Investor Confidence In India: Shaken, Not Stirred
Waking up each morning to gloomy news on most indicators related to the economy might make one believe that we are well and truly in the middle of a depression.
Perhaps in response to this sentiment, the Finance Minister, Nirmala Sitharaman, too announced a rollback of several measures that were announced in the budget speech in July 2019 including the much-maligned surcharge on foreign portfolio investments.
Keeping that in mind, let us look at how investor confidence in India has fared in the last 5 years and how it could shape up, going forward.
Why Are Sentiments Down?
CRISIL recently lowered its gross domestic product (GDP) forecast for this fiscal to 6.9%, 20 basis points lower than its earlier projection. According to CRISIL’s report, till the middle of 2016-17, the economy was cruising along with a GDP of 8.2% in 2016-17. In November 2017, the Government announced demonetisation measures to suck black money out of the economy. This gave a severe blow to consumption, especially rural and led to a vicious cycle of job loss and lower income, fuelling the drop in demand further. 2017-18 ended with a GDP of 7.2%.
In July 2017, the Goods and Services Tax (GST) was rolled out, which crippled exports growth due to a delay in refunds to exporters. Further, the speed of implementation caught the millions of small businesses that are the life-blood of a thriving economy, unawares leading to chaos.
As the economy was recovering from these twin blows, the mammoth INR 910 billion IL&FS crisis triggered the NBFC credit crunch in 2018, threatening to snowball into a systemic liquidity crisis. Even as India clocked a GDP of 8% in the first quarter of 2018-19, the subsequent quarters have been downhill for the Indian economy with weakening global trade and GDP growth due to US-China tariff wars caught up.
It is thus clear: the slowdown in the economy is real. However, if you look at deal-makers, you wouldn’t believe this reality.
Deal-Making And Exits On The Rise
According to the India Private Equity Report by Bain & Company, India saw a total investment of USD 26.3 billion from approximately 793 deals in 2018. The deal volume was higher than in 2017 though the average deal size was flat. In the last five years, total investment was highest at USD 26.8 billion in 2017, closely followed by USD 26.3 billion in 2018.
The Bain report indicates that analyzing trends in exit momentum is a good way to assess investor confidence in India. In 2018, the Indian private equity market saw the highest exit values in the last decade. While this was led by the USD 16 billion Flipkart sale to Walmart, consumer technology, IT and IT enabled services and BFSI were sectors that were equally in demand.
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2018 was an excellent year for exits, signalling investor confidence and in the Indian ecosystem and healthy public markets. In fact, this has been the trend in the last two years, with exits totalling to 265 valued at nearly USD 33 billion in 2018, making it the best year for exits in the last decade. Naturally, a booming stock market has aided this process. The benchmark stock index, BSE Sensex rose from 26,638 points in August 2014 to 36,701 points in August 2019, a compounded annual growth rate (CAGR) of 7% over the five-year period.
Investor Confidence In India: Eye On The Future
The growth in India has attracted more PE players to the market. From 474 active participating funds in 2014–16, active players in India increased to 491 funds during 2015–17 and this trend is likely to continue. Investors looking for diversification continue to be drawn to Asia-Pacific’s healthy long-term growth profile. India-focused funds stand at a healthy USD 11.1 billion. With this kind of firepower, there will always be takers for good deals.
The Bain report states that there is sufficient India-focused dry powder to ensure high-quality deals don’t lack capital. Funds do believe that cost improvement and capital efficiency will become important drivers of return, a sign of the changing realities in a liquidity-constrained economy.
Trends In Foreign Direct Investment (FDI) And Future Projections On Investor Confidence In India
The trend is different when we look at the foreign direct investment (FDI) that the economy attracted over the years. India has slipped to the 16th spot from 8th in 2017 and 11th in 2018, according to A.T. Kearney’s FDI Confidence Index. In fact, the only two countries among the top 25 countries to experience a decrease in score on this index are India and China, though both countries remain among only the three emerging markets on the index, pointing to India’s increased stature in the global economy.
A drop in the score can be partially explained by uncertainty surrounding the long-term impact of foreign investment policies that include regulations on foreign investment into the fast-moving e-commerce space and on global payments processors. The regulatory environment continues to be the biggest risk for anyone, looking to enter the Indian market as regulations change in an apparently arbitrary manner as was the case with the FPI surcharge recently.
The sheer size of the Indian market makes it an opportunity that businesses and Governments can’t ignore. With a thumping majority in the Parliament, the Narendra Modi-led NDA alliance certainly has an enviable mandate to bring about large-scale reform. It is this reason why investors will prefer to watch on the sidelines till things get better rather than exit the India story altogether.