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In our view the long term India growth story remains intact and notwithstanding the impact of demonetisation announced in November, 2016, India is expected to regain the position of the ‘fastest growing major economy’ in 2017. This long term secular growth trend coupled with the strength of India’s internal consumption market is what continues to attract PE/VC investment dollars into the country. A stable currency, an increasingly downward trending interest rate curve, continuing government reforms, a relatively young demographic coupled with high quality entrepreneurs add to the mix of attractive macro factors mentioned above.
We expect to see more PE/ VC backed M&A exits, with an increase in the share of inbound FDI investment into India. In 2016, foreign direct investment (FDI) inflows into India jumped 18 per cent to a record USD46.4 billion, notwithstanding the fall in global FDI flows. At the Economic Survey tabled in the Parliament by the Government of India on 31 January 2017, it was asserted that India had emerged as one of the world’s largest recipients of FDI and that in 2016-17, FDI was running at an annual rate of USD75 billion.
The above confidence is also shared by the PE/VC community. Most large international PE fund heads admit (either in private or publically) that they are looking to deploy investments worth billions of dollars in India from both global as well as India-specific funds over the course of the next few years. This coupled with the significant increase in dry powder with India-focused funds (estimated to be at six year high of USD7.1 billion) can lead one to become fairly sanguine about the outlook for PE/VC investments and PE/VC exits in 2017.
However, the three black swan events that happened in 2016 (Brexit, Trump Presidency and Demonetisation) have caused us to recalibrate our outlook for PE/ VC sector in India for 2017 to ‘cautiously optimistic’ from ‘optimistic’ in 2016. Domestic demand is still weak post demonetisation and credit offtake, especially since the manufacturing sector is yet to take off. Indian exports of goods and services now face the twin uncertainties: those arising from the Brexit-related fallout and an increasingly protectionist U.S. market, given President Trump’s current focus on ‘Buy American, Hire American’ and ‘bringing jobs back to America’. A potential change in the U.S. trade policy could be detrimental for the IT and ITES sector (a sector PE/VC investors are overweight on) and the Indian pharmaceutical industry. Further, with President Trump focusing on high domestic investment and lower taxes, the U.S. dollar has strengthened against major currencies, adding uncertainty over future depreciation of the Indian Rupee into the mix. As the new U.S. administration fine tunes and rolls out its new trade policy, the global economy could be exposed to more volatility and uncertainty. Rumblings of rising geo-political tensions have increased the upside risk of global crude prices, a leading indicator that has a significant impact on the Indian monetary policy and macro-economic mathematics.
Back home, the next major event is scheduled to unfold on 11 March 2017, when the election results of the states of Goa, Punjab, Manipur, UP and Uttarakhand are due to be announced. Perhaps the highest stakes battle is in in the state of UP, India’s most populous state, the results of which could be viewed as a referendum on PM Modi and his personal political capital. These election results are expected to affect the balance between ‘reforms’ and ‘populism’, impacting Indian politics and policy making over the next two to three years.
All of the above has already had an impact on Indian PE/VC investments and exits in Q1, 2017YTD. Data from VCC Edge shows that January and February 2017 saw very tepid levels of PE/VC investments and exits when compared to Q1 2016 or Q1 2015. The months of March and April 2017 are likely to see most of the above mentioned domestic and international uncertainties play out and set the course for the rest of the year. We remain ‘cautiously optimistic’ on the outlook of the Indian PE/VC sector for 2017.
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Reference links:
Dollar hits 10-day high before Trump-Abe meeting, Hindu Business Line, accessed on 22 February 2017.
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