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Slowing, massive power outages provoked mocking caricatures of the country as a "Blackout Nation." By winter, international headlines about the deadly gang rape in New Delhi were casting India as the land of misogynists. India finished 2012 with the economy growing at a rate of just 5%, the worst performance since 2002. In a poor country, that feels almost like a recession, and the mood remains bleak. Plagued by infighting as its coalition partners maneuver for position in the 2014 elections, the government of Prime Minister Manmohan Singh, once feted as the bright star of Indian reform, is no longer seen as having much leverage to push for real change.

And yet, the farther you travel from New Delhi, the less India looks like a nation stuck in a rut. Turn your eyes away from the capital, and you'll notice that Bihar, a state with a population larger than Germany's, has been growing at an average rate of 11.3% since 2005. Indeed, half a dozen of India's largest states — each with as many or more people than Spain — are growing at a pace near double digits.

That's India, a country so diverse it can always be cast in bright or dark hues, depending on where you look. India is no more a single economy than Europe is — and its states are as linguistically and culturally diverse as the nations of the European continent. For India to decisively break out of its current malaise, it needs to embrace its history as a nation of dynamic states, very much like Europe — not the debt-strangled continent of the past two years but the peaceful, prosperous federation of the previous decades.

Any re-emergence of India is likely to be led by a group of popular chief ministers — the equivalent of American governors — who are building strong state economies from Gujarat on the Arabian Sea all the way east to Orissa on the Bay of Bengal. These state leaders have been gaining power and influence ever since the early 1990s, when India, under the pressure of its last major financial crisis, started to end its decades-old experiment with Soviet-style central planning.

Before 2000, chief ministers left economic development to New Delhi and won office on emotional appeals to religion and caste, still the twin pillars of Indian identity. As reform weakened the center, state leaders started to realize they could build lasting support by catering to the growing aspirations of ordinary Indians. The most effective chief ministers focused on building roads, courting business, pumping up growth rates — and winning re-election. The politics of creed and caste is far from dead, but now the politics of competence matters more. The performance of these breakout states should be closely watched by the world: they are what stands between India and a full-on economic slump.

Gujarat
This is the breakout state getting the most attention: that's mainly because of its charismatic, controversial chief minister Narendra Modi, who is likely to be projected as a future Prime Minister by the main national opposition, Bharatiya Janata Party. Under Modi, Gujarat has developed a reputation as India's answer to China, because of its headlong push to industrialize. Factories sprout from farmland outside the state's commercial capital, Ahmedabad — one of the fastest-growing cities in the world, alongside Chengdu and Chongqing. Gujarat now generates about 40% of its income from industry, boosted by Modi's success in attracting multibillion-dollar investment from companies like Tata Motors and Ford.

Modi is widely admired by businessmen but loathed in many quarters, where he is regarded as a Hindu chauvinist, unfit to lead because of a notorious 2002 episode of anti-Muslim violence in Gujarat, which led to about 2,000 deaths. Even strong factions in his own party are questioning whether he may be too autocratic and polarizing a figure to lead India.

Officials and business leaders who work with Modi describe him as a tough CEO who promotes competent officials with creative ideas. He has helped build a state that works with far less chaos than the Indian norm, to provide "minimum government, maximum governance" — in other words, limited spending but efficient delivery of services. Gujarat has become a model in India for providing electricity, clean water and a relatively efficient bureaucracy, allowing entrepreneurs to open businesses with unusual speed. Since Modi took office, Gujarat has been a top draw for foreign investors in India. Those successes are likely to be a centerpiece of next year's national elections in India, in which Modi will attempt to sell his brand of development to the rest of India.

Orissa
The eastern state on the Bay of Bengal was once best known as a place of pilgrimage, to the Jagannath Temple in Puri and the Sun Temple at Konark. Orissa hardly seemed poised for takeoff when Naveen Patnaik, scion of a local political family and a socialite who had spent a life of leisure in New York City, took over as chief minister in 2000. This was Patnaik's first real job, yet he has engineered an average annual growth of about 8.5%.

Orissa's main strength is in natural resources, particularly iron ore, the kind of wealth that can make poor regions vulnerable to the wild price swings and corruption that often accompany resource wealth. Patnaik has avoided the dreaded resource curse by attracting the industries that consume iron ore as well as mine it. Orissa now has $165 billion in committed investments, including a $12 billion steel plant that Posco of South Korea hopes to build in Orissa, if it can clear environmental opposition. To diversify the economy, Patnaik has worked to attract major Indian IT companies to set up software-development centers in his state.

Bihar
Nowhere in India is the development challenge more basic than in Bihar, once described by the writer V.S. Naipaul as "the place where civilization ends." In one of the most fertile regions in India, a generation of dissipated leaders squandered that advantage with a pervasive culture of gangsterism. When Nitish Kumar took charge as chief minister in 2005, the capital city of Patna was a hive of crime — kidnapping was said to be a leading industry. To establish a minimum level of law and order, Kumar mobilized the police and set up "fast track" courts, leading to more than 80,000 convictions. As violent crimes dropped, economic growth picked up.

Landlocked Bihar is poorly situated to be a manufacturing exporter, so Kumar has focused on the domestic market and on improving the yields of its fertile soil, and moving up the chain from growing food to processing it for a higher price. Agriculture is expanding at an annual pace of 4.7%, a full percentage point faster than the national average; industry in Bihar is expanding twice as fast as in India as a whole.

Maharashtra
The state capital at Mumbai, with its deep natural port, has been the gateway to India since British colonial times. In recent decades, the state has been rolling out highways to nearby Pune, turning this formerly sleepy town into a thriving hub for the auto and IT industries. The third point in Maharashtra's golden triangle is Nashik, which has attracted industrial companies like Bosch and ABB. That helped the state sustain growth at a near double-digit pace after the global crash of 2008.

Maharashtra was an island of prosperity in India even in its darkest days, with commerce, finance and film all concentrated in Mumbai — Bollywood took its name from Bombay, the city's previous moniker. More recent chief ministers, most notably Sharad Pawar, have had a reputation as effective if not dynamic administrators. Businessmen say corruption, where it exists, is efficient: bribe takers deliver the goods, rather than just pocket the money without doing any work, as is often the case elsewhere in India.

But this form of less-bad rule is no longer competitive in a country where many state leaders are taking positive steps. In recent times Maharashtra has had a revolving cast of chief ministers, and its growth rate has slipped in the past two years to 8.5%, on par with rivals like Gujarat.

The rising power of the chief ministers is creating a pattern of economic growth within India that is typical for competing nations, but not for states within nations. In China, the industrial provinces of the southern coast were the fastest-growing regional economies for 20 years, and have continued to grow fast in the past decade, as Beijing began shifting investment inland. The pattern in India is much more like the global economy, in which the ranks of the fastest-growing nations tend to shift, as circumstances and leaders change. If you divide up the past quarter-century into five-year periods, only Maharashtra remains among the five fastest-growing states for even three consecutive periods; in China, five different provinces have achieved this kind of run.

Given that India is by nature more a continent than a country, what it needs is more dynamic regional leaders, not fewer. India should welcome the rise of strong state leaders who understand economic reform, and have a mass base to sell it to the public.

Sharma is the head of emerging markets at Morgan Stanley Investment Management and the author of Breakout Nations, out this month in paperback.

• Ruchir Sharma
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