Forty years ago I worked on the Indian economy for the World Bank. Ever since, I have been fascinated by the place. The ability of this huge and poor nation to sustain a lively democracy has been among the world’s political wonders. Yet its economic performance has fallen short of what it might have been. Despite improvements in policy and performance since the crisis of 1991, this remains the case. Nevertheless, India is now the world’s fastest-growing large economy. What might it be in future?

It is with this question in my mind that I have visited Delhi in recent days. It is hard to judge what is happening in terms of immediate performance and policy. But four conclusions emerge. First, Prime Minister Narendra Modi’s Hindu nationalist Bharatiya Janata party government, in power since 2014, represents continuity rather than the pro-market transformation many supporters naively expected. Second, short-term performance and prospects appear favourable relative both to the immediate past and to what is happening almost everywhere else. Third, medium-term performance should also be decent, provided the government implements the reforms it has already outlined. This is partly because India retains so much potential. Yet, fourth, it also faces risks, external and internal. Success must not be taken for granted.

Consider, then, the character of the government. It is centralised in the office of the prime minister. Its orientation is more towards management than to markets, and more towards projects than to policies. It has shown no inclination towards radical privatisation or restructuring of inefficient public monopolies. It continues to spend large sums on inefficient subsidies. To be fair, the upper house, which the government does not control, has so far blocked legislation where the government wishes to do the right thing. A salient example is the services tax — a national value added tax that would accelerate integration of India’s internal market.

An MP, from neither the BJP nor the Congress party, told me the government was “above average”. When it is compared with those of the past quarter of a century, this seems right.

When the government came to power, the economy was suffering from rapid consumer price inflation and sizeable fiscal deficits. Helped by falling oil prices, the former is down from above 10 per cent in 2013 to below 6 per cent. The central government’s fiscal deficit is forecast to fall from 4.5 per cent of gross domestic product in 2013–14 (April to March) to 3.5 per cent next year. The economy grew only 5.3 per cent in 2012–13. This is forecast to reach 7.5 per cent in 2015–16. The Ministry of Finance’s latest Economic Survey forecasts growth at between 7 per cent and 7.75 per cent next year, albeit with downside risks. This would not be stellar by India’s standards. But it would be stellar by those of the world.

Performance, then, seems satisfactory. Will it remain so? Probably, particularly since the central bank should be able to cut interest rates below today’s 6.75 per cent in the next few months. Furthermore, after two poor years, the coming monsoon rains may well be bigger. Yet the near-term optimism must be qualified: first, exports, stagnant for years, are now falling; second, credit growth has slowed sharply; and, third, gross investment fell from 39 per cent of GDP in 2011–12 to 34.2 per cent in 2014–15. It is vital this is at least stabilised.

India could sustain growth at something close to current rates into the medium term. According to the International Monetary Fund, its GDP per head (at purchasing power parity) is just 11 per cent of US levels, against China’s 25 per cent. This indicates substantial room for fast catch-up growth. The economy is also reasonably well balanced. Dramatic transformation might not be in the offing: in the absence of a crisis, that was never likely. But improvements are on the way. They include accelerated infrastructure investment; greater openness to foreign direct investment; more effective administration; consolidation and recapitalisation of public sector banks; a proper bankruptcy code; freedom for states to compete on pro-growth policies; delivery of public assistance by means of the system of unique identification numbers; and, not least, the GST.

Nevertheless, India must not be complacent. The country has shifted from socialism with restricted entry to capitalism without exit: closing down businesses and laying off workers is extremely difficult. The latter is one reason why jobs in the organised private sector amount to 2 per cent of the labour force. Markets for land, labour and capital are all highly distorted. High protection at the border restricts the ability to participate in global value chains. Important product markets are uncompetitive. Even the vaunted information technology sector seems to be losing its dynamism. The overall quality of education is poor. In all, a huge amount of change is still needed. Yet pressure from a rising middle class is likely, in the end, to force much needed reforms.

This leaves three other risks. One is outright conflict, most plausibly with Pakistan. This at present looks unlikely. Another is a global slump. But a slump big enough to derail growth in a nation of India’s size and diversity, as long as it is well run, seems a modest probability.

A final risk derives from the BJP’s “Tea Party” — its chauvinistic, intolerant elements. Muslims make up 14 per cent of the population. One of the miracles of post-independence India is the way people divided by religion, caste and opinion have managed to live democratically and mostly peacefully, side by side. This is a great achievement. If it is to last, responsible politicians must remember that they govern for all Indians, including those they dislike or disagree with. Tolerance of differences matters in all democracies. In one as huge and complex as India, it is truly vital.

martin.wolf@ft.com