Being the poster child for emerging markets, India is acknowledged as an ideal destination for investment-driven growth. Enriched with fast-paced leaps in urban and rural demand, the confluence of a complex skill set with affordable labor as well as favorable policy responses by the government, the markets witnessed an extensive volatility cycle. Due to the normalization and rebound of economic activities from the impact of COVID-19 in the financial year 2020-21, the benchmark index, Nifty 50 rendered a return of 67% to the investors.
SHIFT OF FOCUS FROM TRADITIONAL BUSINESS SECTORS TO TECH-DRIVEN SEED-STAGE SECTORS
The impact of the pandemic led to an overall decline of investments by 25% in the year 2020. However, the lockdown and physical restrictions were advantageous for digital start-ups. The sudden boom was led by the increased penetration of the internet as well as digital devices. Fintech, EdTech, as well as SaaS enterprises, are seen to be the top sectors for investment. In the current financial year, the three sectors received over 47% of the total funding activity. It was found that over 84% of the funding activity was driven by last-stage tech deals and Series B funding. Furthermore, the entry of these companies into the primary markets, through the initial public offer has created an overall frenzy in the Indian financial markets. According to PwC, the startup funding in India crossed USD 10 billion in Q3 2021 for the first time in any quarter. India added the greatest number of unicorns after the U.S. in Q3 2021.
STRESS ON ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) INVESTING
The performance of the companies in the years to come will be contingent on the sensitivity towards the non-financial Environmental, Social, and Governance (ESG) based indicators. The process of price discovery is aided by ESG based investments. According to United Nations Principles for Responsible Investment (UNPRI), the net inflow of ESG investments amounted to a record inflow of USD 168.74 billion in 2020. The ESG focused companies are expected to be more accountable to internal as well as external stakeholders, rendering promising returns to stakeholders.
FINANCIAL INCLUSION AND PENETRATION OF TECHNOLOGY
The increasing financial inclusion and awareness about the primary markets have fostered investment activity in the country, especially through retail investors. The Indian stock markets are currently dominated by retail investors. The National Stock Exchange alone saw a spike of 45% in 2021 compared to 33% in 2016. The influx of technology to capture real-time price movements will also encourage an increasing number of participants from the Tier2 and Tier 3 cities to participate in the pooled growth of the Indian corporate sector.
THE FATE OF CRYPTO AND DIGITAL CURRENCY
According to Colliers, India recorded a leap of 31% in investment in emerging asset classes in 2021. The introduction of new asset classes such as cryptocurrency was intended to restore the economy from the inefficiencies of central currency systems. India accounted for the largest number of crypto owners in absolute terms, with 10.07 crore users, despite the ambiguity in crypto laws in the country. The central government is on the verge of banning private cryptocurrency with the ‘Cryptocurrency and Regulation of Official Digital Currency Bill’, which led to the development of fear among investors along with a massive plunge of cryptocurrency in November 2021. The future of crypto investments will be solely based on the final decision made by the central government regarding the same. Start-ups and professionals working in the shared blockchain space will be hurt by the introduction of unfavorable regulations and a ban. A brand new influx of 30% tax on gains from digital assets have also shaped the
STARTUP AS AN ASSET CLASS FOR HNI
Investments in startups were previously reserved for venture capitalists and private equity investors. Currently, the Ultra High Net-Worth individuals are keen on investing a part of their funds in lucrative startups. In 2021, over USD 23 billion was raised by the unicorns, witnessing a doubling of average deal size. The diversification of investments from public markets is supported by the IPO frenzy and stellar listing of tech-driven companies such as Nykaa, Zomato, and Policy Bazaar will motivate the private investors to park their funds in such private, unlisted startups. The due diligence is conducted by fund managers, increasing preference can be witnessed by Indian investors who are seen to be investing in Alternative Investment Funds (AIF). Apart from early-stage startups, the AIF may capture the benefits accrued from debt for Micro and Small Enterprises, Real Estate, and other asset classes.
WAY FORWARD
The Consumer Price Index rose to 4.48% in October 2021. The RBI maintained an accommodative stance across FY21 to curb the impact of COVID-19 and supplement growth. However, the inflationary pressure may lead to an increase in interest rates in FY 2022. The Indian government has aided the companies through a series of production-linked incentives in the IT, textile, and telecom sectors among others. The investment ecosystem is expected to provide substantial returns to the investors through the proliferation of technology such as AI, Machine Learning, and Blockchain. However, caution and due diligence should be practiced to maximize returns and minimize losses in the market.
- Shreya Cherian
