Bankers and fund managers say private equity investment in Indian infrastructure could pick up, leading to better prospects for growth.
Since taking office last July, Finance MinisterP. Chidambaram has championed reforms and hit the road to woo investors in Asia, Europe and North America.
"There's a perception that the government is no longer in denial as far as the economic reality of India is concerned and is trying to take some steps to correct that," said Sonal Varma, an economist at Nomura in Mumbai.
Despite the slump, consumer spending in India is on track to rise from nearly $1 trillion in 2010 to $3.6 trillion in 2020, or annual growth of 14 per cent, said Mall at Boston Consulting, faster than the global average of 5.5 per cent and the 9 per cent average expected for emerging economies over the same period.
Overseas companies are especially ardent thanks to cheap capital, whereas Indian companies are held back by high domestic interest rates. Also, for global companies, India offers better growth prospects than they have at home.
Meanwhile, some of Chidambaram's efforts are bearing fruit.
Recent investment plans like Malaysia-listed AirAsia's
formation of an Indian airline with the Tata group and Swedish furniture giant IKEA's $2 billion store roll-out projected over 15 to 20 years are the direct result of reforms made last year in the aviation and retail industries.
Gulf state Qatar recently bought a 5 per cent stake in Bharti Airtel Ltd for $1.26 billion despite 13 straight quarters of falling profits for India's biggest telecoms carrier, as subscriber growth and usage trends suggest the worst may be over for one of India's most beaten-down industries.
Among other recent deals, Abu Dhabi-based Etihad Airways last month invested $379 million in India's Jet Airways , while Goldman Sachs agreed to invest $110 million in cable TV operator Den Networks Ltd.
More to be done
Still, India's signature reform of 2012, allowing in foreign supermarket chains such as Wal-Mart Stores Inc, has yet to find takers. Operators are seeking clarification on sourcing and infrastructure rules, and none has applied to enter.
Further reforms, such as a push to increase the limits on foreign ownership in insurance and a land reform bill, stalled when the latest parliamentary session ended early amid noisy political acrimony.
A national election due by May 2014 means the window for Chidambaram to enact more of his agenda is narrowing.
A key deterrent to more investment is often-unpredictable tax treatment of foreign companies in India.
A year ago, corporate investors were horrified by India's efforts to impose a $2 billion-plus retrospective tax on Vodafone even after the highest court ruled in favour of the mobile carrier. While Chidambaram has said he wants the matter resolved, the dispute drags on.