The World As We See It

Global

The global economy continued to gently recover since last year's slowdown. However, concerns about persistent inflation and the health of the banking system after the failure of regional banks in the U.S. have caused panic and discomfort in global markets. We saw the second-largest bank failure in U.S. history, following the 2008 failure of Washington Mutual Bank. SVB’s downfall triggered a global market sell-off, increasing the fear of a banking crisis and a collapsing market knock-on effect. Some economists predict that the current economic situation could have a sustained impact that may last for the next five years. 

The global growth rate (real GDP growth) has fallen from 3.4% in FY22 to 2.8% in FY23 and is expected to be only 3% for FY24. This is the lowest growth projection since 1990. This downgrading is under the shadow of geopolitical tensions around the globe. Trade wars spilled over into the diplomatic sphere in FY23, weakening the bonds between nations. Besides, increased trade protectionism has led to a transition away from the golden age of globalization, which in the past had contributed to lifting several economies out of poverty. Growing concern about financial vulnerabilities, particularly in housing markets, financial institutions, and low-income countries, is the fundamental cause of all current tensions. The underlying core inflation is still proving to be stickier, despite the fact that the global headline inflation rate has decreased from 8.7% in FY22 to 7% in FY23 as a result of lower commodity prices.

The news of falling inflation and other positive economic data at the start of this quarter gave hope that the global economy is on the mend, with some economies exhibiting encouraging signs of a strong recovery. The improved performance and optimism are primarily driven by China's reopening, a significant improvement in the natural gas situation in Europe, and the unexpected near-term durability of U.S. consumer demand. As a result, the forecast for global growth in 4QFY23 has significantly improved since the previous quarter. 

The Asia Pacific (APAC) region has shown strong dynamism for the quarter, driven by China's recovery and India's resilient growth. In 2023, these two economies are expected to account for roughly half of global growth projections. According to the IMF, the APAC region's GDP growth rate is expected to rise from 3.8% last year to 4.6% in 2023, despite the region's struggles with inflation, debt, and financial vulnerabilities. For FY24, the region is expected to contribute ~70% of global growth. 

Despite the turmoil, the U.S. economy continues to defy calls for an impending recession following a revival in consumer spending. Overall, for the year, the CPI eased to 5% in FY23. However, the reduction does not indicate a fall in prices; prices continue to rise in the region, albeit more slowly than a year ago. Moreover, financial stability concerns globally induced sizable volatility in global financial markets: bond yields crashed; there was a sharp correction in equity markets; and the expectations of further monetary tightening yielded pauses and rate cuts.

Positively, tech stocks saw a revival following an uphill battle in 2022, when many tech stocks fell by as much as 90%. To everyone's surprise, tech stocks outperformed the overall market through 1QFY23. This was predominantly because the technology sector's valuations have recently undergone a significant reset, coupled with the adoption of cost-cutting measures by tech companies.

Overall, the lagged effects of synchronized global monetary tightening have yet to be fully reflected, but consumers around the world continue to spend to the extent that a near-term recession is not on the horizon. Inflation may stay sticky under this scenario, although disinflationary forces should resume given the impact of rate increases to date on demand and the clearing of supply bottlenecks. Nevertheless, the current economic and geopolitical risks suggest that global markets started off too strongly this year. As such, the outlook remains uncertain, and there are still significant risks of decline.

India

India, like the rest of the world, has faced a staggering array of challenges, including tightening financial conditions, border tensions, and ongoing supply chain disruptions, but it has withstood them well. Despite the nation's resilience, the World Bank has reduced India's FY24 GDP forecast from 6.6% in March 2023 to 6.3% as projected in December 2022. According to them, growth is expected to be restrained by slower consumption growth and challenging external conditions. India has been successful in avoiding these headwinds since trade has a smaller share (%) of GDP than in other countries, as well as having access to cheap Russian oil. 

In a surprise move, the RBI's Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 6.5%. This comes after six straight rate hikes since 1QFY23. Moreover, India's retail inflation based on the Consumer Price Index (CPI) eased marginally. It fell to a 15-month low of 5.66% in March 2023, as compared to 6.95% reported in March 2022. Moreover, India's Wholesale Price Inflation (WPI) fell to its lowest level since October 2020, led by a decline across commodities; WPI stood at 1.34% in March 2023, compared to 3.85% in  February 2023. Broad-based softening of prices, especially in food prices, has contributed to a fall in inflation, which is good news for the Indian economy. For 1QFY24, inflation is expected to fall below 5% due to this base effect. 

