Worries that India's evolution into an economic superpower may be overhyped and signs the government may lack the will to further dismantle a protectionist legacy drove India-themed funds to the bottom of performance league tables in November.

Laborer

Laborer at work

According to data from Lipper ranking the performance of all 3,400 equity funds available for sale in Britain, India-themed vehicles were well represented at the bottom to reflect heavy falls in local stocks.

The market has to digest a whole different growth outlook, said Maarten-Jan Bakkum, emerging market equity strategist at ING Investment Management.

Commonly regarded in recent years as an emerging giant alongside China, India's reputation with investors has suffered setbacks from a succession of gloomy economic indicators that have sent its equity market and currency lower.

Indian industrial output fell for the first time in more than two years as capital goods investment slumped during October, data showed on Monday.

The government also slashed its growth forecast last week for the fiscal year to March to 7.25-7.50 percent, from the 9 percent estimated in February.

Speaking at a Reuters investment industry summit last Tuesday, the chairman of Goldman Sachs Asset Management Jim O'Neill said India's record on productivity, foreign direct investment (FDI) and reform was disappointing.

The hardest hit equity fund in November was an HSBC India themed fund which sank 17.1 percent, followed by a Pictet India fund which was 16.7 percent lower.

Many investors cited disappointment in Indian policymakers' failure to open the market further to foreign entrants which was causing investment in the country to falter.

United Nations data showed India received less than $20 billion FDI in the first six months of 2011, compared with more than $60 billion in China while Brazil and Russia took in $23 billion and $33 billion respectively.

India last week suspended plans to open its $450 billion supermarket sector to foreign firms, backtracking on one of the government's boldest reforms in years in the face of a huge political backlash.

The retreat came within two weeks of the policy being announced and was for many potential investors a final straw coming alongside increasingly negative economic data.

The fact is they have a current account problem, they have a fiscal problem. And then the final straw was ... when retail reform was shelved, said Allan Conway, head of emerging market equities at Schroders.

Investors were careful not to write off the country's prospects, however.

Remember you are talking about GDP growth of around 7.5 percent this year and the only country beating that in the world of emerging markets is China, Conway said.

(But) had it been embarking on the sorts of reforms we are looking for, the growth would have been even higher.