As one of the leading Indian venture capital firms, we would make the following points to global investors looking at India, without getting into party political analysis.

Firstly and fundamentally, India’s economic prospects remain extremely robust. India is on track to become the third largest economy in the world by 2030. It is expected by the IMF to be the fastest growing major economy in the world this year at 6.8 per cent, and to continue at 6.5 per cent in 2025.

This growth is being powered by compelling long-term trends. India’s working age population to population ratio will be the highest of any largest economy by the end of this decade, and consumer spending is set to double in size in the same period.

Even better, India’s growth is digital-led. Between 2018 and 2023 the number of internet users in the country increased from 398 million to 907 million, growing from 29 per cent of the total population to 64 per cent. There are now nearly a billion mobile phone users in India, more than two-thirds of the total population.

Secondly, one of the best ways to access India’s highly attractive growth is via investing in startups.

India now has the third largest startup ecosystem in the world. There was a period of extraordinary growth between 2020 and 2022, when the number of unicorns trebled to over 100 and the number of startups increased by over 50 per cent to 57,000 with a combined valuation of over USD450 billion.

The picture became more complex in 2023 which was a difficult year for a number of reasons including a global economic slowdown and post-Covid market corrections. There was a sharp decline in deal volume and fundraising, which fell 50 per cent overall.

Now, however, there are clear indicators that growth is returning. The number of startups in India rose from 57,000 to 68,000 last year. The number of unicorns has also continued to grow, to 115, with 112 “soonicorns” in the pipeline.

Thirdly, the Indian government has been very supportive of the Indian startup ecosystem and this is very likely to continue.

Previous initiatives include the Fund of Funds for Startups (FFS) scheme, the Startup India Seed Fund Scheme (SISFS), and the Credit Guarantee Scheme for Startups (CGSS). These were implemented under the Startup India initiative to provide capital at various stages of a startup’s business cycle. The government also previously announced several new measures including tax concessions for startups and customs duty exemptions for EV-related capital goods and machinery.

Fourthly, there are other strong factors which could drive future growth. Last year, it was reported that Indian investors have lined up about USD20 billion in dry powder–capital waiting to be deployed in startups. India retained its position as the second-largest destination for venture capital and growth funding in the Asia Pacific region.

The exits that VC funds were able to secure in 2023 in India amounted to USD3.46 billion across 79 deals. That number is likely to rise significantly in the years to come as the Indian startup ecosystem resumes its growth trajectory.

Fifthly and finally, this positive outlook is further supported by the growing focus on high-innovation sectors such as BioTech, Speciality Chemicals, HealthTech, and DeepTech. All of this is being driven by venture capital investment and demonstrates the growing maturity and sophistication of the VC industry in India.

The result of these positive tailwinds for the Indian startup ecosystem is that there is likely to be increased international investment deployed into the space via Indian VC funds as global allocators increasingly recognise the highly attractive opportunities available.

These investors will be likely to recognise that they cannot allocate capital without having the right partner on the ground that can guide them through the complexities and nuances of the Indian market. Indian VC funds that can demonstrate both a strong track record and a distinctive investment philosophy and that have sophisticated international quality operational infrastructure will be best-placed to be those partners.

“In India we have a saying, ‘There’s always room for one more.’” This insight from our Mumbai tour guide perfectly describes what we saw during our two-week research trip through Mumbai, Bangalore, Delhi, and Amritsar.

From watching five people pack into an auto-rickshaw built for two, to weaving through the unimaginable density of vehicles, motorbikes, rickshaws, CNGs, and pedestrians on the roads and markets… From witnessing the religious and cultural diversity in the mosques and temples that dot the same streets… It’s clear that it’s not accurate to describe India as merely a “country.” India is – more aptly put – a union of states, as someone in a meeting in Delhi said. How else can you describe a land uniting 17 per cent of the world’s population (1.4 billion people), more than 2,000 ethnic groups, six major religions and 121 spoken languages (22 of them official)? 

I saw this for myself at a dinner with a group of young Indian dancers in Mumbai. In a group of 15, each person was from a different state in India (there are 29 total), spoke anywhere from three to five languages, and communicated amongst themselves in English. Three-quarters were “veg” and only a quarter “non-veg” according to their cultural beliefs and in total represented three different religions.

