When Narendra Modi took over as India's Prime Minister in May, there were great hopes of big bang reforms to attract foreign investment and bring the country back on the growth path. Over the last 100 days, PM Modi's government has liberalised foreign direct investment in railways and defence, introduced real estate investment trusts or REITs and taken decisions to improve the ease of doing business in the country.

But these steps have been described as incremental and not enough to revive economic growth. The government has been criticised for not announcing steps to cut subsidies and costly welfare schemes, not laying down a credible roadmap for the goods and services tax (GST) and not scrapping the controversial retrospective taxation amendment issued in 2012.

Global brokerage Nomura says the government's performance with respect to more structural challenges such as food inflation, boosting agricultural productivity, fiscal correction, creating jobs, etc. has been underwhelming.

In normal course, inaction on these key issues would have led to a market selloff, but that has not been the case so far. In fact, the Sensex and Nifty continue to hit new record highs nearly every day. The exuberance in equity markets is surprising because the entire rally from September last year was based on hopes of big bang reforms.

Foreign portfolio investments, too, continue to be robust with year-to-date flows pegged at over $12 billion or Rs 78,000 crore. And analysts continue to be bullish about Indian stocks. On Monday, Goldman Sachs raised its one-year Nifty target to 9,000 citing positive earnings sentiment. (Read the full story)

Companies are expected to report better profitability because the economy is finally looking up. First quarter GDP growth rose to 9-quarter high of 5.7 per cent, raising hopes that FY15 may turn out to be better-than-expected. Morgan Stanley today raised its FY15 GDP estimates from 5.4 per cent to 5.7 per cent. Any credit for the rebound in growth must also go to the previous UPA government though.

So, why are markets excited? Well, it seems that the government's smaller steps are aiding sentiments, analysts say.

According to Nomura, over the past three months the new government has worked on "oiling the machine" i.e. getting work done and done faster.

Quoting Anil Swarup, an additional secretary in the Project Monitoring Group of the Cabinet Secretariat, Nomura says, "In the previous government, our job was just to see that the clearances would happen and we would assume that it was translating to work on the ground. The present government has asked us to do the legwork and make sure that it is."

The brokerage says India's productivity, which fell sharply in the last five years, can be reversed if delivery can match the promise.

According to Nomura, there may be no headline grabbing reforms, but there are a number of micro-level changes in the works that could have positive macro implications.

1) The hike in FDI limit in defence is aimed at boosting domestic manufacturing of defence equipment.

2) The digital India campaign will boost domestic manufacturing of electronics and target zero net electronic imports.

3) The Jan Dhan Yojana can be used to better targeted subsidies, cut down leakage and create a wider tax network, which could aid fiscal consolidation.

4) The move towards online project approvals will automatically lower the scope for corruption.

5) The government is actively considering amendments to a number of labour laws, including: an increase in overtime hours, relaxing the earlier bar on employing women in factories for night shifts, and initiating a single unified web portal for online registration and inspection reports, among other things, to reduce the amount of paperwork.

"These changes are happening on the micro level... and can act as a bridge to the longer-term goals of better infrastructure, creating jobs, boosting competitiveness and developing the manufacturing sector," Sonal Varma and Aman Mohunta of Nomura say.

As far as politically sensitive big bang reforms are concerned, the government might have purposefully delayed them with an eye on the upcoming state elections, Nomura says. PM Modi has a comfortable majority in the Lok Sabha, but in the Rajya Sabha, his government has just 60 of the House's 250 members.

The government's approach seems to have got the backing of Reserve Bank Governor Raghuram Rajan, who last week said people have been expecting "major changes very quickly" from the new government.

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"I think the government has essentially focused on implementation because that is really the need of the hour. Lot of projects are being stuck because of environmental permissions, forest clearances," he said.

Projects worth nearly $50 billion to $70 billion are stuck in the country, according to the Reserve Bank estimates.