India, the third-largest startup ecosystem in the world with 60,000 firms, added 46 unicorns in 2021, doubling the number of billion-dollar companies to 90, according to the 4th India Tech Unicorn report, by Mumbai-based Orios Ventures.

Indian startups raised $42-billion in 2021, up from $11.5-billion in 2020, according to the report. Of the 11 companies that went public in 2021, raising more than $7-billion, eight were unicorns. They include fintech major Paytm, food delivery giant Zomato, omnichannel beauty retailer Nykaa, and SaaS firm Freshworks. Meanwhile, at $37.6-billion, Flipkart, in which Naspers once held a stake, is India’s most valuable unicorn.

“Indian unicorns are flourishing in this fast-paced and dynamic economy. These startups are not only developing innovative solutions and technologies but are generating large-scale employment,” the report noted. “Today, one out of 13 unicorns globally was born in India.”

Of course, India has some way to go. In comparison, the US added 254 unicorns in 2021, taking the count up to 487, and China saw 74 startups turning into billion-dollar companies, which shot up the total number of unicorns in the country to 301.

It’s not surprising then that global fund managers are increasingly paying attention to India’s potential as an investment destination. There is growing consensus that India could take over from China as the main driver of emerging market returns in the coming years.

The economy is set to outperform that of China by two times in the next two years. “The IMF has forecast India’s GDP growth at 9% in 2022 and 7.1% in 2023, placing India at the top of the table among large emerging market economies,” said Laura Cooper, director at global investment manager Blackrock, at a seminar hosted by Satrix.

The Indian government is also taking note of local startups achieving billion-dollar-plus valuations. In January, India’s commerce and industry minister Piyush Goyal said the country should push to grow more unicorns. “Let us make India among the top 100 destinations in the world. A destination for innovation and invention. Let us target to nurture an additional 75 unicorns by the end of this year,” Goyal said at the inauguration of the Startup India Innovation Week in January this year.

Not wanting to miss the opportunity for local investors, index-tracking firm Satrix is set to launch an India-focused exchange-traded fund (ETF) that will provide South African investors with exposure to this market. Although it is not the first investment fund focused on India, it is the first ETF.

The fund, which will track the MSCI India NET TR Index, will give investors direct access to the Indian economy at a time when the country is poised to outperform emerging market peers such as Brazil, China, Russia, and South Africa.

It’s the second emerging market fund launched by Satrix, the first being China. “Emerging markets have always fascinated local investors because they offer the potential for higher growth as increasing portions of those populations move into the formal economy, thereby gaining access to a wider variety of goods and services,” says Kingsley Williams, CIO at Satrix Investments.

Much of India’s promise stems from its growing share of international trade, he says. “India is becoming more impactful for global growth through its trade linkages and global supply chain, but the key point is around its favourable demographics,” he says. Not only will India overtake China as the world’s most populous country in coming years, it is also forecast that some five billion people will enter the middle-income segment in the next decade. India also boasts a median age of under 30, with 375 million people in the Generation Z sub-set compared with just 250 million in China.

The MSCI India Index outperformed the MSCI Emerging Markets Index by 28% in 2021 and the MSCI World Index by 7%. One of the key drivers of this outperformance is that the “digital first” approach adopted by many countries in response to the pandemic has significantly benefited India’s economy, explains Tom Husmann, an equity and commodity product strategist in the iShares EMEA Product Strategy Team. “From a long-term strategic growth perspective, India has a great deal of exposure to the megatrends that Blackrock believes are shaping the next era of investing.”

These megatrends include climate change and resource scarcity, demographics and social change, emerging global wealth and technology breakthroughs.

“India has the third-largest startup ecosystem after the US and China, making them stand out from a technology breakthrough megatrend perspective,” Husmann adds.

Another positive is that India is making strong progress in the renewable energy fields. It boasts the world’s third-largest renewable energy sector and ranks fifth for solar power. And there are plans to invest another $1-trillion in solar projects as the country works towards the net zero carbon emissions targets set at COP26.

Of course, as an emerging market, India has its own challenges, and investors should not be blind to these.

Indian unicorns are flourishing in this fast-paced and dynamic economy. These startups are not only developing innovative solutions and technologies but are generating large-scale employment.

Although India is growing faster than most major nations and its stock market indices, such as the Sensex and Nifty, had a record year in 2021, economists are warning that these indicators, though welcome, mask a worrying challenge that India will confront this year. This is inflation, which is rising fast, driven by fuel and energy prices. In addition, urban unemployment – most of the better-paying jobs are in cities – is also rising and is now above 9%, according to the Centre for Monitoring Indian Economy, an independent think-tank.

“Inflation hits the poor the most,” said Jayati Ghosh, a leading development economist at New Delhi’s Jawaharlal Nehru University. Inflation in particular has the potential to derail growth.

But Cooper dismissed concerns about the impact of inflation as well as lingering concerns about the pandemic on India’s growth prospects. “For as long as inflation remains contained, we expect conditions to be supportive of the IMF’s growth outlook,” she says. As for the pandemic: “With more than half of the adult population fully vaccinated, the economy does remain relatively resilient in the face of further waves.”

India’s tech economy is driven by the software and services sector rather than manufacturing, as is the case in China. This adds a degree of resilience. “Twenty percent of the MSCI India Index derives from the technology sector,” says Williams.

“Software and services businesses within the emerging market block have enjoyed a consistent and smooth performance premium compared to the rest of the market [during times of crisis]. The conclusion is that the premium paid for this index, as measured by its price-to-book ratio, is more than offset by its weighting to software and services companies within the information technology sector.” DM168

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