This month, Indian private equity practitioners will be poring over the fine details of the country's new government's annual budget, dreading to find evidence that the economic reforms that helped deliver GDP growth of 8.1 percent for the year to March 31 2004 will be jeopardised by the new Congress-led ruling alliance. The left-wing Congress party surprisingly defeated the incumbent Bharatiya Janata Party (BJP) in last month's elections and relies on Communist party support for an overall majority.

One person fretting about the budget is JM Trevedi, a partner at emerging markets private equity firm Actis, who has spent the last 25 years working in the development banking, private equity and venture capital spheres in India. He says: “For the last five years, economic reforms have led to brisk growth, which has helped the development of the capital markets and encouraged foreign investment. Now we are concerned that there are pressures on the government from some quarters to scale back future reforms or even reverse existing measures, and all we can do is wait and watch.”

Trevedi is far from alone in finding it difficult to conceal his apprehension – the country's largest stock market, the Bombay Stock Exchange in Mumbai, has suffered a series of dramatic falls and was temporarily closed by the authorities to try and restore some order after its total value dropped 11 percent in the opening minutes of trading on May 17.

Despite promises from the new regime that it will be investor-friendly and will not bring the reform process to an end, investors are clearly running scared at the prospect of the government's Communist partners wielding influence. This sentiment appears to have been fuelled by the announcement towards the end of May that profitable state enterprises would no longer be sold off – reversing a BJP decision to begin doing exactly that in the energy and heavy engineering industries.

The reason why the likes of Trevedi are on tenterhooks is that Indian private equity appears to be on the cusp of significant growth. Hence, the stakes are high. Last year the value of deals totaled a rather modest $774 million – making it only the fifth-largest market in Asia-Pacific – but this still represents rapid progress in a private equity market that only arrived in any meaningful way in the 1990s. Anecdotally, US and European investors are at their most animated when talking of the prospects of two Asian markets in particular: China being one, and India the other.

In addition, while India has long been seen as a promising market for early-stage investments, particularly in technology and the outsourcing sector, it seems to be gaining breadth and depth. Trevedi says investments in mature companies have traditionally been few and far between and restricted to expansion capital deals rather than change of control situations. But management buyouts are just beginning to appear on the radar: as an example, Trevedi cites Actis' Rs750 million ($17 million) buyout of ICI India's nitrocellulose unit in February. The number of sectors attracting admiring glances is also increasing, and now includes banking, pharmaceuticals and automotive components.

On the fundraising front, there is no doubt that more investors are keen to gain exposure to India. Says one placement agent familiar with the region: “Institutions that have not invested there before are now looking at India with interest – and you can include in that a wide variety of organisations based in the US, Europe and South Asia.”

Actis is currently preparing its PPM for a new $300 million India fund, and is in early discussions with potential supporters. Baring Private Equity Partners India – which is seeking institutional investors for the first time for its planned $150 million second fund – is also in the market, as is GW Capital, which is also raising a second fund targeting $40 million after four years of exploring midmarket outsourcing and biotech opportunities.

It is likely that plenty of other GPs and LPs are currently pondering the most effective ways of gaining access to the Indian market. As they do so, they will be aware that even the best-laid plans can go awry. If they are true to their word, the country's new rulers will give investors little cause for concern, but no-one should be blamed for applying very careful scrutiny to the upcoming budget statement: it is a statement that may well be described as make or break.