The World As We See It
Global
In the complex tapestry of the global economy, 2023 is poised to witness growth, though perspectives on global growth still lean positive but are more divided than last quarter. This shift in sentiment is due to a positive turn earlier in the year when inflationary pressures began to ease. The expected growth rate stands at 3.0%, with a slight dip to 2.7% projected for 2024. Global energy prices reverted to pre-Ukraine invasion levels, and the diminishing base effects of post-invasion price surges are expected to further dampen inflation.
A pivotal factor shaping the global landscape is the resolute commitment of central banks from the world's largest economies to combat inflation by maintaining elevated interest rates. This steadfast approach, often characterized as "higher for longer," has gained official endorsement from major central banks, including the U.S. Federal Reserve, European Central Bank (ECB), and the Bank of England (BOE). Its resonance extends beyond borders, influencing policymakers worldwide.
The Federal Reserve, for instance, reaffirmed its dedication to high rates by holding its benchmark federal funds rate steady at 5.25%-5.50% throughout this quarter. Yet, it foresees a 0.25 percentage point increase by year-end and only two rate cuts for 2024. In response, Treasury yields surged to a 16-year peak, exerting downward pressure on U.S. stock markets, where the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all witnessed a drop. Concurrently, U.S. consumer confidence reached a peak of 117 in July, the highest since July 2021, but has since declined, slipping to 108.7 in August and further to 103 in September. This marks the second consecutive quarterly decline, reflecting pops in both current conditions and expectations.
The Federal Reserve's stance on interest rates has reverberated globally, impacting foreign exchange rates and stock indices worldwide. Global stock indices experienced their own fluctuations, with Wall Street inching upwards amid rising bond yields. The U.S. dollar surged to an 11-month high against the Japanese yen and its highest level in nearly 10 months against a basket of currencies. The MSCI All-World index also encountered turbulence, marking its 8th consecutive day of decline, a streak not seen since September 2022.
Contrastingly, the Bank of England made a decision to pause its interest rate hikes, maintaining its main policy rate at 5.25% taking a nuanced approach to monetary policy following 14 consecutive interest rate hikes. This choice influenced local economic conditions and inflation rates which were lower-than-expected in August at 6.7% (lowest inflation rate since February 2022).
Moreover, crude oil prices surged to nearly a 10-month high, driven by concerns that the situation in Israel and Gaza could disrupt output from the Middle East along with high demand expectations and tightening supply. The Brent crude surpassed ~$90 per barrel mark. OPEC, responding to shifting dynamics, revised down global oil demand for 2023 by 1 lakh barrels per day to 29.2 million barrels per day (bpd), which still represented an 8 lakh bpd increase from 2022.
In contrast to global trends, China's manufacturing sector surged in August, registering a Purchasing Managers' Index (PMI) of 49.7, followed by 50.2 in September, rebounding from 49.3 in July. This resurgence, along with an Asian Development Bank (ADB) report affirming strong economic growth in Asia-Pacific, challenges the prevailing narrative. Throughout the region, tourism is on the mend, remittances are steady, and regional financial conditions have stabilized. With decreasing inflation pressures, some regional central banks are already easing monetary policies, granting policy makers some much-needed breathing room. Overall, Asia and the Pacific region is showing resilience and potential for growth. As we move forward, it is essential to closely monitor these developments and adapt strategies accordingly in this dynamic global economic environment.
India
In the bustling arena of global economics, India stands as a beacon of growth, poised to claim the title of the fastest-growing nation in 2023 among the G-20 countries. This recognition follows India's role as the host of the G-20 Leaders' Summit this quarter. After a remarkable 7.8% expansion in the last quarter, India's economic momentum is expected to moderate, the World Bank projects a 6.3% GDP growth for FY24, with a robust service sector and investment growth at 8.9%, despite challenging external conditions and diminishing pent-up demand.
