Domestic Investment in India: Market Activity, Government Initiatives & Growth Prospects

Domestic Investment in India

Overview

Last updated: Dec, 2022

Introduction

A rise in domestic investments has been one of the most significant contributors to the growth story of India. Domestic investments in India are divided into two parts - public investments and private investments. Private investments are further divided into two parts, which are household investments and corporate investments. Private domestic investments depend on a slew of factors - macroeconomic stability, high household savings, productivity, access to credit, resolution of non-performing assets, clearing up of balance sheets, etc.

Domestic investments and foreign investments in India work hand-in-hand to help the growth of the country. Growth in emerging economies like India results mainly from innovations that allow domestic sectors to catch up with cutting-edge technology. The process of catching up with the leader in any sector requires the cooperation of a foreign investor who is familiar with the leading technology, and a domestic entrepreneur/investor who is familiar with the local conditions.

The Indian private investing space has also been showcasing signs of maturity over the past few years. The market has revealed that new investments accounted for about 50% of VC transactions. The VC-to-PE pipeline has also become robust and consistent.

The concept of 'Make in India' - Atmanirbhar Bharat, various PLI schemes, and financial incentives provided by the government are a few examples of investor-friendly programmes that domestic companies are utilising to increase their production base and create new capacities, which leads to increasing domestic investments. There are multiple investors driving domestic investments in the country:

Government/Public Sector Enterprises
Private Sector Enterprises
Banks/Financial Institutions/Domestic Institutional Investors
Retail Investors

Market Activity

India's economy showed great signs of recovery in FY22 after the COVID-19 pandemic. India's gross domestic product (GDP) at current prices in the first quarter of 2022-23 is estimated to be Rs. Rs. 36.85 lakh crore (US$ 447.44 billion), as against Rs. 32.46 lakh crore (US$ 394.13 billion) in 2021-22, showing a growth rate of 13.5%, while nominal GDP is expected to stand at Rs. 64.95 lakh crore (US$ 788.64 billion), a 26.7% growth YoY. These figures make India the fastest-growing major economy in the world, and this economic growth has translated to the domestic investment market in India. Retail investors, mutual funds and PE/VC firms have all stepped up their domestic investments in the Indian market.

Retail and High Net-worth Individual (HNI) investors' and domestic institutional investors (DIIs) combined share, which includes domestic mutual funds, insurance companies, banks, financial institutions, pension funds, etc., reached an all-time high of 23.53% as of June 30, 2022, up from 23.34% as of March 31, 2022. This was on the back of Rs. 128,277 crore (US$ 15.57 billion) inflow during the quarter.

The share of retail investors in companies listed on the National Stock Exchange (NSE) reached an all-time high of 7.42% as of March 31, 2022, up from 7.33% as of December 31, 2021. In the same time period, in rupee terms, retail holding in companies listed on NSE reached an all-time high of Rs. 19.16 lakh crore (US$ 240.17 billion), up from Rs. 19.05 lakh crore (US$ 238.8 billion) on December 31, 2021.

Share of domestic mutual funds in companies listed on the NSE increased for the third quarter running and reached 7.75% as of March 31, 2022, up from 7.46% as of December 31, 2021.

India's Private Equity (PE)/Venture Capital (VC) investment environment is also scaling new heights, with increases in deal size, deal activity and fundraising, as well as improvements in term sheets and benchmarking practices. In 2021, total PE/VC investment activity in India stood at US$ 77.1 billion, a 62% YoY increase.

Investments/developments

In many ways, the year 2021 was a turning point for the Indian economy as initiatives like Atmanirbhar Bharat sped up the formal implementation of several production-linked incentive (PLI) schemes. There was also a push to negotiate comprehensive free trade agreements, which were successfully negotiated with Australia and the UAE. This had led to a huge quantum of domestic inflows coming into the Indian market and making it resilient amidst global uncertainties. With the improving economic scenario, there have been quite a few investments in various sectors in India. Some of them are as follows:

In September 2022, PE/VC investments in India stood at US$ 2 billion across 73 deals.
Infrastructure was the top sector in September 2022, with US$ 795 million in PE/VC investments across 4 deals.
In the third quarter of FY22 (July-September), US$ 8.3 billion was invested in PE/VC investments.
In FY22, net inflows into mutual funds stood at Rs. 2.46 lakh crore (US$ 30.93 billion).
In October 2022, electric scooter maker Ather Energy raised US$ 50 million, led by existing investor Caladium Investment, which values the company at US$ 700-800 million.
In September 2022:
- In order to finance its expansion strategy, Solvy Tech Solutions, which operates the insurtech platform Zopper, has raised US$ 75 million from investors coordinated by Creaegis. ICICI Venture, Bessemer Venture Partners, and existing investor Blume Ventures all participated in the investment round.
- Kotak Realty Fund has invested US$ 200 million in India’s first Real Estate Investment Authority (REIT) Embassy Office Parks REIT.
In August 2022:
- Device management startup Servify raised US$ 65 million in funding as a part of its pre-initial public offering (IPO) round, which was led by the Singularity Growth Opportunity Fund.
- Private equity firm Kedaara Capital invested US$ 50 million in Oasis Fertility in exchange for a sizable minority ownership in the business.
In July 2022:
- Digital therapeutic startup Fitterfly, which focuses on diabetes management, raised US$ 12 million in funding led by Amazon Smbhav Venture Fund and Fireside Ventures.
- DrinkPrime, a subscription-based reverse osmosis (RO) water supplying startup, raised Rs. 60 crore (US$ 7.5 million) in a mix of equity and debt funding. The equity component was led by Omidyar Network India, Sequoia Surge, and 9 Unicorns, while the debt came from Northern Arc Capital and Unitus Capital.
- Content monetisation platform ConsCent raised Rs. 13.26 crore (US$ 1.66 million) in a funding round led by Inflection Point Ventures.
In June 2022:
- Shiprocket signed a deal to acquire a majority stake in its competitor e-commerce platform Pickrr for about US$ 200 million in a mix of cash and equity.
- India's sovereign wealth fund, National Investment and Infrastructure Fund (NIIF), announced that it would invest Rs. 2,250 crore (US$ 282 million) to acquire around 22.5% stake in Hindustan Ports Pvt. Ltd (HPPL).
- GetVantage, a revenue-based finance platform, raised US$ 36 million in funding led by Varanium Nexgen Fintech Fund and DMI Sparkle Fund.
In May 2022, Ather Energy raised US$ 128 million in a Series-E funding round led by NIIF's Strategic Opportunities Fund and Hero MotoCorp.
In May 2022, Reliance Brands Limited, a subsidiary of Reliance Retail Ventures Ltd, signed a franchise agreement to sell Italian luxury lifestyle brand Tod's products in India.
In May 2022, the Toyota Group of Companies (constituting Toyota Kirloskar Motor and Toyota Kirloskar Auto Parts) signed an MoU with the Government of Karnataka to invest Rs. 4,800 crore (US$ 620.23 million) to build electric powertrain components.
In the first four months of 2022 (upto April 28), M&A deals, and deals in the making, have already crossed US$ 105 billion, compared to US$ 44.2 billion in the first four months of 2021.
Startup PE/VC investing in India stood at US$ 28.5 billion in 2021, a 290% YoY growth.
Technology (US$ 16.3 billion), e-commerce (US$ 15.9 billion) and financial services (US$ 11.7 billion) accounted for 57% of the total PE/VC investments by value in 2021.
The AUM of the PE/VC industry in India exceeds US$ 150 billion, as of 2021.
In 2021, new sectors like edtech, electric vehicles, gaming, online streaming, and sports-based entertainment recorded significant PE/VC investment inflows of over US$ 10 billion.

Government Initiatives

With the government's focus on making business in India easier through the establishment of nation-specific offices to "handhold" foreign investment, India has advanced in recent years in the rankings for ease of doing business. The government has also attempted to rein in the aggressive tax administration through more openness and transparency. It has also taken multiple other initiatives to improve the business regulatory environment in the country, and simplified the process of making domestic investments. Some of these are:

The Department for Promotion of Industry and Internal Trade (DPIIT) has introduced a dynamic reform exercise called the Business Reforms Action Plan, which ranks all the states and UTs in the country based on the implementation of designated reform parameters. The reforms have focused on streamlining the current rules and procedures and getting rid of unnecessary requirements and steps. The Action Plan covers multiple reform areas such as:
- Investment Enablers
- Online Single Window System
- Land administration and Transfer of Land and Property
- Construction Permits Enabler
- Labour Regulation Enablers
- Environment Registration Enablers
- Inspection Enablers
- Paying Taxes
- Obtaining Utility Permits
The Ministry of Labour and Employment has taken a number of steps to streamline labour laws to make conducting business easier. By condensing, combining, and rationalising the pertinent provisions of 29 Central Labour Laws, the Government has notified four labour codes: the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020, and the Code on Occupational Safety, Health, and Working Conditions, 2020.
In order to incentivise new domestic companies to set up their manufacturing units in India, the government has extended the concessional tax rate of 15% to March 31, 2024.
The government introduced the India Industrial Land Bank (IILB), which is a GIS-based portal - a one-stop repository of all industrial infrastructure-related information - connectivity, infrastructure, natural resources, terrain, plot-level information on vacant plots, line of activity, and contact details.
On April 30, 2022, Minister of Ports, Shipping and Waterways, Mr. Sarbananda Sonowal, announced that Cochin Shipyard Limited has committed to invest an initial corpus of Rs. 50 crore (US$ 6.47 million) in startup companies engaged in the maritime sector.
India's production-linked incentive (PLI) schemes generated investment commitments of Rs. 2.34 lakh crore (US$ 30.24 billion). Automobile and auto components, advanced chemistry cell batteries, speciality steel and high-efficiency solar panels have attracted the maximum interest.
The government is expected to invest Rs. 1.20 lakh crore (US$ 15.5 billion) in the automobile industry in the next five years.
The Ministry of Education (MoE) has proposed an outlay of Rs. 1,102.91 crore (US$ 142.57 million) for Punjab in FY23 under the flagship Samagra Shiksha Scheme for school education.
Minister of Home Affairs and Cooperation, Mr. Amit Shah, inaugurated the newly constructed tourism facilities for SeemaDarshan at Nadabet in the Banaskantha district of Gujarat. The Gujarat government spent Rs. 125 crore (US$ 15.66 million) on the same.
The Uttar Pradesh government launched projects worth Rs. 70,000 crore (US$ 8.77 billion) in the state in June.
In April 2022, the government approved financial incentives to 61 companies for its textiles production linked incentive (PLI) scheme. These companies plan investment of Rs. 19,077 crore (US$ 2.39 billion).
In February 2022, The Ministry of Heavy Industries notified a Phased Manufacturing Programme (PMP) to promote domestic manufacturing of electric vehicles, their assemblies/sub-assemblies and parts/sub-parts/inputs of the sub-assemblies.
In February 2022, Minister of Finance and Corporate Affairs, Ms. Nirmala Sitharaman, announced a new scheme, Development Initiative for North East' PM DevINE', allocating Rs. 1,500 crore (US$ 200.6 million).
In February 2022, Minister of Finance and Corporate Affairs, Ms. Nirmala Sitharaman, proposed to allocate Rs. 100,000 (US$ 13.37 billion) to assist states in overall investments.
In January 2022, the cabinet committee on Economic Affairs approved equity fusion of Rs. 1,500 crore (US$ 200.6 million) in the Indian Renewable Energy Development Agency Limited (IREDA).
The Ministry of Finance has granted Rs. 7,309 crore (US$ 977.4 million) to 11 states for undertaking reforms in the power sector in January 2022.
In January 2022, the government-sanctioned seven Mega Integrated Textile Regions and Apparel Parks with an investment of nearly Rs. 4,500 crore (US$ 601.8 million).
In December 2021, Minister of Commerce and Industry, Consumer Affairs, Food and Public Distribution and Textiles, Mr. Piyush Goyal, stated that more than 25,000 compliances had been reduced in the previous exercise implemented by the centre to reduce compliance burden and to promote ease of living and ease of doing business.
On December 27, 2021, Prime Minister Mr. Narendra Modi visited Mandi to inaugurate hydropower projects worth over Rs. 11,000 crore (US$ 1.47 billion).
In the next five years, the Airports Authority of India plans to invest roughly Rs. 25,000 crore (US$ 3.34 billion) on the expansion and renovation of current terminals.
In September 2021, Minister of Commerce and Industry, Consumer Affairs, Food and Public Distribution and Textiles, Mr. Piyush Goyal, launched the National Single Window System (NSWS).The single window portal would become a one-stop shop for investors for approvals and clearances, which would bring transparency, accountability and responsiveness to the ecosystem.

Road Ahead

The mutual fund industry in India has been witnessing consistent growth in portfolio numbers over the past few years, as evidenced by the fact that 51 lakh new investor accounts were added in April-June, 2022. The Association of Mutual Funds in India (AMFI) is targeting a nearly five-fold growth in assets under management (AUM) to Rs. 95 trillion (US$ 1.30 trillion) and more than three times growth in investor accounts to 130 million by 2025.

To achieve a GDP of US$ 5 trillion by FY25, India needs to spend about US$ 1.4 trillion (Rs. 100 trillion) over these years on infrastructure. Liberal FDI policies, quick solutions to corporate disputes, a simplified tax structure, ease of doing business, and a boost to public and private expenditure are all part of India's attempt to implement reforms to unlock the country's investment potential, which is expected to improve the business environment.

In line with this, in May 2022, during the India-Denmark Business Forum, Prime Minister Mr. Narendra Modi applauded India's reforms and investment opportunities, and stated that those who don't invest in the country are bound to miss out. He stated that India's ongoing economic reforms have created investment opportunities in various sectors like renewable energy, health, ports, shipping, circular economy and water management, and invited Denmark, as well as other foreign countries, to invest in these sectors.