Even as the West Asia war and elevated crude oil prices tested global economic resilience, India strengthened its position to secure the second rank among emerging market economies in April, driven largely by a strong rebound in exports, according to Mint’s Emerging Markets Tracker (EMT).
The improvement, however, came largely from higher exports of petroleum products amid rising crude prices. Strong GDP growth, robust manufacturing activity and relatively contained inflation also supported India’s performance, although stress in currency movements and stock markets remained visible.
Brazil, which emerged as the top-performing EM on the chart, gained from strong stock market and currency movement. China and Vietnam, which gave tough competition to India last month, slipped in the rankings as their currencies came under pressure amid global turbulence.
Launched in September 2019, Mint’s Emerging Markets Tracker compares 12 emerging market economies using seven high-frequency indicators: real GDP growth, manufacturing PMI, export growth, retail inflation, import cover, exchange rate movements, and stock market performance.
Stress test
India’s goods exports rose 13.8% year-on-year in April after a 7.4% contraction in March, driven largely by a 34.7% jump in petroleum shipments.
“The surge in petroleum exports was a reflection of the continued rise in crude oil prices and a likely diversion of shipments to other Asian markets,” Crisil said in a note. While export growth played a crucial role in pulling India’s scores up, it was still not at par with other EMs, signalling continued structural weakness.
While India’s exports jumped in April, pulling India’s rank up, the flip side of the oil-led push is also being felt on the import bill, which could potentially balloon India’s current account deficit to as much as 2.2% to 2.4% of GDP, making the current situation more vulnerable than ideal.
The rupee continued to weaken during the month, declining 0.7% month-on-month against the dollar, making it the fourth-worst-hit currency. Even though India’s stock market capitalization rose 2.7% month-on-month, five other EMs posted stronger figures.
Moreover, the pressure points are expanding from trade and markets to domestic inflation and manufacturing costs. In India, retail petrol and diesel prices were raised after much delay this month, and analysts expect further hikes in the coming months. Apart from pushing consumer inflation directly, the costs would also emerge by gradually feeding into logistics prices and farm inputs.
Early signs of inflationary pressures are already visible across several emerging markets: Thailand’s CPI rose to 2.9% in April from -0.1% in March, while the Philippines saw inflation jump to 7.2% from 4.1% in March. Vietnam’s CPI also climbed further to 5.5% from 4.6% a month earlier.
In India, while inflation was contained at 3.5% in April, wholesale prices displayed the sharp impact of the West Asia crisis. Industrial raw material inflation also surged to 17.3% year-on-year in April from 3.4% in March, reflecting a sharp rise in the cost of fuel, electricity, minerals and imported inputs.
According to a report by IDFC First Bank, rising global freight costs have added to these pressures, squeezing producer margins as input cost inflation continues to outpace finished goods inflation.
Growth risks
Given India’s high exposure to elevated crude oil prices, risks are likely to continue weighing on the rupee, stock markets, the government’s fiscal position, inflation and overall economic growth.
Several agencies have already cut India’s GDP forecast by 20-100 basis points for the current financial year to around 6.5%. Against this backdrop, the upcoming monetary policy meeting by the Reserve Bank of India (RBI), scheduled 3-5 June, will be crucial for signalling the policy response in a situation where multi-pronged challenges from rising inflation, slowing growth, weakening rupee, and foreign portfolio outflows have gripped India.
Economists do not expect a rate hike in June, but views are divided on whether the central bank will stay on a long pause to support growth or start hiking from the second half of the year to contain inflation.