The World As We See It

Global

As the world transitions to normalcy from the pandemic, long-term effects remain catastrophic for the world economy and populace and will take a long time to be addressed. These effects include a roller coaster global liquidity ride, an uneven economic recovery, rising inflationary pressures, the prospect of a sovereign debt crisis, and a disruption in the supply chain accompanied by the Russia-Ukraine geopolitical situation. In its recent report, the IMF kept its global growth forecast for 2023 unchanged at 3.2% but trimmed next year’s projection by 0.2% from July’s outlook to 2.7%. Major global economies are dealing with a combination of events, such as sharp currency depreciations, rising government bond yields, troubled public finances, and tightened policy restrictions. History has shown that these typically lead to economic and financial stress in emerging markets, including India. Sticky inflation and a tight employment market in the US, energy price escalation in Europe, incessant COVID lockdowns, ongoing property market upheavals in China, household consumption downturn along with behind-the-curve policy changes in Japan, and the UK undergoing recession are all intertwined. Against this challenging backdrop, a massive, unwanted, and avoidable global crisis might await us.  

Inflation rates remain the number one public enemy, being obstinate and at multi-decadal highs across various economies. In response, global central banks are raising rates at a pace not seen since the 1980s. Even as early rumblings of a rebellion against the ‘don’t fight the Fed’ camp gain momentum, the Federal Reserve has remained resolute in raising rates and doing whatever it takes to quash the ugly head of inflation. The Fed relies on history to ensure inflation comes off, although many believe that the economic pain inflicted globally may not be required or be worth it. While only one side of this argument may play out, for now, the path forward is not as straightforward as one would have hoped for.

The Fed’s actions have resulted in an ever-stronger USD, adding downward pressure to global growth and overall risk appetite while forcing other central bankers to tighten their policies. The trouble is particularly vicious for emerging market countries as commodity prices rise and their currencies depreciate, causing capital withdrawals and excessive tightening of monetary conditions. Some central  banks, including India, are using their foreign currency war chest to resist currency weakness, but it remains a Sisyphean task, to say the least. 

India

India’s position has been reasonably stable despite the recent global turmoil. A few apparent patterns point to India’s adaptability and capacity for success, including its credit growth, which has strengthened recently, reaching a nine-year high. This credit flow is good news for the economy as more liquidity has been made available to invest and for businesses to expand —the 16% YoY expansion in credit points to a substantial recovery in economic development.  

Although India remains in a relatively better spot than many of its peers, a few measures are paramount to continue weathering the storm caused by aggressive global monetary policy actions. Thus, addressing issues like multi-decade high inflation, the deterioration of the economic outlook, and the spiralling national debt have become priorities.

The rupee has lost more than 7.0% of its value against the dollar in the current fiscal year. In the first quarter of FY23, India’s current account deficit increased to US$23.9 billion from US$13.4 billion in Q4FY22, primarily due to a larger trade deficit.

Between April and August 2022, imports were US$317.8 billion, while exports amounted to US$192.6 billion. A few counterbalancing forces to this deficit are India’s FDI and foreign investment inflows of US$83.6 billion and US$21 billion, respectively.  

The CPI Inflation rose from 6.7% in July 2022 to 7.0% in August 20227 as food inflation surged, driven by increasing costs for grains, vegetables, pulses, spices, and milk. Fuel inflation continued in the double digits, although kerosene (PDS) prices have come off. With upward pressures on various constituent products and services, core CPI inflation—i.e., CPI minus food and fuel—remained unchanged at elevated levels. As part of the recent Monetary Policy Committee review, the RBI announced new rates to curb sustained high inflation. India raised the benchmark interest rate by 50 basis points to 5.90%, a three-year high. Although there were some risks to economic growth, India’s GDP growth in April and June 2022 was among the highest in the world. In light of this, the MPC has revised its GDP projection downward, from 7.2% to 7.0% for the current year. These adjustments align with the need for the monetary policy to sustain its calibrated measures in conjunction with changing economic dynamics. 

It will be crucial to stick to a long-term strategy by carefully balancing India’s policies, allowing for more flexible currency movements and moderate monetary policy hikes, to prevent inflationary pressures from getting entrenched. We await to see to what extent India can shield itself from these overarching challenges.

Early Stage Ecosystem

The overall investment levels in the quarter gone by stayed low following the sluggish first quarter. This period saw a 45% dip in the capital invested (from US$8.1 billion to US$4.4 billion) while the number of deals remained largely unchanged at 535, down from 541 in the previous quarter. Consequently, average deal values dropped by 44% (from US$14.9 million to US$8.3 million).

In the current calendar year, Indian startups have received US$21 billion in funding across 1529 funding rounds. 

Despite the decline in overall funding and average deal value, the number of deals remained unchanged,  suggesting investors are pouring small amounts into mostly early-stage startups while preferring to wait  until the companies have proven themselves before investing heavily. 

The funding freeze has particularly impacted late-stage investments and big acquisitions with the path to  profitability and valuations being questioned more granularly by sceptical investors. Many late-stage  businesses have struggled to keep cash flowing, but those that are showing signs of profitability are more likely to attract venture capital funding during the "lean" season.  

Both the primary and secondary markets have displayed extreme volatility this calendar year. This is in contrast to the bullish trend in 2021, which also had a record number of businesses becoming unicorns.  India now has 107 unicorn firms with a combined worth of US$340.79 billion after 21 new companies joined this calendar year, valued at a US$26.99 billion.  

Even with the recent loss of momentum, the vitality of India's startup ecosystem still holds huge growth potential. On the global landscape, it remains the world’s fastest growing ecosystem shaped by a confluence of factors. Building the technology-led ecosystem will be a critical engine of economic growth in India's self-reliance goal, which is tied to its ambitious plan of expanding its economy to US$5 trillion by the fiscal year 2028-29.