Our guide’s saying, evoking inclusion and community, was perhaps most visible at the Golden Temple in Amritsar, the holiest shrine in Sikhism. The temple is home to the world’s largest langar (community kitchen) where anyone of any background can find a free meal or a place to sleep. Completely run by donations and volunteers who cook 24/7, the langar feeds 100,000 people every day, and tens of thousands more during religious festivals.

At a business and policy level, we saw this concept reflected in government digitisation initiatives like the Unified Payments Interface (UPI). When meeting with Paytm in Mumbai, one of India’s preeminent fintech companies that helped build the tech behind UPI and now offers innovative subscription-based payment solutions for vendors, we gained insight into the real-time digital payment system. Launched in 2016, UPI now accounts for 68 per cent of all payment transactions by volume. The UPI QR code is ubiquitous in India; operated by companies like Paytm, Phone Pe and Google Pay, it can be found in kirana stores (mom-and-pop shops), individual ice cream sellers parked in tourist areas, and even in chai stalls and fruit stands in the Dharavi slum, made famous by 2008 film Slumdog Millionaire. When buying tickets for a monument like the Taj Mahal or Humayun’s Tomb, you get a significant discount when paying with UPI or card, while cash-paying customers pay full price. (This is in line with Modi’s 2016 demonetisation campaign, which kickstarted India’s revolution in digital payments).

In an economy that is 50 per cent driven by consumption alone and where 90 per cent of that commerce happens at kirana stores, simplifying transactions and reducing payment transfer delays through UPI has a massive rippling effect. Improving cash flow for sellers and buyers alike encourages the establishment of new businesses and drives consumption. In 2021 alone, UPI unlocked USD12.6 billion in cost savings and USD14.6 billion of economic output in India. Beyond India’s megacities, UPI has started to find its footing in cash-dominant semi-rural and rural stores; in 2022, UPI transactions saw a 650 per cent increase in those regions. While urban areas rapidly digitise, India’s efforts to promote digital financial inclusion ensure the rural consumer doesn’t get left behind. 

After effectively digitising payments, India is now turning its attention to revolutionising e-commerce. In our meeting with Invest India in Delhi, the national investment promotion and facilitation agency, we got a glimpse into the Open Network for Digital Commerce (ONDC). This government initiative will make “digital commerce in goods and services available equitably to all Indian citizens,” according to ONDC’s Strategy Paper. Currently in testing and set to launch in mid-2023, ONDC will support a decentralized ecommerce network that all players – from Flipkart, Amazon, Uber and Zomato, to supermarkets, retailers and the 13 million kirana stores operating in India – can plug into. With all players in food, fashion, payment and travel accessible in one super-app, ONDC will enable any buyer to connect with any seller on the open network. The super-app will increase visibility of all merchants, including small and medium sellers that are often digitally excluded, expand choice and improve pricing for consumers, and drive healthy competition and a level playing field in an industry dominated by giants in other markets (think Amazon, Alibaba).

Having spent many years living and working in other emerging markets like Kazakhstan, Uzbekistan and Russia and following their efforts to improve market efficiencies and digitise, I find India’s journey incredibly compelling. India is conquering its unique conditions – which could easily impede another country’s journey – head on. Its mind-boggling density, ever-growing population, staggering ethnic and linguistic diversity, low smartphone/internet penetration, and limited infrastructure are the same conditions that are enabling India to leapfrog traditional consumption/development stages and go straight to digital, creating more efficient public and private services than we in the US could ever imagine.

India’s digital transformation has been commended by many, including the IMF in a recent working paper, as a world-class example for other countries to look to. Unlike many emerging markets where the private sector steps in to fill public service gaps, India’s government is a key innovator in the market and even a catalytic actor in the country’s digitisation journey. (When is the last time you heard a government described as a catalyst?). The goal behind Digital India is not merely to digitise specific public services, but rather build digital building blocks that can be used by both government and private players to “enable society-wide transformation” (IMF). India’s focus on building a digital environment that empowers, unites and supports innovation across the entire ecosystem is – to my mind – what sets it apart from the rest. 

