Here's a nasty thought: the big threat to Australia's commodities-underwritten prosperity extending out to 2030 and beyond is India's democracy. Much worse though is the threat that irresponsible democracy poses to India itself.

Present crises aside, Australia is supposed to live happily ever after thanks to India picking up the commodities demand slack as the Chinese economy matures, thus extending our resources boom for another decade or two, giving us yet more time, money and opportunity to restructure into a smart country by investing much more heavily in education.

But as we saw in speeches by BHP's chairman and CEO last week, the world's biggest miner is no longer buying that story.

The Goldilocks scenario was based on the assumption that India would follow much the same path of industrialisation and urbanisation as China is and the likes of Japan, Taiwan and Korea did. They, in turn, travelled much the same road as the US and Europe had a century or two ago, experiencing massive restructuring, productivity growth and wealth creation as their societies were transformed by the growth of cities and moving up the value chain from being primarily agrarian.

There's one big difference though – India is a democracy. It is arguable that no country has undergone such a revolution as a genuine democracy. The leap involved in a populous nation industrialising tends to involve plenty of hard and nasty stuff as the status quo is overturned – land being cleared of peasants, established rent seekers replaced by a new order, societies uprooted and overturned.

The established Asian economic powers weren't democracies when they passed through that stage and China definitely isn't now. Universal suffrage remains a relatively recent phenomenon, post-dating the European and American industrial revolutions. The US might have come closest to it, but only a minority of Americans had the vote (women and blacks were excluded just for starters) as it absorbed “your tired, your poor” and created wealth in various dark mills.

To state the obvious, India is different. By most reckonings of the standard development curve, India is travelling somewhere between 15 and 20 years behind China. Of particular interest to Australia, its steel intensity has barely started to take off. If India was to follow the Chinese example, the economic benefits would be massive, lifting hundreds of millions of people out of extreme poverty. It's been expressed in various ways, but Deng Xiaoping arguably did more to alleviate poverty than all the world's NGOs, charities and United Nations agencies combined.

Krishna knows India urgently needs to follow the established pattern. Cheap labor certainly is exploited in the social sense, but has scarcely begun to be in the economic sense – the poor are just exploited and kept in their place.

As China moves into the next phases of higher value manufacturing, as robots move into Guangdong factories, India barely has manufacturing industry thanks to a conspiracy of poisonous protectionism, stifling bureaucracy and endemic corruption, never mind the gross waste of resources that is the caste system.

India's great success stories in technology and outsourcing, from software engineering to call centres, have been achieved because they are new industries that didn't have the dead hands of protectionism and bureaucracy upon them and thus allowed the entrepreneurial skills of well educated people to blossom.

But while those new service industries have thrived, fuelling a burgeoning middle class of a hundred million or considerably more (depending on how you care to measure it), it remains a fraction of the whole. Yes, India produces hoards of talented university graduates, but more than a quarter of the population is illiterate. GE, Microsoft and IBM have Indian research centres, but the garbage dumps are combed by rag pickers who try to make a living by recycling plastic bags. India is a nuclear power, but the fuel of necessity for many remains dried cow pats.

And looming over everything is a fearful demographic imperative. India, running hard to stand still for most of its nearly 1.2 billion people, is on track to add another half a billion or so by 2050. (And a worryingly disproportionate percentage of those new citizens are male, but that's another story.)

A feudal agricultural system won't cope with that and the difficulties in establishing manufacturing and building infrastructure prevent the necessary job creation to support the population. The weight of the status quo fights against the necessary change, a status quo imposed by a vibrantly dysfunctional democracy.

An Economist magazine cover story in March editorialised around three recent examples of the nation's political paralysis:

“First, the government announced that it was at last opening its inefficient retail industry to foreign firms — only to change its mind within days. This month, to protect industry at home, it banned the export of cotton, upsetting India's farmers and trading partners; within days, it backtracked. And last week the government moved to overrule the Supreme Court and change the tax code to tax foreign takeovers retroactively, not least Vodafone's purchase of its Indian arm. Some worry that the rule of law, one of

India's great strengths, is being eroded.

“No wonder business is in a sulk and investment is falling. Red tape and corruption, always present, seem to have got worse — in recent state elections so many banknotes were doled out that they help explain a liquidity problem in the banking system. Longstanding bottlenecks have not been tackled. Partly as a result, inflation is high and stubborn.

“Every one of these problems involves the state, still huge and crazy after all these years. Few ever thought it could be reformed easily. But the hope was that a wily private sector would allow India to sprint to prosperity regardless. That view now looks romantic. It is not just a matter of a lack of the public services, from roads to power, that any economy needs, particularly if manufacturing is to thrive — as it must in India if the millions entering the workforce every year are to find jobs. Lately the state has found other ways to muck things up.”

Increasingly fractured and corrupt politics failing to deal with India's enormous challenges now means the nation is being set up for greater crises as its population boom rolls on. The pro-India cheer squad cites its demographics and democracy as reasons for the Indian tiger to eventually overtake the Chinese dragon, but while China's one-child policy has become a demographic problem and it suffers from not having enough democracy, India's quickly growing population and rampant democracy may prove even more dangerous.

Should the day arrive when one brand or another of authoritarianism – nationalistic, religious or military – is able to seize control through gross government failure, lack of demand for Australian coking coal could be the least of the region's concerns.

Michael Pascoe is a BusinessDay contributing editor.

Read more: http://www.smh.com.au/business/australias-next-big-problem-indias-democracy-20120521-1z08u.html#ixzz1vUHdgm6K