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India stages a comeback as Asian emerging markets battle covid

India is ranked second only to Russia in the latest update to Mint’s emerging markets tracker as the Delta variant upended recovery for key Southeast Asian peers. (Mint)Premium
India is ranked second only to Russia in the latest update to Mint’s emerging markets tracker as the Delta variant upended recovery for key Southeast Asian peers. (Mint)

  • India held on to its economic recovery momentum in August as relatively stronger GDP growth data and improving activity took the country to the second spot in Mint’s latest emerging markets tracker

Boosted by a fast-improving covid-19 vaccination drive and subsiding infections, the Indian economy was largely able to retain its growth advantage over other key emerging markets (EMs) in August. The country ranked second only to Russia in the latest update to Mint’s emerging markets tracker as the Delta variant upended recovery for key Southeast Asian peers.

Growth-sapping restrictions are back in countries such as Malaysia and the Philippines, derailing their macroeconomic performance at a time when vaccines haven’t reached people equitably. In India, meanwhile, the vaccination effort reached its fastest levels yet in August, averaging 5.9 million daily doses during the month.

As mobility and demand picked up, the manufacturing purchasing managers' index (PMI) for India stayed in the expansion zone, and the goods and services tax mop-up crossed 1 trillion for the second straight month. The gains helped foreign capital find its way back into India after remaining on the sidelines in July. With demand picking up and the economic environment looking more conducive, foreign portfolio investors (FPIs) bought equities worth $284 million in August. China firing regulatory shots at its tech giants gives all the more hope that India could corner some of the benefits.

This made India the biggest recipient of portfolio equity flows over the last 12 months on the tracker, amounting to $25.3 billion. Thailand, Malaysia and the Philippines saw outflows of over $2 billion during the period. Foreign fund flows into EMs have been of interest lately under the imminent pressure of a tapering of monetary policy in the US.

In August, Indian equities delivered the third biggest gains (3.4%) in the tracker, behind only the Philippines (10.5%) and Turkey (5.6%). The rupee appreciated 0.5% against the dollar on the back of FPI flows. Other EM currencies remained relatively stable as the greenback weakened in late August due to disappointing jobs data.

GDP boost

Part of the reason for India’s superior performance was a stronger economic growth than its peers during the June-ended quarter, data for which was released on 31 August. The 20.1% year-on-year growth was second only to Turkey’s (21.7%) despite the crippling second pandemic wave. This also took India to the top spot in the updated July rankings.

To be sure, the base effect was strong: with its 24.4% contraction in April-June 2020, India had the lowest GDP base among the EMs considered in the tracker. Moreover, despite the rebound this year, India still fell 9.2% short of the April-June 2019 output levels. Yet, the consistent recovery since then has kept India in a sweet spot as China’s growth sees a deceleration due to a fresh covid-19 surge and regulatory curbs.

The Reserve Bank of India estimates a 9.5% growth for 2020-21, but could revise this upwards to 10% while staying accommodative for the rest of the year to favour sustained recovery, said an Edelweiss Wealth Research note dated 1 September. Another research note, by Moody’s Investors Service, said that though GDP growth had solidified across Asian EMs, the pace would vary by country and sector, with the pandemic acting as the biggest risk in the near term.

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. The final rankings are based on a composite score that gives equal weightage to each indicator.

Silver linings

External trade also showed encouraging signs. Exports in August clocked an annualized 13.2% growth compared to the two-years-ago level, and were up 46% from the year-ago period. However, this is still trailing significantly behind Brazil, Russia and Indonesia, and is likely to moderate further owing to slowing global recovery.

Some perceptible signs of weakness were evident in industrial activity as the PMI print softened to 52.3, against 55.3 in July. However, the services sector PMI offered a silver lining, surging to an 18-month high of 56.7 as business leaders reported a surge in new orders. A 50-plus PMI reading denotes a month-on-month expansion.

A waning base effect helped tame retail inflation to a four-month low of 5.3%, which could ease further. Despite being elevated, the figure has returned to the tolerance band in the last two months. The RBI has not yet joined the bandwagon of tightening monetary policy as some other EMs such as Brazil and Russia have done. However, some dissent to the accommodative policy is likely again when the monetary policy panel meets in October.

All said, demand appears to be gaining firmer ground in India and could get a boost from the upcoming festival season. However, the elevated risk of a third wave during the festivities will need attention as the economic trajectory will depend heavily on the mitigation plan.

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