iNDICA NEWS BUREAU-
The California-headquartered Silicon Valley Bank (SVB) – the 20th largest banking group in the United States – in its State of the Markets Report H1 2022 has said that India ranks fifth in the world for attracting foreign direct investment (FDI).
The SVB report praised India’s “tactical reforms” such as the ‘Make in India’ initiative and said that such reforms have increased the ease of doing business in the country. The report also states that India is ranked the sixth-largest economy globally with a Compound Annual Growth Rate (CAGR) of 5.4%.
“India ranks fifth in the world for foreign direct investment (FDI) inflows. Computer software and hardware industries attract the most capital. For example, India is the second-largest producer of smartphones in the world behind China. It edged out Vietnam for this spot in 2018 thanks to tariffs in China and government subsidies via India’s production-linked incentive scheme. Apple, which began smartphone manufacturing in India in 2017, announced the iPhone 13 would be produced exclusively in India from a Foxconn plant in Chennai,” the report states.
The report provides more examples: “In 2020, Samsung announced it would move its entire display production unit from China to India. Amazon is currently building a $2.8 billion data center in Hyderabad set to launch in mid-2022, and Microsoft announced plans to build their own in March of this year. In January 2022, Google announced an investment of $1 billion in Indian telecom Bharti Airtel.”
For Priya Rajan, Managing Director, Global Gateway, and SVB’s market lead for India, MENA (Middle East and North Africa) and SEA (South East Asia), India’s growth comes as no surprise. In the executive summary of the report, Rajan writes: “Over the past decade, innovation and policy have converged to shape an increasingly entrepreneurial and digitally-enabled India. The confluence of smartphone proliferation, affordable mobile data and the establishment of a wide infrastructure rapidly digitized small and mid adopted digital payment size businesses. The COVID only accelerated this trend. In May 2022, India marked its 100th unicorn with a sense of ‘we’ve arrived,’ but this is just the tip of the iceberg. India is a leader in global SaaS ChargeBee , Innovaccer, Uniphore , and Postman with the likes of Freshworks, and has a flourishing domestic technology market: 83% of unicorns serve Indian businesses and consumers.”
“Foreign direct investment, boosted by reforms and production-linked incentives, reached $84 billion in fiscal year 2022. In light of supply chain shocks, companies like Apple and Samsung are seeking to diversify their respective smartphone manufacturing by expanding their operations in India. Through production-linked incentives, the Indian government has taken steps to bolster smartphone manufacturing and establish key industries such as semiconductors,” Rajan stated.
The report points out that over half of the Indian population of 1.34 billion is under 30. In the 2019-2020 academic year, India had 30.6 million undergraduates, with 3.8 million studying engineering and technology. India’s domestic smartphone market is the world’s second largest, worth $139 billion in 2021, and is expected to grow with a CAGR of 10.5% to reach $281 billion by 2028.
Smartphone proliferation has gone hand-in-hand with the adoption of digital payment infrastructure, particularly the Unified Payment Interface (UPI) which launched in 2016. “In the same year, 86% of banknotes were removed from circulation via demonetization. Adoption of UPI grew exponentially, with over $1 trillion worth of transactions processed in the 2022 fiscal year, accounting for about 60% of retail payments in India,” the report states.
On the startup eco-system of India, the report says that tier-2 Indian cities like Jaipur, Kochi, and Indore are gaining a reputation for their startup scenes.
“Lower cost of living, access to talent, and a reduction in the digital infrastructure gap have laid the foundations for startups based in tier-2 cities to thrive. Local incubators such as TiE-Rajasthan, The Kerala Startup Mission, and Indore Smart Seed act as catalysts providing programming, space, and support. Startup India, a flagship initiative of the Government of India launched in 2016, recognizes over 70,000 active startups,” the report states.
In May 2022, India celebrated its 100th unicorn —the third-highest count behind the US and China. Waiting in the wings is a robust pipeline of “soonicorns” and “minicorns.”
While the achievement was celebrated by the ecosystem, the report states, it remains to be seen if the public markets will embrace these companies.
To illustrate its point, the report refers to these developments: “In May 2022, Delhivery, whose shares popped 10% on its first day of trading, is now down 13%. Life Insurance Corp. – India’s largest IPO ever – fell 8% on the first day of trading and is now down 20%. Indian public markets are highly exposed to foreign institutional investors which comprise approximately one-fifth of share ownership on the National Stock Exchange (NSE).
“In 2022, foreign institutional investors withdrew more capital in the first five months than they invested between 2009 and 2021.” The report also points out that the domestic retail investing provided some cushion for now and share ownership is at an all-time high (7.42% of the NSE as of March 2022). “However, RBI’s interest rate hikes mixed with a continued downturn may drive a sell-off by retail investors,” the report states.
