Disruptions, one could argue, are part and parcel of a nation pulling ahead despite counteractive forces. One even tends to appreciate such upheavals because, especially in a democracy, plurality of opinion-and the ensuing consensus-is the only way to achieve long-term systemic stability. Thus, countries like Malaysia (not fully democratic, though), Taiwan and South Korea can go through the worst kind of economic crises and still bounce back because investors fundamentally have faith in the system. But what do you do when the system itself actively encourages or condones disruptions that tear the very roots of a society? If you are an investor, you leave-with your faith charred.

That is the sin the Vajpayee government may have committed by its inept handling of the violence in Gujarat, sparked by the burning of returning kar sevaks (Hindu religious workers) at the Godhra railway station in Gujarat, and fuelled by the retaliatory killing of nearly 800 muslims all over the state. As the BJP's (principal constituent of the ruling National Democratic Alliance) rout in the capital's municipal elections shows, the people of India aren't just upset-they are willing to decide and react. The implications are clear: the Vajpayee administration may be on its last leg.

The appeasement of peeved public has already started. Finance Minister Yashwant Sinha has been promising to roll back one after another unpopular, but critical, measures announced in his Budget 2002. He may well become one of the first victims of the war that BJP's arch-rival, the Sonia Gandhi-led Congress Party, has unleashed on it. The going of NDA and the coming of Messrs Congress and Allies do not-and we suspect, will not-materially affect the lives of ordinary people. However, the fanatic-induced instability does threaten to irreparably damage whatever little goodwill India may have earned since it started off on a programme of economic reforms, 11 years ago.

Foreign institutional investors-the barometer of an economy's attractiveness and outlook-are already voting with their feet. Their gross purchases in March 2002 were down by 35 per cent over the previous month. Net purchases have fallen even more-by 80 per cent. The slowdown in investment portfolio-especially at a time when other markets like the US are looking up-is now a grim reality.

The more critical issue, however, is of long-term foreign direct investment. Pictures of marauding mobs looting and burning shops even in distant Ahmedabad is enough to distort India's image as an up-and-coming economic powerhouse (well, Time did, in its cover story on the Gujarat carnage, label us Bloody India). Sentiment, even in the cold world of business, precedes reason. And the worst that India can do is to sour investor sentiment.

Already, the country's foreign direct investments-despite its fabled consuming middle-class-are refusing to show any signs of inching up. And the sovereign rating-at a non-investment grade bb+ by Moody's-could take a turn for the worse. Even without such a demotion, India faces plenty of competition for investment dollar from Asian countries such as Singapore and Thailand.

Domestic investors, too, do not relish a lawless situation and some manufacturing industries-especially in Gujarat-are feeling the pinch. Big companies such as Hindustan Lever have reported that their revenues in the state may decline because of the Gujarat carnage. And that in a state with the highest project spending of Rs 11,500 crore in the pipeline.

Most analysts would like to believe that if the communal violence and instability can be contained here and now, things could return to normalcy in another two quarters. Yet, this time round the situation seems grimmer. It is not the violence per se, but the government's unwillingness to act that is scaring investors. Even corporate chieftains like Deepak Parekh of HDFC are questioning the relevance of a government that can't protect the lives and property of the innocent.

You can be sure, that's a question many foreign investors will ask before they decide to invest in India.