WASHINGTON, DC: In a few days, finance minister Pranab Mukherjee will arrive in the US capital on a trip that is being billed as a major effort to reassure foreign investors about India’s continued medium- and long-term viability as an investment destination.

It is not going to be an easy task, with the India story having lost some of the lustre lately, and a dip in growth rate, the growth of 7.8% in first quarter this year was the lowest in five quarters. From an international investor’s perspective, despite relatively strong fundamentals, there’s a long list of worrisome issues.

That includes an inflation that continues to linger. The immediate reaction of the private sector to RBI decision to increase interest rates has not been positive. The unending saga of high-profile corruption cases, which have dented the image of the government of Prime Minister Manmohan Singh , is another one.

Nothing is Happening

Lower returns, compared with China and some other Asian markets, has also been forcing investors to look elsewhere. “China has had huge returns, India hasn’t had,” says Kanwal Rekhi, co-founder of Inventus Capital Partners and a veteran of many US-India ventures. Other pet peeves among investors and fund managers are the slow pace of reforms and regulatory and infrastructure obstacles.

While no one has jumped off the India bandwagon yet, many are not as gung ho about it anymore, as they fear the country might take more time to reach its potential. Those who say India has veered off track include investors with deep Indian roots, such as Rekhi, one of the best-known Indian American investors in Silicon Valley.

“The Indian government shoots itself in the foot all the time. The common wisdom is India is a banana republic. It is always changing rules,” says Rekhi. Specifically, Rekhi blames the country’s tax system. Last year, Sierra Atlantic, a company he was part of, was sold. Rekhi says he did not know how much is owed in taxes due to the sale.

Confusing Tax Policy

He cites the government’s attempts last year to levy tax on Vodafone ’s $11-billion purchase of Hutchison Essar as the kind of move that would undermine investor confidence in India. “People like me who are believers in India have a tough time convincing about investing in India,” he says.

The sluggish pace of reform has frustrated investors both in India and abroad. “The government has been very slow on economic reform, much slower than the investors hoped for,” says Anup Maheshwari, a Dubai-based portfolio adviser for BlackRock India Fund . What the investor is going to be looking at is that the government has not been up to speed.

“We would like to see the government do more privatisation. There are some good businesses which have a lot of scalability ahead of them,” Maheswari adds. According to him, financial services, one of the areas still under penetrated in India, could help from lesser regulation.

Maheshwari says BlackRock, which has been in India since 1997, has done reasonably well in the country, with an annualised return of 24%, way more than the stock market returns.

Private equity investments have also fluctuated in the past few years. India has struggled “to rival China as the region’s private equity darling”, according to a report the Emerging Markets Private Equity Association released last year. “Despite the buzz on Indian private equity, pan-Asian funds allocate a significantly larger percentage of their capital to China,” it says.

The report adds: “India’s rigid bureaucracy and difficult regulatory framework, alongside its dilapidated infrastructure, are considerable obstacles”. It also says “a significant amount of work remains to be done on the legal and regulatory front in India to make the country more attractive for private equity generally, and for private-equity investment in particular”.

Short View Vs Long View

However, the Indian story is not without influential backers. Ajay Raju, a sought-after adviser to multinational companies that seek to do business in India, is one of them. “Even though there is a cause for concern in terms of predictability, in the long run, investing in India is a no brainer,” says Raju, a managing partner with the law firm Reed Smith in Philadelphia. “If I were a hedge fund, I would be investing not 15%, but 40%.”

Raju, whose clients include funds that invest directly or indirectly into the Indian market, says fund managers can be “jittery” as they take a quarter-by-quarter view: “Everybody is taking a snapshot of what it is today. If you take a historical perspective, they are dead wrong,” he says. That’s a talking point Mukherjee could use next week.

(Global India Newswire)