In India, “there’s always room for one more,” and everything the country’s doing will ensure that this fast-rising tide indeed lifts all boats.

Fans of Kevin Costner* may recall Field of Dreams. The above quote went to the heart of the 1989 film. It sprung to mind during our recent visit to India. Namely, that Indian infrastructure is finally shifting from a ‘hindrance’ to a ‘help’. In the words of The Economist, “India is getting an eye-wateringly big transport upgrade.”

Now those of you who know us as investors in Emerging Markets (“EM”) consumption may be asking how does this help Aubrey EM? Stay with us and the answer will become abundantly clear.

The current breakneck pace of infrastructure spend is most painfully obvious in Mumbai, where city planners are trying to build out 10 metro lines simultaneously, as well as a highly ambitious and partly submerged coastal expressway. It is the same story in Indore, India’s 17th most populous, and apparently cleanest, city where another metro line is under construction. This is more of a pre-emptive build, as we have become used to in China (‘if you build it…’).

However, most English-speaking journals reporting on this give the Modi administration little credit. The first dig is always that the development was set in motion by previous administrations. But we remember the great reforms of Narasimha Rao’s government in the early 1990s which were going to rid India of its ‘Hindu rate of growth’, and the numbers clearly suggest otherwise. In 1990, China and India had the same GDP per capita of around USD350 per head of population. Today, China’s number is 5x greater: USD12,500 vs USD2,500. There was precious little progress before Modi.

India’s previous investment boom was a decade ago, and was fuelled by public sector banks, whose balance sheets were compromised for a period of time. The resolution of these state banking problems was one of the thorniest issues facing the Modi administration but has finally been resolved through a combination of mergers and recapitalisation. India’s now well capitalised banking system is a key reason why a cyclical upturn is poised to reinforce the well-known structural story, with loan growth rising steadily for the first time in a decade.

There are multiple drivers for the coming investment upturn. However, the major one, in our view, will be private sector corporate capex. This will be from domestic corporates, most of whom (other than perhaps the Adani Group) are starting from a very strong and underleveraged financial position, as well as foreign companies.

At a little over USD80 billion last year, foreign direct investment (“FDI”) was at record levels for India, but in Chinese terms at least, it is still small. Modi’s reformed promotion body, ‘Invest India’, is helping, as are his production-linked incentive schemes. So too are state incentives as competition to land new investments intensifies. The poster boy is perhaps Apple, whose iPhone exports from India grew from USD100 million/month last April to a staggering USD1 billion/month in January this year. But manufacturing investment is broadening rapidly with flows from 162 countries, into 61 sectors and directed to 31 states and territories, that is, nearly all of them.

All the above helps to explain why India is now, not only a realistic destination for those seeking to diversify from China, but it is also becoming a more obvious one. None of this is to say FDI won’t continue to wash up on the shores of Vietnam, Indonesia, or Mexico, but an ever-increasing share is heading to India.

And this is where the potential for consumption comes in. India’s urbanisation rate is low, at around 35 per cent, and the opportunity is in growing this more rapidly. But why would you leave the farm if there are no jobs in the towns or cities to go to? What this investment upcycle implies is rising urban job creation, whether its construction, manufacturing, or associated service jobs, and only this will drive urbanisation. Experience tells us that an urban job comes with an income which is a multiple of the rural one left behind, and that multiplier drives consumption.

Our friendly Mumbai Uber driver, Sakir, was a case in point. Hailing from Chhattisgarh, one of India’s poorer states, he taught himself decent English which allowed him to negotiate the outrageous rate of INR2,500 (USD30) for a day driving around Mumbai. With his wife, who makes clothes, and two children he lives in a “small house”, for which read tenement. An apartment is not yet within reach but is an aspiration. As well as keeping them clothed, housed, and fed, he also pays for some form of private education for his children so that they can have a better future. No doubt, some funds also return to relatives back home. That USD30 USD, less the cost of running a half-respectable Maruti for the day, goes a long way.

*It’s reasonable to believe that following ‘Yellowstone’ his fan base will be larger now.