India's capital markets indicative of strong growth in 2018

Having navigated a period of adjustment resulting from the introduction of GST and the demonetisation drive, India’s economy in general – and capital markets in particular – are back on upward trajectories. A new report from Grant Thornton reveals that India's thriving startup culture has played a big role in this turnaround. 

Against the backdrop of a rapidly expanding economy, Indian markets have had a challenging couple of years from a policy perspective. The demonetisation drive in 2016, which was an attempt to tackle the 'black money' issue by discontinuing the two largest currency denominations in the country, put an abrupt stop to cash flows and brought about a sustained dip in economic output. 

Then came the comprehensive Goods and Services Tax last year, which eliminated traditional licensing and taxation procedures to create a single, streamlined, umbrella taxation process. The government introduced GST to reduce technical and administrative costs and improve the ease of doing business.

The GST also caused substantial disruption, as companies had to rearrange their financial structures to comply with the new regulations. Nevertheless, both policies were born of the ‘short-term pain, long-term gain’ school of thought, and a new report from Grant Thornton reveals that the painful period may be over.

For starters, India’s GDP graph has finally tilted upwards in recent months, following five consecutive quarters of decline. The GDP growth rate pushed past the 6% mark, which prompted a number of predictions that India's economy could become the second largest in the world in coming decades. 

The financial sector has made a particularly strong recovery over the last year. On the back of strong inflows of capital, Indian stock market indices Sensex and Nifty registered growth of 28% and 29% respectively, raising the market to its highest point in ten years. The relaxation of policies around Foreign Direct Investment also had a large role to play in this scenario.

Perhaps the biggest jump, however, came in the level of IPO activity in the country, particularly in the latter half of last year. While there were 37 firms that issued IPOs over the whole of last year (generating a total of $10.7 billion), more than 25 of these came in the second half of the year, contributing $9.3 billion to the total values raised.

As per the report, the long-term, pro-business policy framework being laid down by the government has proved invigorating for investor sentiment in the country, aiding the success of IPO issues. In addition, IPOs offer majority-stake private equity firms with an easy exit option – a trend been exemplified by Warburg Pincus, ChrysCapital, Kedaara Capital, and a number of others.

Nevertheless, the private equity sector remains active, and has been particularly supportive of the booming startup environment in India. Overall, the number of private equity deals in India dropped last year, but the value generated from these deals saw a huge jump to nearly $21 billion from just under $14 billion in 2016. The dichotomous scenario was brought about by a number of high-value deals in the telecom sector. 

Most of this deal volume was driven by the startup sector. The National Capital Region, Maharasthra, and Karnataka – which are home to India’s biggest financial centres such as Delhi, Mumbai and Bangalore – all saw approximately 200 deals each completed last year. The top sector in each of these cities was the startup segment.

Commenting on the overall economic scenario in the country, Harish HV, Partner at Grant Thornton India said, “We entered 2018 in high spirits as the economy is poised for growth post demonetisation and successful initial implementation of the GST. India’s ranking has improved in the World Bank’s Doing Business report by 30 spots over its 2017 ranking. Also, as per the mid-year Economic Survey of India, the country received its highest ever FDI of USD 43.4 billion in FY17, becoming one of the most open global economies with the right liberalisation measures.”