The foreign stimulus

Source: Business Standard 

Synopsis:

Foreign money pouring into the start-up universe may finally provide the stimulus to the economy that the government was unable to provide. This money would help the country to achieve a sustained growth rate of 7% for the coming years.

Background:

• The Indian start-up scene is on fire. In the first six months of calendar 2021, $10 billion was raised by start-ups and private companies in India. In July, another $10 billion was raised, led by the mammoth $3.6 billion by Flipkart, the single largest fundraising by a private company in India. 
• At this rate, in 2021, we may see almost $40 billion being pumped into the Indian private company universe by global capital. This surge points to the faith shown by investors in the Indian Economy.

Factors pointing towards a robust future growth of the Indian Economy:

First, money raised by the start-up/private ecosystem will be spent to hire people, build infrastructure, strengthen the core tech, accelerate demand and build the brand.

Second, experts have predicted a strong revival of the IT sector. Attrition has rocketed (Cognizant just reported attrition of 31%) and salary hikes are accelerating. 

• Attrition is defined as the natural process by which employees leave the workforce (through resignation or retirement) and are not immediately replaced.

Third, there is a clear trend of higher value-added manufacturing relocating to India. The trend is a result of the Production Linked Incentives schemes, China+1 strategy adopted by most MNC’s or structural industry change. 

• It is noticeable particularly in specialty chemicals, API, precision manufacturing in automotive and light engineering, and textiles. As a result, exports will accelerate, after almost five years of no growth.

Fourth, there is a clear reversal in the real estate sector. Housing demand is strong and pricing is improving. It is only a matter of time before new construction begins to pick up. 

• This sector has been under serious stress for almost five years now. A recovery here will be a big multiplier, as it creates low-skill jobs and pulls in demand for cement/steel, and helps clean up the non-performing asset mess.

Way Forward:

• India must make sure that it does not shoot itself in the foot and inadvertently take measures to temper foreign enthusiasm. The enthusiasm is very high towards India due to the apparent next wave of innovation and a high degree of mistrust over China post the pandemic.
• The proposed pricing and valuation of some new issuance in the start-up space seem quite rich. It is inevitable that a few issues will fail and investors, including retail, will lose money. However, even if some companies fail, we cannot shut the door to IPOs by the start-up ecosystem or raise significant hurdles to list.
• We must also be careful to guard against the perception of a lack of a level playing field. Many global investors are continually worried that domestic lobbies can make the operating and regulatory environment difficult for foreign-funded companies. There should be no discriminatory treatment of such companies in order to ensure a continuous flow.