use the internet; as a percentage, four times as many Chinese, Brazilians and Russians surf the web. Some BRICs really are more equal than others.

But whether critics have overdosed on optimism or pessimism in the last decade is a debate about selected data and perception. It is unimportant. The truth is that India's growth has slowed sharply and it has profound consequences for India's poor. Add to that, India is becoming dangerously unequal in wealth distribution. The political scientist Pratap Bhanu Mehta points out that the urban Gini coefficient – a way to measure inequality – has jumped from 0.35 in 2005 to 0.65 today (zero indicates perfect equality, one represents one person cornering all the wealth; anything higher than 0.4 is considered to create conditions ripe for unrest.)

Economics is not India's problem. It is politics. The Economist points out that the remedies to India's growth problems are blindingly obvious. Among them, it notes cutting subsidies, investing in infrastructure and confronting corruption. But politics has consistently gotten in the way. India's Prime Minister Manmohan Singh, despite being a visionary economist who charted its path-breaking reforms two decades ago, is often criticized by the political opposition and the intellegentsia as a puppet of the Gandhi family, powerless and ineffective, held hostage to larger political currents.

But the signs are that change may finally be afoot. Just as in 1991, when a balance of payments crisis led to much-needed reforms, the current downturn could well become an opportunity to administer smart economic policies.

Among the immediate changes this week: the finance minister Pranab Mukherjee has stepped down to focus his attentions on running for the largely ceremonial post of president. So Prime Minister Singh has once again taken full control of the country's balance sheet.

The task in front of Singh is immense. If he broke India's "License Raj" two decades ago to open up the economy, this time he'll need to conquer "Populism Raj." India imports 80% of its crude oil – and yet it heavily subsidizes fuels like diesel and kerosene, popular among the poor. India's retail sector is shockingly inefficient: a third of all vegetables and produce rot en route from the farmers to consumers, and yet populist forces prevented foreign companies from entering the country and potentially using their technology to revolutionize its supply-chain systems.

New Delhi's greatest challenge isn't to envision the policies that could return India to the rapid growth its people need. Those policies have already been outlined by a number of smart economists already on India's payroll. The challenge is to implement those policies and convince the electorate that corruption and red tape won't get in the way.

There's nothing like a crisis to steel the nerves of a nation. Two decades ago, Finance Minister Manmohan Singh took his chance and became known as the father of India's economic revolution. As prime minister, his reputation has seen a steady decline. This could be another defining moment for him – and India, too.