VUCA: Foreign Investments and the Indian Economy

India, a developing economy has immense growth prospects in the world. Whilst the effort towards the said long-term growth is certain and fruitful, the path towards it may be a gradual trajectory. The world today is surrounded by uncertainties that affect the conduct of life in every manner. VUCA is the abbreviation that perfectly describes the world today. It is a world that sees volatility, uncertainty, complexity, and ambiguity in our day-to-day conduct of businesses. This phenomenon can be witnessed through the state of the global capital markets and how a growing developing economy like India is sailing through this storm. 

India is a thriving ground for the inflow of foreign investment being an emerging economy and this in turn makes room for a great return on investment. Foreign investment in India comes through Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPIs); the latter comprises Foreign Institutional Investors (FIIs) that invest in the country’s markets. Institutional investors have the benefit of having a huge amount of capital, alongside other resources. Thus, they trade in larger quantities as compared to a retail investor. It can be understood that institutional investors are market makers and if there is any action taken by them, whether it is desirable or not, it has a short-term effect on the markets. In an integrated world, foreign investment has become a necessity to support a country’s growth as it assists in capital building and boosts investor confidence in the capital markets. 

Even with a global healthcare crisis that showcased the impending gaps in the logistical and supply side of the economy, India has continued to be a favoured country for foreign investment. FDI equity inflow in India for FY2021-22 stood at $ 83.57 billion. Indian economy showed stability as compared to FY2020-21 and this trend of foreign investment continued till early 2022. 

Any economy in the 21st century is sensitive to shifts in geopolitics. The conflict in Ukraine has invariably had an effect on an economy as invested in the globalised supply chain as India. India has economic ties for trade and knowledge exchange with both the countries; India imports sunflower oil, inorganic chemicals, plastics, iron and steel etc. This meant that supply to India for the same was disrupted, that in turn, resulted in a shortage leading to these products becoming costlier. Disruption in the supply chain leads to a cycle of inflation wherein the demand for goods and services is not being met. For investors, whether institutional or retail, such incidents bring distress and may trigger panic selling. This is reflected in the risk appetite of investors indicating moving their investments to the debt markets - which are a safer bet. Interest rate hike in the United States which was a measure to tackle inflation due to the globalised effect of the Ukraine conflict resulted in weak market sentiment. FIIs gradually started aggressively selling off their stake in the Indian equity market and moved on to the US debt market. Since institutional investors invest huge amounts in the markets, during disruptions they are bound to move to safer options such as debt. 

While India continues to evaluate and implement measures to tackle inflation, the stake sold off by FIIs is being absorbed by DIIs as a measure of stability. One can derive that the current market sell-off is a short-term phenomenon and that markets in the long-term always show promise. Additionally, the growth of the Indian economy is not always linear but, in an upward trajectory establishing that continued implementation of macroeconomic measures for stability proves to reaffirm market sentiment. 

While capital markets are an important factor for assessing economic growth and prospects, private investment avenues also add on to the growth agenda of an economy such as India. Keeping an eye on the future prospects, India is becoming a startup hub, bringing innovative solutions to complex problems. This sows the seed for future companies that will grow with funding, promote entrepreneurship and create jobs within the economy.

Private equity and venture capital firms invested INR 5.5 lakh crore ($ 76.38 bn)  in Indian startups in the year 2021. Undoubtedly, private investment while riskier aids in building the foundation for the growth opportunities in the Indian market. There is no world without risk; VUCA is a continuous phase that needs to be mitigated. With continued government initiatives and support, as well as the involvement of private players it is evident that investment opportunities in India will evolve and add to its growth trajectory. India will continue to face challenges, both in the short-term as well as the long haul, and a vision that is full of holistic development is what will push the nation to its full potential.

This is co-authored by Kamiya Arya and Karthik Vadapalli.