India presents a myriad of opportunities for inbound mergers and acquisitions (M&A), and foreign direct investment (FDI) as one of the fastest-growing economies in the world. The country's robust economic growth, burgeoning middle class, and strategic position as a technology and innovation hub has made it an attractive destination for foreign investors.
In recent years, India has seen a significant uptick in FDI across various sectors, driven by favorable demographics, government reforms, and an increasingly liberalized economy. With the pre-election Indian government widely announcing its core objective to obtain around USD 100 billion of annual foreign investment over the next few years, the key questions are:
- How can businesses ride on this trend as the uptick continues?
- What are the key sectors — and up and coming sectors — for inbound deal-making activity in India?
India deal-making outlook
While much of the world’s deal-making activity dropped significantly in 2023 after the boom year of 2022, Indian M&A and FDI activity experienced only moderate slow-down. From 2022 to 2023, M&A deal volume fell by 15%, and M&A deal value reduced by 4% (excluding the outlier 2022 HDFC and 2023 Jio mega-deals).1 Additionally, in line with global market movements, the higher cost of capital impacted activity by private equity (PE) and venture capital (VC) investors, with India’s combined PE and VC deal value falling by 35%.2
Yet, despite these headwinds, 2023 set the scene for emerging trends for 2024:
- Mid-market and smaller strategic deals: Mid-market acquirers (up to USD1 billion in revenue) comprised nearly 50% of India’s M&A activity, and mid-market deals (with a value of USD100 million to USD1 billion) increased from 20% to 35% from 2022 to 2023.3
- Inbound M&A: Inbound M&A as a share of overall M&A activity in India increased significantly from 27% in 2022 to 41% in 2023, led by US and European strategic investment interest particularly in the financial services, technology and manufacturing sectors.4
Key sectors to watch
AI and emerging technologies
India’s burgeoning information technology (IT) industry, along with its large pool of skilled professionals, has made it a magnet for technology giants and start-ups alike.
In more recent years, traditional investment into the IT and information technology enabled services industries has been superseded by a focus on emerging technologies.
— Ash Tiwari, Partner, London
Since 2021, more than USD 700 million of FDI has been invested into Indian generative AI start-ups. The number of these start-ups is rapidly multiplying, particularly around the AI cluster cities of Bengaluru, Hyderabad, Mumbai, Chennai, Pune, and the National Capital Region (NCR).5
Companies such as Nvidia, Google and Facebook have made significant investments into India, targeting innovative startups that specialize in artificial intelligence, machine learning, and big data analytics.
Recent notable deals include:
- US chip manufacturer Nvidia’s partnerships with Reliance Industries and Tata Group announced in September 2023 to develop AI-powered cloud infrastructure and language models for applications servicing (1) Reliance’s 450 million Jio (telecom) customers and (2) generative AI apps and a supercomputer to support Tata’s provision of software services.
- AI start-up Krutrim and B2B Software As a Service (SaaS) fintech firm Perfios becoming India’s first AI start-ups to attain unicorn status in Q1 2024, following funding rounds with significant overseas investment.
In Q1 2024, the Indian government approved a USD 1.24 billion funding package to launch its IndiaAI mission through a public-private partnership and announced a further USD10 billion semiconductor scheme. These initiatives aim to position India as a global hub for AI and digital technologies.6
AI is rapidly changing the way in which business is conducted and, as it is increasingly adopted across sectors such as finance, e-commerce, and healthcare, related FDI activity will continue to rise. The Indian government's focus on promoting a digital economy through initiatives like Digital India and the introduction of the National AI Portal and National AI Strategy has further accelerated this trend.
— Priya Shah, Associate, London
Renewable energy and sustainability
The Indian government’s commitment to achieving its renewable energy targets, including the ambitious plan announced at the COP26 to reach 500GW of renewable energy capacity by 2030, has attracted significant investments from global energy giants.
In the recent Indo-Pacific Economic Framework for Prosperity (IPEF) Clean Economy Investor Forum meeting, India pledged USD 500 billion in investment opportunities by 2030 in the clean energy value chain including the renewables, green hydrogen and electric vehicle markets.
This shift has led to increased inbound M&A activity in renewable energy, waste management, and sustainable agriculture. From 2021 to 2023, energy deals as a share of total M&A deal value in India rapidly increased from 7% to 15% as did inbound PE investment into solar and wind energy assets in India, mirroring a focus on PE’s "green asset" allocations.
Recent notable deals include:
- Total SE acquired a 20% stake in Adani Green Energy, one of India's largest renewable energy companies, for USD 2.5 billion in 2021.
- In 2023, Canada Pension Plan Investment Board increased its stake in solar company ReNew Energy Global, becoming the Nasdaq-listed solar company’s largest shareholder.
- In 2023, Brookfield Renewable Partners committed to a USD1.07 billion investment into Avaada Energy, a leading renewable energy company in India, to expand its solar energy footprint in the region.
Within this space, competition among foreign investors for solar and wind assets is predicted to continue as rising energy demands, lower production costs and increased capacity targets, supported by favorable government policies, make renewable energy targets valuable additions to the portfolios of the traditional energy giants, PE funds and multinational conglomerates alike.
— Ash Tiwari, Partner, London
Healthcare and pharmaceuticals
The healthcare sector in India is also attracting inbound M&A, fuelled by India’s large population and growing middle class, rising healthcare needs, and growing medical tourism industry.
Recent notable deals include:
- In Q3 2023, Advent International completed its acquisition of a majority interest in Hyderabad-based contract development and manufacturing organization, Suven Pharmaceuticals Ltd.
- In Q4 2023, Blackstone acquired a circa. 75% stake in Care Hospitals from TPG with a USD 1 billion investment.
