The World As We See It
Global
In the first half of 2023, the global economy faced challenges with slowing growth due to monetary tightening and Russia's war in Ukraine. Inflationary pressures and financial sector problems in the US and Europe further increased uncertainty. Despite significant policy rate increases this quarter, demand pressures, especially for services, remain strong. Labor markets globally are tight, and while core inflation remains high, headline inflation has eased in major economies. Major central banks plan to keep rates higher for longer, which will affect emerging market central banks' ability to cut rates. Revised GDP forecasts show faster growth in CY23 but a slower pace in CY24. Factors such as increased interest rates, geopolitical conflicts, ongoing war, and high debt-to-GDP ratios contribute to the uncertain economic environment.
Global growth is now projected to slowdown from 3.1% in 1QFY23 to 2.3% in 1QFY24 (up from 1.9% forecast in 4QFY23). Developing countries face worsened growth prospects due to tighter credit conditions and higher external financing costs. Geopolitical tensions have weakened global demand, and stricter monetary and fiscal policies continue to exert pressure on global trade. WTO revised global merchandise trade volume growth estimation to 1.7% in 1QFY24, a slight increase from an estimate of 1% in 2QFY23.
The US has shown significant economic progress from the previous quarter. Resilient household spending has prompted an upward revision of the growth rate to 1.3%. The Federal Reserve has implemented gradual rate increases to address inflation, leaving the interest rate unchanged for the first time in over a year. The focus now turns to whether further rate hikes are necessary to bring inflation back to the target of 2%. The current inflation rate stands at 4.4% and the benchmark interest rate ranges between 5% and 5.25%. The consumer confidence index rose to an 18-month high this quarter, reaching 109.7 in June 2023, according to the Conference Board. The effectiveness of overall measures in curbing inflation from various sources remains uncertain, especially in the services sector, which is vulnerable to labor shortages and rising wages.
The European Union's GDP—driven by lower gas prices and robust consumer spending—is up by 0.1% and its employment is up by 0.5%. Preliminary data shows a slowdown in business activity growth in Europe, as the eurozone's composite PMI dropped to 50.3 below expectations, indicating a potential contraction due to demand concerns and higher interest rates. While the European Union experienced slight economic growth, Germany entered a technical recession. Despite the European Central Bank's 3.75% rate increase, doubts surround the optimistic growth predictions for CY23.
Asia-Pacific economies have shown slight improvements, with China's revised growth forecast at 5.2% due to the lifting of the government’s zero-COVID policy. Excluding China, the region is expected to grow by 3.8% in FY24. Japan experienced stronger GDP growth, driven by solid private consumption, which grew by 4.5% y-o-y. Investment momentum varied in the region, but generally improved, with notable strength observed in India, the Philippines, Japan, Malaysia, and South Korea.
India
The Indian economy experienced a growth rate of 6.1% q-o-q and 7.2% for FY23. This growth has been driven by private investments, government capital spending, and strong growth in service exports. The rural economy has remained steady, as evidenced by the growth of the agricultural sector. The services sector, construction, and real estate have performed well, and growth in banking credit has benefited the services sector.
Consumer confidence remains high, increasing to 88.50 points in May from 87 points in March 2023. The external sector shows stability with robust growth in service exports. The drop in commodity prices has resulted in a decline in goods imports, while foreign exchange reserves have risen in the country. The government's capital expenditure has played a crucial role in driving growth, with increasing gross fixed capital formation.
The banking sector has witnessed impressive credit growth of 15% this quarter. Asset quality improved, and the GNPA ratio reached a 10-year low of 3.9%. The profit margin was boosted by a higher Net interest margin (NIM), leading to strong 38.4% y-o-y PAT growth. Moreover, the Manufacturing Purchasing Managers' Index (PMI) for India reached 57.8 in June, showing robust demand for ‘Make in India’ products, both in the domestic and international markets.
India’s trade deficit has shown a considerable decline in 1QFY24. The overall trade deficit is estimated at US$ 13.3 billion as compared to the deficit of US$ 20.6 billion during 1QFY23, registering a decline of 35.4%. Fiscal consolidation is also on track, with increased GST revenues and growth in personal and corporate income taxes.
During this quarter, Prime Minister Narendra Modi paid a visit to the United States, aiming to strengthen bilateral relations between the two nations. As part of his trip, he engaged in meaningful discussions with US officials, with the primary objective of solidifying agreements in a multitude of sectors. Notably, these sectors encompassed the production of jet engines, the manufacturing of semiconductor chips, and the utilization of drones. Furthermore, esteemed companies such as Micron Technology and Applied Materials also seized the opportunity to announce their investments in India, specifically directed toward bolstering the country's semiconductor manufacturing capabilities.
On the domestic front, after four high-octane contests, the upcoming elections in Madhya Pradesh, Rajasthan, and Chhattisgarh are highly anticipated as they will influence the outcome of the important Lok Sabha elections. The results are crucial for the Congress and other opposition parties seeking to form a united front against the BJP.
Despite simmering variables and uncertainties in the global economy, there is optimism for the medium term in India. The country's macroeconomic factors remain stable, NPAs (non-performing assets) are low, and corporate balance sheets have been deleveraged. The government's focus on growth, service exports, digitization, and transitioning to a greener pathway contribute to India's potential for a multi-year growth cycle.
Early Stage Ecosystem
During the first quarter of FY24, early-stage startup activity in India experienced a period of stability amidst the ongoing funding strain. The total amount of capital invested in early-stage startups saw a minor decline of 4.4%, going from US$ 2.8 billion to US$ 2.7 billion. This decrease also affected the number of deals, which fell by 14.5% compared to the previous quarter, going from 304 deals to 260 deals. However, there was a slight increase in the average deal size, rising by 12% from US$ 9.4 million in the fourth quarter of FY23 to US$ 10.5 million in the first quarter of FY24.
Overall, the H12023 saw a total investment of US$ 5.5 billion across 564 deals, with an average deal size of US$ 9.8 million.
Most growth-stage companies were seen navigating icy roads. Even on the late-stage side, the funding squeeze resulted in layoffs and postponed stock listings. This trajectory is expected to intensify and will likely lead to industry consolidation. These challenges are particularly apparent among larger companies and late-stage startups that lack focus on building the bottom line. Furthermore, the emergence of inadequate corporate governance practices among these startups has become a notable concern for investors, prompting them to conduct thorough evaluations.
Despite the obstacles posed by the tumultuous financial environment, investors have steadfastly shown unwavering support for both their existing portfolio companies and promising new startups that have exhibited encouraging growth. In this ever-evolving landscape of the Indian startup scene, it becomes imperative to place emphasis on and prioritize the fundamental pillars that underpin value creation. This entails the implementation of effective operational procedures, the reevaluation and fine-tuning of strategies, and the establishment of sustainable models that ensure long-term survival and growth.
As the narrative of a profound reset for the Indian ecosystem takes shape, we can anticipate a surge in investment activity in the forthcoming months.