Despite these impressive growth figures, India grapples with a nuanced economic landscape. Retail inflation in the country has eased to 6.83% due to moderation in food prices, while the Wholesale Price Index (WPI) inflation has contracted for 5 consecutive months, registering (-)0.52% in August. Notably, food inflation, a substantial component of the overall consumer price basket, stood at 9.94% in August, down from 11.51% in July. On the back of this high retail inflation, the Reserve Bank of India maintained a status quo on policy rates throughout this quarter.
Foreign Portfolio Investors (FPIs) have also played a pivotal role in India's economic dynamics, with substantial inflows in recent months. However, FPIs turned net sellers in September and pulled out INR 14,768 crore. Before the outflow, FPIs were incessantly buying Indian equities in H1CY23 and brought in INR 1.74 lakh crore during the period. Going ahead, reports suggest FPIs are unlikely to turn buyers in the market soon in the context of the elevated dollar and US bond yields.
Furthermore, India's trade dynamics faced challenges, with the goods trade deficit reaching a 10-month high. August witnessed a trade deficit of US$24.16 billion, marking a nearly 17% increase from July's US$20.67 billion gap. Goods exports continued their decline for the 7th consecutive month. This widening trade deficit may strain India's external balance in the coming quarter. However, the resilience in core sectors offers a potential buffer, indicating domestic economic strength. Nevertheless, amidst these challenges, India's 8 core sectors demonstrated resilience, with an 12.1% growth rate in August, following a 5-month high of 8.3% at the end of the last quarter.
In September, India's manufacturing activity hit a 5-month low, with the Purchasing Manager's Index (PMI) dropping to 57.5 from 58.6 in August. Despite the slowdown, India outperformed other Asian markets in factory output growth. Conversely, the S&P Global India Services Purchasing Managers' Index (PMI) rose to 61 in Septmeber from August's 60.1, reflecting the second-fastest growth in new orders since June 2010. The slowdown in manufacturing has raised concerns about the broader economic momentum, possibly impacting employment and industrial production. Conversely, the growth in services is a positive sign, suggesting strength in the services sector as a driver of economic activity.
Looking ahead, India's economic growth is expected to receive a boost from increased government spending, driven by anticipation of the upcoming general election in May 2024. As India navigates these diverse economic currents, it stands as a key player in the global economic landscape, contributing to the complex narrative of growth and stability on the world stage.
Early Stage Ecosystem
The first half of 2023 saw a dramatic drop in both deal volume and funding levels in the Indian early-stage investment ecosystem. This downward trend peaked in the Q2FY24 as investors became more cautious, emphasizing the need for companies to demonstrate innovation, viability, and long-term potential.
Capital invested in early-stage startups plummeted by 70% in Q2FY24, to US$ 0.81 billion, from US$ 2.7 billion in Q1FY24. Whereas the number of transactions in Q2FY24 declined 77% to 59 from 260 in the preceding quarter. In contrast, the average deal size increased by 31% from US$ 10.5 million in Q1FY24 to US$ 13.7 million in Q2FY24.
This decline in funding was not limited to any particular stage of investment, as late-stage, early-stage, and seed-stage rounds all saw notable declines in funding, highlighting the evolving investment landscape in India. Furthermore, the shift in the dynamics of the startup ecosystem were evident, as was only 1 new unicorn minted that emerged in the first half of 2023. In fact, during the second quarter of fiscal year 2024, no new unicorns were created.
So far, first half of CY2023, saw investments amounting to US$ 6.4 billion across 623 deals with an average deal size of US$ 10.2 million compared to US$ 26.1 billion in CY2022 across 2,032 deals with an average deal size of US$ 12.8 million.
Several sectors such as fintech, D2C, healthcare, and SaaS have emerged as leading sectors in attracting investments. Moreover, segments like e-commerce, cleantech, and electric vehicles have also shown promising growth as they adapt to changing trends and market demands. Amidst the challenging economic conditions, companies that have demonstrated quality and innovation have managed to secure investments.
Despite facing obstacles such as infrastructure and regulatory challenges, as well as an uncertain funding environment, India's entrepreneurial and innovative spirit continues to thrive, establishing itself as a vibrant startup ecosystem. This further strengthens the government's goal of transforming India into a US$ 5 trillion economy.