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Home / Economy / Despite second wave, India leads emerging markets league table

For the second month in a row, India has outperformed other large emerging markets, the latest update to Mint’s emerging markets tracker shows. China follows close behind India on the rankings.

Chart-busting export growth, high levels of manufacturing activity, and relatively moderate retail inflation in April pushed up India’s ranks in the league tables despite a selloff by foreign equity investors that pulled down both stock market capitalization and the rupee.

The outlook however remains uncertain, with the pandemic still ravaging several parts of the country and lockdowns expected to continue for a while.

Some economists have argued that the deadlier second wave could hit consumer sentiments and aggregate demand sharply given that the affluent classes have been hit harder this time. Others argue that the return to normalcy may be slow unless vaccination picks up pace, given the deep scars of the second wave.

Several economists have downgraded their growth forecasts for this fiscal year. Yet, the extent of the downgrades has been much less than last summer, when a nationwide lockdown brought the economy to a standstill.

Companies and consumers have both adapted better this time around. More importantly, governments at all levels seem to have learnt some harsh lockdown lessons, with industrial activity largely being allowed to continue this time.

The centre resisted calls for a national lockdown, allowing states to frame their own lockdown rules based on their needs, and this too may have contributed to the lesser economic impact. Yet, mobility has indeed taken a hit, with the lockdown stringency index moving up sharply over the past month.

While the hotspot states, largely in the north and the west, have seen a dip in both cases and test positivity rates, other states, especially in the east and the south, may not be past their peaks yet. Country-wide cases could decline to February levels only by July, some epidemiological models suggest.

Global Boost

Even as domestic demand remains weak, global demand has seen a sharp uptick because of the rapid recovery in health and economy across most developed markets. As a result, export orders are up. Without the crippling lockdowns that hobbled Indian firms in 2020, most firms have been able to service those orders so far.

Exports from the country grew nearly 200% in April, albeit on a depressed base. Compared to April 2019, exports have grown at an annualized rate of 8%. This is much lower than the year-on-year growth number but still a respectable performance compared to other emerging market peers.

Higher export orders pushed up the manufacturing purchasing managers’ index (PMI) to 55.5 in April , the highest among all the emerging markets considered here. Global demand thus played a key role in pushing up India’s ranking in April.

Mint’s Emerging Markets Tracker, launched in September 2019, takes into account seven high-frequency indicators across 10 large emerging markets to help us make sense of India’s relative position in the emerging markets league table.

The seven indicators considered in the tracker encompass both real activity indicators, such as the manufacturing purchasing managers’ index (PMI) and real GDP growth, and financial metrics, such as exchange rate movements and changes in stock market capitalization. The final rankings are based on a composite score that gives equal weightage to each indicator.

Uncertainty Ahead

Financial sector indicators were among India’s weak spots last month, with the ferocity of the second wave garnering global attention, and scaring most investors. India’s stock market capitalization saw a month-on-month decline of 2.3% in April even as the rupee fell to a 10-month low.

Nonetheless, the financial sector may recover faster compared to the rest of the economy, given abundant global liquidity, which is once again finding its way into riskier asset classes such as emerging market equities.

The road ahead for the real economy appears more uncertain. Much depends on how deep covid-19 spreads, and how long it lasts. But unless vaccinations pick up pace, workers and consumers are likely to remain cautious even if cases decline over the next few weeks. The rise in global commodity prices at a time when inflationary pressures have already risen in the country could also weigh on investor sentiment, and make it difficult for the Reserve Bank of India to maintain its accommodative stance for long.

Given that the higher-than-anticipated borrowing has already spooked bond markets at a time when inflation remains elevated, the centre is unlikely to boost spending much beyond what has already been budgeted. Higher government spending that can boost domestic demand significantly does not seem to be on the cards.

For now, the Indian economy remains a one-trick pony, relying largely on the rebound in global demand to stay afloat.

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