In terms of generating raw frustration among investors, India is a hard country to beat.  It has the second-largest population in the world, but unlike number one China, it also has a young, English-speaking workforce.  The country has a large and successful diaspora scattered across the globe and old trade ties that date back to the British Empire.  It’s democratic…and has an Anglo-Saxon common law legal system.

I could go on all day, but it wouldn’t matter.  Despite all of India’s selling points, the country can’t seem to get out of its own way.   Since independence from Britain, India’s economic growth has so badly trailed that of China and several other East Asian economies that economists derisively called it the “Hindu rate of growth.”  In the early days of the Indian republic, the country copied the worst aspects of British bureaucracy and Soviet central planning and melded the two into a unique Indian “self sufficiency” model that virtually guaranteed economic stagnation.

Even in more recent times, India has appeared downright hostile to foreign investment.  Earlier this year, India’s Supreme Court invalidated the licenses of several foreign telecom operators.  The Court claimed—and probably with justification—that the licenses were granted illegally by a corrupt government minister, but the incident made many Western firms rethink their decision to invest in India.  A deal isn’t a deal there.

Some of India’s “wins” are actually losses in disguise.  For example, India has embraced the information revolution better than any other major emerging market and has used the falling price of communications to create a thriving outsourced services sector.  But one of the reasons that India was so quick to jump into the information revolution is that the country’s “old economy” infrastructure (everything from roads to its sewage system) is so horrendously bad that competition with China in manufacturing is an impossibility—even though Indian wages are significantly cheaper than Chinese wages.

I give credit to India’s entrepreneurs.  They operate in an environment that would cause most Western businessmen to lose their hair or drop dead of a heart attack as they look for creative ways to leapfrog the regulatory monster known as the Indian state.

But lest anyone think that I am a perma-bear on India, not all news is bad.  Prime Minister Manmohan Singh appears to have rediscovered the reforming zeal of his earlier years and has pushed through a much-needed reform of the Indian retail sector.  He tried opening the retail sector to foreign retailers once before, only to back down at the first sign of protest. Perhaps the prime minister has rediscovered his backbone as well as his talent for economic reform.

Investors have taken note.  Indian stocks, measured here by the iPath India Index ETN (NYSE: $INP) have spent most of the past two years in a bear market but have had a nice run since late November.

Are Indian stocks a buy at current prices?  That’s harder to say.  At 17 times earnings see (FT estimates), Indian stocks are far from cheap, particularly when you compare them to Chinese and other emerging market averages.  Chinese stocks are trading hands for just 8 times earnings, and Brazilian stocks just 14.

It’s hard to get wildly enthusiastic about Indian stocks based on valuations, but that doesn’t mean that they can’t have a nice run as investors rediscover the joys of emerging markets.  I’m bullish on emerging markets in general over the next 6-12 months, and I expect to see India participate in the rally.

Just don’t fall in love with Indian stocks, or they will break your heart.  If you decide to buy India, use a trailing stop to lock in your profits for the next time the Indian government does something characteristically impulsive and causes investors to lose interest again.

Disclosures: Sizemore Capital has no positions in any security mentioned. This article first appeared on InvestorPlace  

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