Take the present Indian five-year plan (2007-12). In line with the Chinese approach and as Derek Scissors from the Heritage Foundation puts it, "state-led infrastructure is the centrepiece of economic policy and growth strategy". Of the $US500 billion spent on infrastructure development across this period, only 17 per cent came from the private sector and almost all of that came from telecommunications firms.
For the next five year plan (2012-17), the government has set the target of $US1 trillion in infrastructure spending, with half to come from the private sector. No one in the Indian private sector believes this is an achievable goal.
Why are domestic and international private investors so reluctant to commit? One problem is that regulatory conditions and tendering processes are biased against private firms, while cheap loans generally are offered only to state-owned firms. In proposed public-private partnerships, the government's attitude is skewed towards socialising profits and privatising losses. Partly from a legacy emphasising the co-operative and collective ownership and exploitation of land, little progress has been made on an effective land title registration system. This means it is unclear who owns various pieces of land and investors cannot be sure that their infrastructure projects will be granted legal sanction.
Moreover, because the state still dominates - or else limits foreign firms from participating in key industries such as banking, insurance, agriculture, mining and minerals, energy, retail and transport - extremely inefficient and protected state-owned firms allocate and receive far too much capital while delivering far too few products and services at too great a cost. The impact on the agricultural sector is particularly troubling since some indicators suggest productivity in this sector has declined, a worrying trend for a country with a large and growing population to feed.
This means that the economic model, like China's, grows increasingly addicted to throwing more and more money at poorly performing state-owned firms to guarantee growth.
One consequence of heavy reliance on cheap money (in addition to subsidies, tax breaks and protective tariffs) offered to undeserving firms to drive growth is a government debt-to-gross domestic product ratio of 50 per cent - large for a developing country with a small tax base, and one that spends little on welfare - meaning interest payments absorb more than one-fifth of the annual budget. Another is that the money supply is growing three times faster than GDP, contributing significantly to 7 per cent to 8 per cent annual inflation in the past few years. As in China, the state-led mobilisation of resources is preferred over an emphasis on efficiency and productivity.
India's problem is not its democratic past but its socialist legacy. Across the past two decades, India can boast the rise of world-class private sector firms in areas such as telecommunications, pharmaceuticals, vertically integrated manufacturing and bio-technology, which occurred despite government policy.
The most vibrant economic sectors are dominated by domestic private firms that can compete with the best in the world on equal terms. If Australia is hoping an Indian economic miracle can match or surpass the Chinese one, then New Delhi needs to move on from its history and look beyond Beijing for inspiration.
