Namaste, India…

What an enormously complicated time to have been in India, and to have been there alongside the recent G20 Summit made for an even more precarious environment. With a general election a year away, Prime Minister Modi assumed the role of global statesman with gigantic posters festooned throughout Delhi. Notwithstanding that the twenty foreign ministers were unable to agree on a joint Ukrainian statement, Secretary of State Blinken and Russian Foreign Minister Lavrov met in Delhi for the first time since the start of the war.

India must walk a fraught tightrope as the country appears to be pivoting more towards the West, as China becomes a greater adversary. Surprisingly, a series of editorials earlier this month in the Hindustan Times expressed deep sympathy toward Russia (citing NATO encroachment, etc.), hoping to ensure important economic ties, while also extolling Modi to “lead in Ukrainian talks.” Since the start of the war in February 2022, India’s purchase of Russian crude oil has increased a staggering 33-fold, and at a 30% discount to global oil benchmarks. India imports nearly 90% of its oil but has created a vast oil refinery industry, ironically now likely to serve as a potential refinery to European oil needs.

While unemployment spiked last month to 7.5%, up from 7.1% in January, the International Monetary Fund estimates that the Indian economy will grow by 6.1% in 2023 and 6.8% in 2024. According to the Centre for Monitoring the Indian Economy, the workforce is estimated to be 410 million people, 35 million of whom work in the manufacturing sector while only 2 million are in information technology. Much of the economic growth is in corporate jobs (finance, investments, business process outsourcing) which tend to be less labor-intensive given each unit of output, thus the spike in unemployment in the face of strong growth. This also accounts for Modi’s recent initiatives to reform labor laws to frankly look more like China. Under his watch, the major public equity index (Bombay Stock Exchange SENSEX) has responded.

Encouraging multinational migration to India is a critical objective of Modi. At the end of 2022, he announced a $30 billion production-linked subsidy program to relocate manufacturing facilities to India. Foxconn announced a 2024 goal to produce 20 million phones in India. Today, only 3% of all iPhones are made in India; the goal is to take that to 25% by the end of next year.

Major automakers are moving significant production capacity from China to India in response to the 24% increase in local passenger vehicle purchases to 3.8 million units in 2022. India is now the third largest market, tied with Japan; by 2030 it is estimated that 7.5 million vehicles will be sold in India, according to Arthur D. Little. Notably, in 2019 India withdrew from the China-sponsored Regional Comprehensive Economic Partnership of 15 Asian countries to promote free trade in the region. While improving, India still has some of the highest trade tariffs with an average of 18.3% as of 2021.  

There were prominent story lines earlier this month that echoed issues we see in the U.S. and that undoubtedly spin up with any society in transition. While there, the Supreme Court was to consider a case to outlaw same-sex marriages, citing it would lead to “complete havoc.” Just in 2018, India decriminalized same-sex relationships, a head-spinning change in direction. Last week the state of Punjab had its entire internet taken off-line for 27 million people as authorities searched for a Sikh separatist. This was topped by the two-year sentencing of the leading opposition figure, Rahul Gandhi, for suggesting in 2019 that Modi was a thief.

There is much, though, for Modi to crow about. Electricity production has increased 66% since he took office in 2014. Just in the last three years there has been a 3-fold increase in homes with running water to 108 million. There are twice as many airports. Corporate tax rates have been lowered from 30% to 22%. The 350 million middle class Indians have clearly seen a marked improvement in quality of life, even with some recent warning signs. GDP in 4Q22 increased by 4.4%, which is slower than the 3Q22 rate of 6.3%, but was 1.5% ahead of China’s 2.9% 4Q22 GDP growth. In fact, 4Q22 manufacturing declined 1.1%, which was the third quarter in a row, and underscores the urgency of many of Modi’s initiatives to entice multinationals to relocate production capacity to India.

The local venture capital industry also saw significant declines in 2022. According to Bain & Company and Pitchbook, overall venture capital investment was $25.7 billion in 1,611 companies in 2022 as compared to $38.5 billion in 1,545 companies in 2021. While the number of investments was modestly higher, the average deal size was markedly lower at $16.0 million as compared to $24.9 million the year before. Aa a point of comparison, the U.S. venture capital activity was $238.3 billion in 17,990 companies in 2022. India now accounts for roughly 20% of all venture capital investments in the Asia Pacific market and ~5% globally.

Consistent with many other markets, the Indian venture capital industry witnessed a surge of activity during Covid, in part due to the greater awareness of new innovative solutions required to navigate this new reality and also given extraordinary liquidity and nominal cost of capital. The eight trailing years heading into Covid saw an average of 610 deals per year in India, which spiked nearly 3x during the pandemic. Much of this investment activity was driven by the arrival of numerous seed funds, which now number more than 80 firms. There are thought to be 200 corporate venture capital funds operating in India today. According to Tracxn, there are 1,654 venture capital firms in India now.

There was a dramatic rotation to earlier and mid-stage investment rounds, with a rather dramatic pullback in late-stage rounds in 2022. There were only 48 “mega rounds” (greater than $100 million) in 2022, compared to 92 in 2021; most of the decline occurred in 2H22. Notwithstanding that, there were 23 unicorns created in 2022, eclipsing 100 in total – a strong barometer as to the strength of the Indian market. In light of that, though, there is growing anxiety about the exit environment; there were only eight IPOs in 2H22 and analysts note that at least 10 pending technology IPOs have been recently pulled. Total exit level in 2022 was approximately $3.9 billion, well below the $14.3 billion in 2021.

There was a significant deceleration of investments in the healthcare technology sector, as highlighted below, to $700 million in 35 companies, which is somewhat surprising given India ranked 66 out of 195 countries for overall global healthcare security index. According to a recent World Bank study, India spends 2.2% of GDP on healthcare, suggesting an extraordinary market opportunity for healthcare technology to improve access to affordable care.

A World Health Organization (WHO) analysis concluded that Indian life expectancy today is 70.8 years, which is nearly half a year longer than just in 2021, but sadly ranked only 117 in the world. The WHO calculated 44.7 million Covid cases with 531k deaths. India ranks third in the world for the incidence of lung disease, in part due to the extraordinary level of air pollution. A headline in the Hindustan Times earlier this month featured a leading Indian actress (Saiyami Kher) complaining that she still coughs after running the Mumbai Marathon in January. There was chaos surrounding each hospital I saw in Delhi.

There was one other dimension to good public health which one is often reminded of: whatever you do, do not stare at the monkeys…which are everywhere. And certainly, do not tease them – they can be very sensitive.

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