Start-up deals help India beat China in M&A race

In early May, US-based retail giant Walmart finally gatecrashed into India by acquiring nearly 77% stake in e-commerce major Flipkart for a $16 billion bill.

That was the country's biggest foreign direct investment so far, giving the world's largest brick-and-mortar chain control of around half of India's emerging e-commerce market, with the other half in the hands of its rival Amazon, the other US company that dominates the global online marketplace, reaching out to half of the world's population.

As a part of its plan to pump in $5 billion in India, Amazon has so far put in $1 billion in the country in the first nine months of this year.

And driven by the lure of the digital economy, there has been a spate of such large-ticket deals that are pushing up the foreign direct investment (FDI) into the country.

Online food delivery company Swiggy raised $1 billion in its latest funding round led by South African internet group Naspers while hotel aggregator OYO Rooms raised an equal amount from investors like SoftBank of Japan and America's Sequoia Capital, among others. Naspers also invested big in online education player BYJU's leading a $540 million funding round.

With the new money, OYO and BYJU's are looking outside of India while Swiggy would consolidate its position in the country by taking on Zomato, UberEats and others.

But what makes India attractive for these global majors?

"The Flipkart investment transforms Walmart's position in a country with more than 1.3 billion people, strong GDP growth, a growing middle class and significant runway for smartphone, internet and e-commerce penetration," Walmart said at the time of its investment.

In the real economy, Anil Agarwal led-Vedanta group invested a little over Rs 5,000 crore in stressed asset Electrosteel Steel Ltd, part of the London-headquartered group's plan to pump in $9 billion in sectors like metal, mining and hydrocarbons.

India has now surpassed China in attracting cross-border merger and acquisition deals with overseas companies lapping up Indian assets worth $38 billion against $32 billion flowing into China between January and September this year.

The development vindicates some of the progress made by India in terms of improving ranking in ease of doing business parameters, stability in economic policy, implementation of Goods and Services Tax (GST) and also growing attractiveness of sectors like e-commerce to foreign investors.

But will the party continue for long? Experts are cautious.

To put things in perspective, in terms of overall FDI, China was way ahead in the first half of calendar 2018, bagging $70 billion in inflows against India's share of $22 billion, as foreign firms are investing heavily into greenfield projects in China. Even Brazil was ahead of India by clocking in $25.5 billion worth of FDI.

Meanwhile, overall global foreign direct investment dropped by a sharp 41% in the first half to an estimated $470 billion, according to a report by the United Nations Conference on Trade and Development (UNCTAD).

D K Srivastava, chief policy advisor, EY India, believes that recent US Federal Reserve's interest rate hike, uncertainty over likely outcome of forthcoming general elections can reverse the trend despite China's strained relationship with the US.

Partha Ray, IIM Calcutta professor and former director of Department of Economic and Policy Research of Reserve Bank of India, said India has recently featured in a monitoring list of economies running current account surplus with the US and would to be tracked for any currency manipulation.

Experts believe that inflows into Indian corporate assets exceeding that into China could be an impact of rising tensions between China and developed nations like the US over the trade and other issues.

"In the roller-coaster drive along the global trade track, China is being seen poorly by major global trading nations. That, no doubt, benefits India marginally. Also, India is currently witnessing growth rates highest in the world. The country has also significantly improved its ranking on the ease of doing business indicators with its rank going up from 142 in 2014 to 77 in 2018. This is no small achievement," said Partha Ray.

That said, when it comes specifically to starting a business, India is abysmally poor with a rank of 137th.

"So, it's too early to comment whether doing good in ease of doing business ranking would have a long-term positive impact," Ray added. "While India has done well in indicators like growth and ease of doing business ranking, we also need to consider current account deficit figures." Though India runs a deficit unlike China, it has a surplus in its trading with the US.

"The US looks at every economy running a current account surplus as a currency manipulator. The US Treasury released a report which added India in a list of economies running trade surpluses. That we appear in the list is bad for the US," the IIM Calcutta professor said.

Adding India to the monitoring list that comprises China, Japan, Korea, Germany and Switzerland, the report said, "India increased its purchases of foreign exchange over the first three quarters of 2017. Despite a sharp drop-off in purchases in the fourth quarter, net annual net annual purchases of foreign exchange reached $56 billion in 2017, equivalent to 2.2% of GDP. The pick-up in purchases came amid relatively strong foreign inflows, both of foreign direct investment and portfolio investment."

The global flow of FDI has dropped primarily because of inward flow of investments into the US primarily because of a rise in the interest rates.

The US Federal Reserve on Wednesday raised interest rates a quarter of a percentage point, for the fourth time in 2018, to a range of 2.25% to 2.5% despite intense opposition from President Donald Trump to leave rates unchanged is bad news for emerging markets as American investors would be now happy continuing inward investments rather than invest in risky economies.

"Recent policy of the Federal Reserve would impact global investing community. In the domestic market, there is some uncertainty over the outcome of the general election particularly following the results of the recent rounds of Assembly elections," said Srivastava of EY India.

On the brighter side, India offers an attractive return on investments.

"In some of the industrial sectors including services, the return on capital is quite high. Also, skilled labour is available and is relatively cheaper. These are some of the factors that make India attractive to foreign investors," he said.