The World As We See It

Global

The global economy has been recovering rapidly from its COVID-induced lows. We must keep building towards pre-pandemic levels sustainably from current levels. The latest COVID version, Omicron, has spread more rapidly than earlier versions and is causing its own lockdowns and supply chain issues. These ebbs and flows will continue, and it is time we don’t get surprised by newer variants or newer attacks by this virus. Talking of surprises, we need to brace ourselves against all kinds of surprises as they have become a part of life nowadays. It is pertinent to note that surprise after surprise, mostly nasty ones, have roiled markets and humanity. From the dotcom bust to the Global Financial Crisis involving Lehman and Bear Stearns, to the ongoing COVID pandemic or Trump’s appointment and the recent US exit from Afghanistan after 20 years, there have been surprises galore. 

The biggest surprise of 2021, and 2022’s numero uno risk factor, lies in the rising inflation due to supply chain issues coinciding with unleashed pent-up demand globally. In our assessment, the risk is not so much the inflation levels but some policy mistake or misstep that the powers that be take in managing the current situation we are facing. This assertion follows from our belief that humanity has never faced any problem of this magnitude at such a crucial time within a pandemic situation and a tsunami of central bank liquidity. Given that the Fed has been preparing markets with their tapering conversations to temper this runaway inflation, we will likely avoid the same fate as we did due to the 2013 taper tantrum. Those emerging market countries with a robust macro backdrop will weather the Fed taper, even if it is faster than expectations, far better than others that are not at their best. 

Significant geopolitical risks looming over our heads today include US/China non-tariff barriers and how they can play out with global implications for all, US/Russia in the Ukrainian context, and lastly the Chinese flexing their military muscle in their neighborhood. Chinese policymakers have prioritised factors other than GDP growth, focusing on income distribution, geopolitical initiatives, and pollution control. Even as China contributes lesser to global GDP growth rates, the IMF projected global economic growth to be 4.4% in 2022. We believe this might need adjustments as Omicron and other future variants and their financial and human impacts play out. 

In summary, we believe we remain firmly in the throes of the virus and consequently its economic and human impact. We would have never thought that we would ever say that the best action to ensure a strong economy is to simply use masks, sanitisers, and vaccines. 

India

The IMF forecasts that Indian GDP will show a real growth of 9% in 2022. We believe India is in for a long-term growth trajectory at these levels given the demographic dividend benefits are playing out even as population growth has tapered down to about 1% per annum. A variety of factors like political and financial stability, near-zero electricity deficit, access to primary and premium services for the average Indian since we have over 825 million mobile users, financial inclusion with over 85% bank account penetration, addition to roads, railway, airports, etc., are all aiding this economic growth. 

Economic activity continued to be buoyant on the ground, as reflected in a US$18.6 billion GST collection for January. Forex reserves remained at a high level at US$630 billion, providing adequate import cover. FII equity flows moderated in 2021 and came in at US$7 billion though FDI came in at US$52 billion and NRI deposits stood at US$141 billion at the end of 2021. Inflation, which is becoming a substantial global scare, is something we watch closely. WPI remains elevated around the 14% mark, while CPI is in the 5% region. Even as we continue monitoring inflation closely, there doesn’t seem to be a cause for concern as yet. 

COVID and its Omicron variant pose a threat that is so far perceived not to be as lethal or havoc wrecking as the earlier variants. India reported 41.8 million cases out of 384 million patients globally. Daily, India reported 172,433 cases of a global total of 3.1 million. India has administered 1.7 billion doses of the vaccine of the 10.1 billion doses globally. The number of fully vaccinated people stands at 714 million (53% of the total population) of the 4.2 billion people globally (53.6%). Recently, various cities and states have imposed some movement restrictions. Still, the government is mindful not to impact economic activities and allows essential livelihood activities to continue as usual. 

In summary, India is well-placed to enjoy robust economic activity and is likely to report strong growth numbers in the foreseeable future.

Early Stage Ecosystem

Concluding what can be called the best year the startup ecosystem has witnessed, the quarter ending December 2021 saw a 35% decrease in investments (from US$15.9 billion to US$10.4 billion), with a 23% increase in deals consummated (from 635 to 784), resulting in a 47% decrease in average deal values (from US$25.2 million to US$13.2 million). This increase in activity over the past year reinforces our belief that we are at the beginning of a long-term trend that will take the ecosystem to new highs in years to come. 

2021 was nothing short of exceptional for the ecosystem. India became home to 44 new unicorns, more than all previous years combined. We saw remarkable numbers across all avenues as capital invested rose by 249% (from US$11 billion to US$38.4 billion), the number of deals increased by 79% (from 1,188 to 2,127), while the average deal values almost doubled (from US$9.3 million to US$18.09 million), setting the bar higher for years to come.

The lion’s share of these investments was geared toward pre-IPO funding rounds. The listing of Nykaa, Zomato, PolicyBazaar, and Paytm inspired investor confidence in the Indian startup ecosystem by providing early stage investors with exits, which had earlier remained a major cause for concern for many investors. This substantially larger capital flows into high-growth startups is due to a combination of reasons, including increased global liquidity, the relative attractiveness of startup investments in comparison to other asset classes, and the acceptance of India as a technology and new economy hub. Hence, we believe this to be sustainable and not a blip.

In all, 2021 has set new standards for the Indian startup ecosystem. COVID-19 has proved to be highly instrumental in accelerating digital trends. With increased interest from VCs across the globe, India has become an attractive destination for investors and startups alike and we are excited to be part of this journey.