BackAmidst global economic uncertainty, India shines as a prime destination for long term investors
In the last few years during and now following the pandemic, the world as we knew has inexorably changed.
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In the last few years during and now following the pandemic, the world as we knew has inexorably changed. We are living in very unique times. From modern life coming to a standstill as COVID-19 emerged and proliferated, to businesses pivoting, shutting down, and struggling to survive, to others thriving due to the new circumstances. There is no question that the times are still volatile, as uncertain macroeconomic conditions continue. For the first time in recent history there are a culmination of factors at play, such as:
1. Quantitative tightening with interest rate hikes by central banks across the majority of the world
2. Geopolitical uncertainty due to the war in Europe and the shifting polarity in global south
3. Impact of diminishing Covid tailwinds for certain sectors
4. Softening of consumption, in both, consumer, and enterprise demand pools.
These multiple economic and geopolitical forces are interestingly not congruent – some are acting in one direction and the others in the opposite, resulting in an overall churn that makes it tough to predict what the short term will look like. The only thing that is certain is high volatility.
For these reasons, we are seeing a softening in later stage investments globally as it will be difficult for investors who have a short investment horizon to be aggressive at this time. Such investors will continue to take bets but they will be very selective – only what look like very stable and mature ventures or solid foundational businesses will stand a chance.
Interestingly for India, despite this short term volatility, the long-term story is intact. The reasons are not hard to grasp:
1. Demographic. India is one of the few countries where the demographic dividend is still to play out. In the next decade there will be more people of earning age than those that need to be supported. Of course, there will need to be avenues for gainful employment for these people.
2. Related, this large workforce is skilled in technology and has global exposure. They can work on solving local problems and serve the world through indigenously developed products. This will make a large impact and in turn drive high value creation for the ecosystem.
3. Thirdly, India has a large and vibrant local economy. It has also emerged as the fastest-growing major economy in the world. A decade ago, India’s GDP was the eleventh largest in the world. Today, we are the world’s fifth-largest economy by nominal GDP and the third-largest by purchasing power parity(PPP). With a large domestic market, and relatively less exposed international trade flows, the economy is relatively well positioned to weather global spill overs compared to most other emerging markets. India is expected to be one of the top three economic powers in the world over the next 10-15 years, backed by its robust democracy and strong partnerships.
Importantly, this growth is underpinned by strong government push in the form of support and reforms, as well as investment into laying the physical and digital infrastructure for growth – be it highways, logistics, or payment gateways. In fact, the India government recently announced its intent to make India a USD 5 trillion economy earlier than the International Monetary Fund’s forecast year of 2026-27.
4. Lastly, there is adequate capital availability in terms of different types of capital sources. From a handful of institutional investors in India in the 2005-10 period, the institutional investor base across deal stages has grown manifold. Within equity providers, we now see crossover funds, pure domestic funds, pure foreign funds, funds with mixed vehicles (foreign and domestic), venture debt providers, government as an investor through SIDBI, structured solution providers, among others. This highlights the coming of age of the startup ecosystem and also the belief that a cross-section of capital providers have in India’s growth story.
The India growth story therefore remains pretty solid and intact. I am confident that while late stage investments may take a hit in the short term, the action in early stage investing – where the investing horizon is much longer, will make a strong return.
Trends to watch in 2023
Sectoral trends
Tech driven start-ups have led investments in 2022.
Countries in Southeast Asia, like Vietnam and Indonesia are trying to seize the opportunity along with India to take advantage of demand for diversification of supply (China +1). With similar low labor costs and high labor productivity, India still has some advantages over these countries due to the large population size.
There is therefore a huge opportunity in making offline supply chains more efficient. In 2023, B2B businesses, especially the ones solving issues relating to offline supply chains are going to hold considerable ground. The Indian economy is entering into an aggressive growth phase now and B2B businesses that solve the challenges of this new economy will make significant contribution to India’s GDP.
With internet and 5G networks powering the nation at an enormous speed, 2023 will also see a push for real financial inclusion by Fintech companies targeting areas beyond tier 1 and tier 2 cities.
Climate action has become more important globally, and enterprises focusing on sustainability, renewable energy and EV sectors will receive attention from investors.
Additional sectors that will see burgeoning interest from entrepreneurs as well as investors are very early stage including climate tech, blockchain, Metaverse, gaming and drone tech for defence and commercial sectors for security and entertainment purposes.
Investors’ resources
Times have changed and the scrutiny that investors use to evaluate businesses is changing as well. The bar is likely higher and due diligence will have even greater importance. Before investing, investors will not only look at an enterprise’s books of accounts and the entrepreneur’s ability to manage the business growth, but also at alternate data as a resource while deciding a company’s net worth. Data like press releases, social media properties and intangible data like brand affinity, governance and/or customer perception will play a greater role in funding decisions.
In conclusion
While there are many challenges for the world economy at this time, we are seeing India as a bright spot in this. This is not just because of the diversification of supply chain requirement of a lot of enterprises and countries, but due to fundamental reasons as well, which include coming of age of the Indian startup ecosystem.
The ecosystem is more vibrant today with very unique ideas being discussed and executed upon, a variety of capital providers willing to support the ecosystem and a variety of methods to which these investors find exits. In addition, the quality of founders who now don’t come solely from Western countries implementing overseas models but come also from the hinterland of India.
In the short term – because of what’s happening all across the world – there may be some pain for investors with shorter investment horizon. Investors committed to India, who are willing to take very long term bets, will be actively investing in early-stage companies and will continue to keep the momentum of investing in India.
Author: Ashutosh Sharma, Head of Investments – India, Prosus Ventures
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