As Greece and Europe dominate headlines across the world, experts in the US are striking a more bullish note on investing in India, but they caution that there could be some damage in the short term as a fallout from the crisis and the Asian country's internal problems.

Risk aversion could be one of the biggest challenges in the near term. "Over the next two to three quarters," says Paul Christopher, chief international investment strategist at Wells Fargo Advisors, "I see high volatility in emerging market equities and commodities due to the risk of contagion from Europe and the US."

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The impact will be greater, as countries like India "do not have the stimulus ammunition they had in 2008", he adds.

Faced with high inflation, the Reserve Bank of India has already been tightening interest rates in the wake of a stimulus provided in response to the 2008 crisis.

Christopher believes the stimulus, and the resulting inflation, in fact, revealed and reminded investors of chronic productivity issues in emerging markets.

The negative impact of too much money chasing too few goods was particularly acute in India due to the way the stimulus was targeted, according to Christopher.

"India had a very strong fiscal programme, including subsidies, on top of chronic infrastructure challenges, particularly in roads, ports and the power grid," he notes.

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"And, the stimulus was targeted at the rural sector, where the infrastructure problems are even worse."

But Christopher would still bet on India over a longer term of five to 10 years, as he says investors cannot afford to ignore the country's long-term growth trajectory.

James Rosener, a partner with  New York law firm Pepper Hamilton, notes the pipeline for new stock offerings is 'moribund'.

"But I expect a thaw in about six months," adds Hamilton, who has represented many US and Indian firms in mergers and acquisitions, and travels to India every couple of months.

The prospects for foreign direct investment appear more promising. Rosener points out that India is overtaking China in the rate of growth of FDI inflows, with infrastructure, real estate and manufacturing as the most attractive sectors.

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While US businesses have been lobbying for raising the FDI limit in the banking and insurance sectors, Rosener is skeptical of quick action, given the picture that emerged of the US financial sector after the 2008 meltdown.

"If there's one thing that came out of 08-09, I don't see a significant increase (of the FDI limit) for some time," he adds.
Christopher says inflation could have been lower now if the government had allowed quicker access to FDI, especially in retail.

Environmental clearances are another bottleneck.

"We see a lot of fighting between ministries arguing over individual ministerial prerogatives," he says.

India scores high marks on some fronts.

"On some structural issues, progress in India has been better than expected," says Christopher.

"For instance, on anti-corruption measures, and the trend in state elections of voters favouring development-oriented candidates and parties."