Investments into India is at crossroads

India is booming. There's little to contradict that, at least on a comparative macroeconomic basis. Our Gross Domestic Product (GDP) is amongst the fastest growing within large economies and is projected to continue growing meaningfully.

Consumption is thriving, and the sun appears to be shining on most sectors. Manufacturing, particularly tech manufacturing - long perceived to be just over the horizon - is now within grasp, with multiple billion dollar projects breaking ground. Flow of capital both in and out of India is relatively easy; the capital markets are strong and reliable, while the political and regulatory regimes are largely comprehensible and predictable. 

Given the paucity of growth globally, capital seeking returns will find a natural flow towards India. This is magnified by the closure of China, largely, as a capital destination numbed somewhat with Ukrainian crises and European slowdown, which has frozen decision-making amongst capital allocators in Europe. Overall though, it looks good for India from an Foreign Instituional Investors (FII) perspective, and we can expect an expansion in the private equity market at minimum, possibly in the debt markets as well, over the medium term.

But then comes the worrying news: interest rates are higher than they have been in a generation, and projected to keep rising. Inflation is up and also expected to keep inching upwards. Global supply chains are taking a beating, and political uncertainty looms the world over, with tensions between China and Taiwan and the Ukraine crisis. And just when things were looking to ease up, Russia massively escalated in Ukraine with 300,000 troops and the threat to go nuclear. 

If you run a small company, you'd be right to experience a bipolarity of emotions ranging from euphoria to despair, about your prospects in the short term. The simple question is: are you good? Unfortunately, there is no short answer. 

If there ever was a time when making predictions was hazardous, we are in it now. This uncertainty breeds restlessness in markets, making capital-raising hard. For equity and debt alike, this is a difficult and expensive market. 

Valuations are going through a major correction, and companies in the market for raising equity today are price takers. Markets reflect this, with equity markets freezing up. Of the past three quarters, the first two saw around a 15% decline in startup funding, while the last one saw a whopping 37%. 

The debt situation is better, but only marginally. Higher interest rates have made lending tougher, so if you have healthy financials and a robust balance-sheet, you could be fielding offers for loans. But for most, it simply means that debt today, like equity, is just more expensive. Whether you are borrowing from a bank, a venture debt firm, operational lenders or NBFCs, they must pass on the increased cost of capital they are encountering, which leads to a market with lesser borrowing. It's Monetary Policy 101 in action.

If I were to put my economist hat on, I’d put my money on India being good, on average, in the medium to long term. I can’t say the same about Indians though, who are running small firms, and that is an important distinction. It is time for you to be proactive. It is always better to enter an uncertain environment overcapitalized rather than under. 

If you can raise capital today - debt or equity - you should leave no stone unturned to do so. Assume that it will get worse before it gets better. That equity check which comes with a poor valuation today could seem like a godsend 12 months down the road, if valuations get dearer. Between being underfunded and undervalued, the former is the greater evil. Control costs and focus on growth, so that you are in a better position to raise next year: irrespective of the market dynamics. Boom or bust, cash-flows and margins will always prevail. 

This is neither the time to seek solace, nor be tormented by the macroeconomic forecasts though. It is the time to act. 

There is an old adage: “Never forget the 6-foot-tall man who drowned crossing the stream that was 5 feet deep on average.” Don’t go about measuring the depth of the stream right now. Swim: smartly, furiously and relentlessly. Better shores await.