India's power, telecoms and aviation sectors, core to sustaining the country's growth, are in various states of crisis. That may prove a good thing, if it forces government to act.
Regulations in all three industries have kept prices low and brought power, cellphone service and even air travel to millions of Indians for the first time. The same policies have left many operators battered by losses, debt, and plunging share prices.
The recent debacle over foreign supermarkets, wherein India announced that it would allow entry to the likes of Wal-Mart Stores Inc before putting the plan on hold in the face of intense political opposition, underscores the difficulty of pushing through reforms in the world's largest democracy.
Conditions in all three sectors are likely to worsen before improving, said Saurabh Mukherjea, head of equities at Ambit Capital in Mumbai.
You'll probably see some big-ticket defaults before things start getting better and you'll need the government of India to get back to work before things start getting better, he said.
Power, telecoms and airlines are capital-intensive sectors that attracted heavy investment when the regulatory environment was more favorable and global capital was plentiful and cheap.
That has left India crowded with more than a dozen cellular carriers, loss-making airlines with too many planes and billions of dollars of investments in a power sector made uneconomic by high global prices of coal and low domestic tariffs.
Many investors once keen on India's long-term growth have had enough as global and domestic economic conditions worsen, making Indian stocks among the world's worst performers of 2011.
Despite passenger growth of nearly 20 percent, shares in India's three listed airlines are down between 62 and 72 percent in 2011. The index of power stocks is down 32 percent even as electricity demand far outstrips supply.
Crisis has historically been a spur for New Delhi to act. Reforms that would improve conditions in telecoms, aviation and power are less polarizing than the move to allow global players into multi-brand retail and there are recent glimmers of hope for operators in all three industries.
I think out of all this, we'll see some positive change, because the change only comes when the crisis is at its highest point, said David Cornell, a director in Mumbai for UK-based fund manager Ocean Dial. Have we got to the point of maximum crisis yet? Perhaps not.
HAVING IT BOTH WAYS
The plight of liquor baron Vijay Mallya's Kingfisher Airlines, scrambling to keep creditors at bay as it tries to raise equity, is an example of the gap between India's industrial aspirations and the problem of how to pay for them.
Taxes make jet fuel in India 60-70 percent more costly than the global average, but fares are cheap as loss-making state-run Air India sells tickets below cost, prompting others to respond.
Cellphone calls cost about 1 U.S. cent per minute, the lowest just about anywhere, but carriers pay 19-28 percent of their revenue to the government, according to a PwC report, a bigger share than in neighbouring countries or in Europe.
Millions of farmers receive cheap or free power, a populist measure that discourages investment in new plants for fear that debt-strapped state electricity boards cannot pay for them.
Still, India wants to build $1 trillion worth of infrastructure in the five years to 2017, with the private sector expected to pay for half of that. The wish-list includes 600 million broadband connections by 2020.
Who is going to build those 600 million broadband connections? asked Marten Pieters, who heads the local unit of Vodafone, India's biggest foreign corporate investor.
Vodafone, the country's No.2 cellphone player by revenue, last year booked a 2.3 billion pound impairment charge on its India operation and has been an outspoken critic of regulatory policy in the country.
I'm not saying, 'government come and help me.' I'm just saying, 'government, realise that in this situation you cannot expect the companies to keep investing forever if there is no return for the investors', he told Reuters last month.
WAKE UP CALL?
While the government of Manmohan Singh recognizes a need for reforms, it has been unable to implement them because it is sidetracked by corruption scandals and a fractious coalition.
As policymaking stalls, the economic outlook deteriorates. Some analysts now expect sub-7 percent growth in the fiscal year starting in April, far below India's ambitions for China-like double-digits. Inflation remains near 10 percent and the plunge in the rupee adds to a sense of alarm.
Kingfisher is expected to have a tough time finding investors, while smaller cellular carriers are said by industry insiders to have slowed or stopped investing. Without reforms, about 560 billion rupees in loans to the power sector are at risk, ratings agency CRISIL said in October.
In one recent hopeful sign, India unexpectedly increased by $10 billion foreign investment limits on local bonds.
India's aviation minister has asked states to cut the sales tax on jet fuel, although they have not yet done so. The government may also lift a ban on foreign airlines investing in Indian carriers, which could provide a lifeline to Kingfisher.
A pending telecoms policy could make it easier for operators to merge with each other or exit, reducing competition.
State electricity boards have begun to raise tariffs.
In some cases, the market is doing what regulators have not. After years of ferocious competition, cellular firms have begun to push up call rate and shares in carriers Bharti Airtel and Idea Cellular have raised this year as weaker players are unable to compete aggressively.
There is enough awareness in the country that unless we improve the health of the state electricity boards, the entire progress, economic progress will come to a halt, Akhil Gupta, India head of U.S. private equity giant Blackstone Group, told the recent Reuters India Investment Summit.
Blackstone has invested nearly $780 million in five Indian power companies in the last two years. Gradually people are saying, look: you can't have your cake and eat it too, he said.