“India’s two main indices, the Nifty50 benchmark for the NSE and the SENSEX 30 for the Bombay Stock Exchange (BSE), are both down 13% YTD. By comparison, the S&P 500 and NASDAQ are down 23-27% YTD,” it says.
Pointing at venture-backed tech IPOs, the report says: “The number of India’s venture-backed tech IPOs has been modest compared to the US, but in 2021 there was an uptick, thanks in part to new Securities and Exchange Board of India (SEBI) rules that allow loss-making companies to go public if 75% of shares are allocated to qualified institutional buyers.
“As of June 2022, six Indian tech companies went public, while 14 have filed with the SEBI. This includes BYJU’S which plans to go public via a SPAC on the NYSE as well as listing on the BSE. Conversely, Oyo has delayed IPO plans until 2023. Flipkart (India’s most valuable private company) plans to IPO in 2023.”
The report also claims that “entrepreneurship is a national priority”, which has bolstered India’s emergence as one of the largest global innovation ecosystems. It points out: “CISCO, Google, Meta, and Microsoft all have dedicated India accelerators and innovation labs. For Y Combinator, a prominent US-based incubator, Indian companies represented the largest portion of non-US based companies in their last several cohorts. The startup ecosystem spans the entire subcontinent, builds new markets, and unlocks innovation and talent.”
In 2022, there was a large increase in India focused funds raised. International firms often invested in Indian companies out of global, Asia, or non-geographic specific funds. The report states, “Now we are seeing firms building out specialized teams —often on the ground —to invest across the Indian innovation landscape. Silicon Valley Venture Capital (VC) funds have a long track record of investing in India.”
Rajan added, “India has not been immune to global macroeconomic events such as rising fuel prices and supply chain congestion. Inflationary pressures prompted the Reserve Bank of India (RBI) to raise rates, as a result public and private markets pull back. For the remainder of 2022, we expect muted private investment, lower company valuations, slower unicorn creation and delayed IPOs. We don’t expect 2022 to exceed last year’s record $36B of VC investment, but we feel confident Indian VC investment is on track to surpass the years prior to 2021.”
Notable US investors have long recognized the opportunity India presents, with many maintaining a presence in the country for over a decade. The report states, “Lightspeed India Partners has been active since 2004. Sequoia India, the most prolific investor, established its India presence in 2006 with the acquisition of WestbridgeCapital Partners. In June 2022 Sequoia India closed $2B in funds to invest in Indian companies across stages.”
“Accel formed its Accel India Venture Fund in 2008 by acquiring Bengaluru-based ErasmicVentures. Bessemer began investing in 2006 and raised its first India-specific fund in 2021. Softbank, the largest foreign investor in India, deployed approximately $14 billion over the past decade in India. General Catalyst has picked up the pace, in 2022 they began building a dedicated team for India investments.”
“India captured $36 billion in global venture capital in 2021. Valuations are modest compared to the US, however leading Indian SaaS companies have valuations and revenues in-line with their US counterparts. Modest valuations provide opportunities for foreign investors in addition to the strong domestic investor community. Praxis’ ‘India Investments Pulse 2020’ states more than 50 international investors made their first VC or PE investment in India in 2020,” the report states.
The report claims that VC investors now perceive India as an alternative to China. Over the past 16 months, China enacted sweeping tech regulations, caught headlines for shutting down EdTech companies, levied fines on large tech companies after antitrust probes, and proposed sweeping data privacy regulations.
In May 2022 (five years after the US withdrew from the Trans-Pacific Partnership) the US launched the Indo-Pacific Economic Framework (IPEF), a trade agreement with India, Southeast Asian nations, Australia, New Zealand, Japan, and South Korea.
“Against the backdrop of continued COVID-19 lockdowns, VC investment in China grew 7% between the first and second halves of 2021 –a significant slowdown compared to growth of 110% between the first and second halves of 2020. Meanwhile, VC investment in India increased 160% between the first and second halves of 2021. Reforms, such as the 2013 Companies Act, have increased transparency and accountability, fortifying investor confidence,” the report pointed out.
However, due to recent declines in public markets, crossover investors are reevaluating their private market strategy, for instance Tiger is investing in more early-stage deals.
The report states that in 2022, foreign institutional investors withdrew more capital in the first five months than they invested between 2009 and 2021. Is Rajan concerned? “Foreign institutions pulled more capital, yes, and it will definitely have an impact but that is a global phenomenon. It may slow down IPO listings, and unicorn surges may not be the same as the last few years.” But she is hopeful about early-stage funding. “Early stage is still vibrant and will continue to be… just need to keep our heads down be focused on what matters and less on vanity metrics. Not on valuation but value creation. We will get through this as we did earlier. India is resilient.”
