People say that India "grows at night while the government sleeps", says Gurchuran Das in the Financial Times. "Where the state is needed, it performs poorly. Where it is not needed, it is hyperactive." And that's when government is actually up and running.
This week, the Congress Party-led coalition lost the support of one of its key allies, which says it intends to pull out of the government in protest at its official stance on human rights in Sri Lanka.
This does not imply a collapse: the coalition tends to be propped up by two other parties, giving it a narrow majority. But with the government looking increasingly shaky, and elections due by May next year, the "scope for tough reform decisions is pretty much on the back burner", says Rajeev Malik of CLSA Asia-Pacific Markets.
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The government has recently impressed investors with some much-needed structural changes to bolster India's growth potential, including promoting foreign investment in supermarkets. Now it wants to liberalise the pensions and insurance markets and make it easier for firms to buy land for major projects. There is still quite a long way to go, as Das points out. It still takes 42 days to start a business in India, even though 40% of workers are self-employed.
The near-term growth outlook, meanwhile, is unlikely to offset disappointment over the slowdown on the reform front. Annual GDP growth has slowed to under 6% a year, a far cry from rates around 9% seen a few years ago.
The external environment has weakened, but a key problem has been lacklustre domestic investment, a result of red tape and government overspending crowding out the private sector. The central bank has trimmed interest rates, but its room for manoeuvre is limited by consumer-price inflation in double digits.
The upshot? Stocks will probably remain range-bound for now as valuations are "fair" and earnings momentum is weak, says Sanjeev Prasad of Kotak Institutional Equities.
Reforms are likely to happen more slowly than investors hoped, but India's basic strengths promising demographics, highly profitable, world-class firms and an expanding middle class remain. Our favourite India play, Aberdeen's New India investment trust (LSE: NII), is worth tucking away, trading on a discount to net asset value of 12.4%.
