Even with all the uncertainty in global economic markets, as the World Economic Forum?s India Economic Summit is held in Mumbai for the first time in its 27-year history, India?s investment outlook continues to be net positive. The drivers for this optimism are two-fold. First, domestic consumption will continue to increase. Companies, both Indian and foreign, are expanding their horizons to set up operations in India to meet the ever-increasing demands of the emerging middle class. Second, Indian companies are in the process of ?going global? and providing strong competition to indigenous market leaders.
Thus, there is great potential for mid-to-top tier companies to increase their business at home and abroad. This will fuel even greater foreign direct investment in India. Foreign private equity will play a large part in helping all of ?India Inc? achieve that potential. The World Economic Forum?s India Economic Summit provides an appropriate backdrop, in India?s business capital, for leaders from ?India Inc? and the rest of the world to come together to explore growth opportunities.
Private equity investment in India will also accelerate because of the rising cost of capital and dormant public markets. This will push businesses and their promoters to look elsewhere for much-needed capital to support their ambitious plans. There are going to be a lot of opportunities both for long-term debt as well as high-quality, long-term capital infusion for equity deals.
Every sector in India has the potential to grow. While promoters need capital and private equity firms are looking to provide that capital, more and more Indian promoters are recognising that they should look for long-term partners who go beyond capital provision. Indian companies need partners who support their business. They increasingly look for firms that can offer strategic counsel to supplement their local market expertise, can bring international best practices to their team, and can assist in expansion and entry into foreign markets.
While organic growth is sustainable and will increase steadily, Indian businesses need to move beyond counting on ?a rising tide lifts all boats? mentality. Inorganic growth through acquisitions or scaling-up existing operations needs to be considered as a part of any company?s growth strategy.
Availability of capital is going to continue to be competitive, as companies will be judged increasingly on the basis of management, ability to scale-up growth, corporate governance, infrastructure and productivity. So, even though we may see a strong shift towards alternate sources of capital, promoters must demonstrate potential and ambition for value creation to attract the right kind of capital. With too many investors chasing too few quality deals, the situation has shifted to businesses seeking the right investment partners.
More and more companies in India realise that becoming more sustainable must be a part of their everyday business model. An investment firm?s ability to work with its portfolio on environmental, social and governance (ESG) issues allows the private equity firm to be a better investor and allows its portfolio companies to be more sustainable and profitable. This is an increasingly important way to protect and grow value at a time when companies around the world increasingly face challenges to their long-term sustainability. This is why it is important for firms like ours to be involved in the World Economic Forum?s work on sustainable investing which examines key pathways for investors, corporations and other key stakeholders in the investment value chain to accelerate the transition towards sustainable investing.
However, there are certain challenges which pose serious threats to the overall growth story. The biggest being a burgeoning fiscal deficit without adding commensurate ?capacity? in the economy. This results in sticky and rising inflation which impacts the profit margins of the companies in India. The price conscious Indian consumer cannot take on every price hike. This not only dents consumption but is also impacting consumer confidence in the country.
Supply-side issues need urgent attention. Indian entrepreneurs need a confidence boost to reinforce the opportunities for home-grown businesses and the potential to evolve into strong and sustainable worldclass enterprises. This can only be tackled once policy programmes are fast-tracked and supplemented by capital solutions. Once fiscal reforms on the expenditure and revenue side are tackled, coupled with capital market reforms, the Indian companies can hope for an overall lower cost of capital.
Still, with all of these challenges, India remains a good source for investment. Foreign direct investment which goes beyond just providing capital but also includes a partnership approach which brings the ability to offer real value-creation to the Indian companies is they type of investment which will be most welcome as Indian companies look to take advantages of market opportunities both in India and abroad.
The writer is CEO of KKR India Advisors and member of the World Economic Forum
