There were sighs of relief in India last week when Federal Reserve Chairman Ben Bernanke unexpectedly announced the U.S. central bank would continue buying Treasury bills and other government securities at a rate of $85 billion a month. Worries over the past few months that investors would flee riskier emerging markets like India in anticipation of better yields on “safe” Treasuries had sent the rupee and India’s major stock exchanges plummeting.

But the Fed’s action was the one note of good news for an Indian economy that is still in crisis. The Indian government this month cut its gross domestic product forecast for the current fiscal year to 5.3 percent from 6.4 percent. India had already seen GDP growth fall from 8 percent in 2010 and 2011 to just 5 percent last year, the worst number in a decade.

“India’s gone through some downturns before, and this [most recent] one has hit investors really hard,” says Shearman & Sterling Hong Kong partner Sidharth Bhasin. “They’re questioning the whole India story.”

That’s not good news for law firms that only two years ago looked to India as a major growth market. Bhasin, like many other lawyers who do India-related work, are quick to say they are not giving up on the country. After all, it is still Asia’s third-largest economy and, even at lower growth rate, opportunities exist.

But the slowdown has been felt.

“The activity levels are significantly less, so I think everybody’s feeling the downturn across all practice areas, whether you’re an international firm or a domestic firm,” says Dorsey & Whitney Sydney partner John Chrisman, who handles India matters for the Minneapolis-based firm.

Herbert Smith Freehills Singapore partner Nicola Yeomans points to a noticeable drop in outbound deals from the country’s larger companies. “We don’t see that work anymore,” she says of deals like Tata Steel’s $94 million investment in Australia’s Riversdale Mining in 2007, which saw the Indian company sell its stake for $1.1 billion four years later. “That was keeping me really busy–maybe half my practice at the time, all Indian outbound acquisitions.”

The work that remains is subject to even more fierce competition.

“It puts pressure on firms who are not the first or second phone call,” says Milbank, Tweed, Hadley & McCloy Singapore-based Asia managing partner David Zemans. “I think there’s a flight to quality in a challenging market.”

Many Singapore-based India lawyers say they have dealt with the lull by focusing on work elsewhere in the region. For Latham & Watkins Singapore partner Rajiv Gupta, that means more transactions in Thailand, Malaysia, Indonesia, and Singapore.

“We are hedged in a way, because the Singapore office is a regional practice,” he says. “If one country or jurisdiction slows down there are others that keep us active. It’s always a challenging environment, obviously, and we follow the work.”

Yeomans, who transferred from Australia to Singapore earlier this year, agrees, noting that India is now part of a broader regional practice for her.

And some think the current economy may also create opportunity. White & Case Singapore counsel George Cyriac says the weak rupee is starting to draw private equity eyeing bargains in certain sectors. He and several other lawyers also say some clients continue to make long-term investment in manufacturing, consumer goods, and infrastructure.

But the Indian economy has structural issues that changes in Fed policy can’t alter. Efforts to open the economy to foreign investment still clash with protectionist impulses. Onerous but inconsistent regulation continues to delay much-needed infrastructure projects. Massive corruption scandals in the mining and telecommunications industries have also shaken the confidence of international investors. Much blame has fallen on the current administration of Prime Minister Manmohan Singh.

This has created an environment of uncertainty that has put investors in “wait and watch” mode, Jones Day London-based partner Sumesh Sawhney. There is some hope that the next election, planned for early next year, could change things, but there is also plenty of cynicism.

“What people will look at is, will the next government take positive steps that help business in India,” says Cleary Gottlieb Steen & Hamilton London-based India consultant Shreya Damodaran. “If we’re stuck with a coalition, nothing is going to get through because it will just hold everything up” as it did before.

“It’s a question of how big a mandate they have from the voters,” she says. “Whether the newly elected government will have the mandate and initiative to ensure such continuity and clarity remains to be seen.”

Right now, says Khaitan & Co. Mumbai partner Rabindra Jhunjhunwala, no party looks like it will get a clear majority or a strong enough coalition to push through much-needed reforms, which would result in the same deadlock that hurt the Singh government.

“The biggest concern in my mind is what will India be after the elections,” says Jhunjhunwala. “Stability is key.”

Even in the best-case scenario of a government committed to reform, Baker & McKenzie India practice head Ashok Lalwani says it would take months for the effects to be felt in the market.

“That means there won’t be a breakout any time in the next year,” he says.

Not all investors will sit and wait for the politics to play out, says Damodoran. Some will act fast in case the rupee trends up again. Others are simply confident enough in the long-term India growth story.

“There are as many views as there are economists and there is no single opinion on India’s prospects,” she says.

Lalwani also points out that experienced investors and their lawyers have long understood there are challenges inherent to doing business in India. He calls it a “long-term and being-patient story.” Investors know they need to be there, and that, with time, the transactions will go through.

“But there are always hiccups along the way,” says Lalwani, “and some bigger than others, but things will get done eventually with a bit more pain.”

Email: tbrennan@alm.com.