- Mubadala acquired a minority interest in Manipal Health Enterprises in Q1 2024, to support the expansion of healthcare services across India.
- In May 2024, KKR entered into binding agreements to acquire a majority interest in the Karnataka-headquartered medical devices producer Healthium Medtech from Apax Partners.
The slew of recent deals demonstrate that healthcare and pharma remain areas of particular interest for investors. The market is also currently seeing a surge in foreign PE to PE deals as venture and growth capital investors look to exit and larger PE funds step in.
— Priya Shah, Associate, London
Manufacturing and automotive
India is an established global leader in the manufacturing sector, with strong inbound M&A and FDI flows over a number of years. In 2023, the manufacturing sector had one of the highest growth rates in M&A activity amid general market suppression, with a rise in M&A deal value in the sector from 2022 to 2023 by 33% and deal volume increase of 22%.7 This growth can be attributed to India’s strategic initiatives to enhance its manufacturing capabilities, including the longstanding “Make in India” campaign.
In the automotive sector, the growth in automotive component manufacturing, driven by the shift towards electric vehicles (EVs) and sustainable mobility solutions, is leading the charge for the surge in FDI activity.
Between 2021 and 2023, EV-focused original equipment manufacturers (OEMs) rose in number from 479 to 698,8 and a 2023 landmark deal was Tesla’s strategic partnership with Tata Motors to co-develop EV technologies and manufacturing capabilities in India. This growth in deal activity in the automotive sector is in large part attributable to favorable government policies and initiatives including the Product Linked Incentive (PLI) scheme — launched in 2020 across 14 industries and with a total outlay of USD 3.5 billion — which provides benefits including subsidies and tax rebates to incentivize companies to invest in EV production.9
The government’s push to enhance its manufacturing capabilities and the adoption of innovative manufacturing technologies have created an attractive investment environment for overseas investors looking to leverage India’s cost-effective production capabilities and large domestic market. As India consolidates its position as a global manufacturing hub with sector-specific specialization in emerging automotive technologies (among other areas), foreign investment interest is expected to continue rising.
— Ash Tiwari, Partner, London
Up-and-Coming Sectors
Space
Through policy reform, India is on a pathway towards the privatization of its space industry. India currently makes up around 2% of the global space economy but is hoping to increase its share five-fold following a recent significant relaxation in its FDI policy.10
As of April 2024, sector-specific FDI limits have been amended to permit up to 100% FDI across key sub-sectors within the space industry and lower barriers to entry for foreign investors.11 In turn, this is expected to boost employment for high-skilled workers and open a new tax revenue stream for the government as foreign players set up manufacturing and launch facilities.
While the space market is still in relative infancy, start-ups such as Skyroot Aerospace — which is building India’s first privately developed launch vehicles and has attracted investment from GIC — are paving the way for others to follow. With around 200 space start-ups already established and a growing number in the pipeline, India’s space industry is set for exponential growth in the next few years.
Defense
In 2020, the Indian government announced a significant liberalization of FDI in the defense sector to increase the automatic route threshold from 49% to 74%, with further FDI up to 100% permitted with prior government approval. This has facilitated larger-scale investments by foreign defense players. Notably, under the new FDI policy, Swedish defense company Saab has recently obtained government approval for 100% FDI to build a new Carl-Gustaf manufacturing facility in India, for the manufacture of rifles for use by the Indian Armed Forces and for export.
In line with the Make in India campaign, the Indian government is actively promoting domestic capital expenditure projects to modernize India’s defense system and weapons arsenal, with some reports predicting that such capital expenditure may account for up to 37% of India’s total defense budget by 2030 (as compared to 26% in 2024).12 This trend, coupled with recent government discussions of further FDI liberalization in the defense sector, creates potentially lucrative opportunities for foreign investors to invest in on-the-ground manufacturing and production facilities.
Key takeaways
H2 2024 brings rising investor confidence: While inbound investment activity in India remained cautiously opportunistic in the first half of 2024 ahead of the election, the second half of the year will likely see increasing investor confidence and a resurgence in deal activity.
Macrotrends, GDP and inflation point to uptick for foreign investment: Overall macroeconomic trends continue to shine a spotlight on India and any slowdown as India’s capital markets and M&A dealmakers adjust to a new political landscape of coalition politics for Narendra Modi’s ruling Bharatiya Janata Party (BJP) should be temporary only. India's consistent GDP growth and controlled inflation rates remain an attractive proposition for foreign investment across various sectors.
*All information pertaining to deals mentioned in the article are available in the public domain.
Footnotes:
1. Mergermarket; IMF World Economic Outlook; S&P Global; National Council of Applied Economic Research, India
2. “India Venture Capital Report 2024,” Bain & Company in collaboration with the IVC Association, India
3. Mergermarket; IMF World Economic Outlook; S&P Global; National Council of Applied Economic Research, India
4. Mergermarket; IMF World Economic Outlook; S&P Global; National Council of Applied Economic Research, India
5. Nasscom estimates; World Economic Forum; International Trade Administration, US Department of Commerce – India Artificial Intelligence
6. 7 March 2024, Press Release, Ministry of Electronics & IT, Government of India; India Semiconductor Mission, Ministry of Electronics & IT, Government of India
7. Mergermarket
8. Mergermarket; The Economic Times
9. Invest India, Government of India
10. Times of India; Reuters (press coverage on remarks by Union Minister Jitendra Singh at the Indian National Space Promotion and Authorisation Centre on 5 March 2024)
11. 21 February 2024, Press Release, Ministry of Commerce & Industry, Government of India
12. The Economic Times; “India Defence” Report, Nomura
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