While capacity pressures remained mild in the country and jobs rose only marginally, the unemployment rate rose to a three-month high of 7.8% at the end of this quarter. On the other hand, India’s monthly GST collections, which hit the second highest ever in February 2023, rose 13% from a year earlier to INR 1.6 lakh crore, making the total GST revenue in FY23 amount to INR 18.1 lakh crore, compared to INR 8.1 lakh crore in FY22. 

India’s Make in India program also achieved certain milestones in the year. India’s defense exports reached an all-time high of ~INR 16,000 crore in FY23. Moreover, Indian smartphone exports crossed ~INR 82,000 crore in FY23, according to the new industry data. Lately, India's services exports, which amounted to ~INR 24,000 crore in February, are expected to shield the economy from upside risks from external headwinds and weather-related factors for the coming quarter. Remarkably, the Indian service sector has moved one step forward this quarter, with output expanding at the strongest rate in 12 years. 

Notwithstanding external pressures, India’s service exports have continued to increase, and the current account deficit is narrowing. Indian goods and services exports have crossed the US$ 750 billion (INR 61 lakh crore) mark for the first time, growing at 13.84% during FY23 over FY22. 

The Indian government has been pushing for international trade in rupees, for which India also plans to use the G20 platform. For this purpose, India also offered the rupee as an alternative for trade to countries that faced a shortage of dollars due to monetary policy tightening by the US Federal Reserve. With its leadership in services and digital growth, India is set to withstand global downturns for months to come. 

Early-Stage Ecosystem

Early-stage ecosystem investments had a slow start to the quarter as investors maintained their caution due to macroeconomic uncertainties. 

The total amount of capital invested in startups fell by 44% in 4QFY23 compared to 3QFY23, from US$ 5.1 billion to US$ 2.8 billion. It had a similar effect on deal volume, which dipped by 40% from the previous quarter, from 503 to 304. While the average deal size decreased from US$ 10.2 million to US$ 9.4 million, an 8% drop from 3QFY23 to 4QFY23. The declines were particularly noticeable in January, as the month saw most of the brunt of the funding squeeze, which was an extension of the impact seen around the end of CY2022. 

The total amount of money raised by startups in 4QFY23 fell by 66% compared to the US$ 8.5 billion secured in the same period in the previous year (4QFY22). However, FY23 ended on a positive note, with VC funding reaching US$ 1.4 billion in March 2023, compared to US$ 734 million in February 2023. 

Fintech, retail, and enterprise applications dominated the funding landscape in the first quarter of 2023. With 46 acquisitions in the first quarter, there hasn't been much of a change in the exit situation. In addition, unlike the same period last year, when 14 new Indian unicorns emerged, there were no new unicorns created in the quarter that ended in March.

Over the past few months, as VCs closed the funding tap, they were seen as feeling pressured to pay closer attention to what goes on behind the scenes for these startups. As far as your fund is concerned, we believe investors like us can thrive in the current funding environment because we have always been tuned to choose prudently and take our time in conducting our diligence. Our thorough internal deal evaluation process has always ensured that we are cautious with the high-quality deals that are presented to us, even when the ecosystem is in its natural state. 

Significant progress has been made in recent years to strengthen the startup ecosystem, with support from the government through initiatives like the Startup India program, the Atal Innovation Mission, and Production-Linked Initiative schemes (PLI), which foster an environment favorable to their growth and success. There has been a recent wave of startup activity in rural areas as government-backed dedicated funds and skill development programs are helping to promote entrepreneurship in these regions. 

We believe that the macro perspective of the funding winter will be indispensable for the long-term growth of the startup ecosystem, and it has only transformed the way fundraising deals happen in the ecosystem. Having said that, a lot more must still be done to fully realize the tremendous potential of Indian startups before India can be considered a center for entrepreneurship on a global scale.

The impact of a systemic collapse of financial institutions and signs of a global recession is hurting investor sentiment in the Indian startup ecosystem. In such a global scenario, your Fund’s strategy is to remain resilient and continue to focus on backing repeat founders, seasoned teams, innovative business models, and high-growth markets.