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India reclaimed its top position among emerging market (EM) peers last month as economic recovery continued unabated, inflation stayed under control, and the rupee performed decently despite concerns over capital outflows. Most other EM economies struggled with depreciating currencies and high inflation, ensuring India moved two steps up from its third position in October, the latest update to Mint’s emerging markets tracker showed.

Russia, one of India’s top competitors on the tracker in recent months, performed badly in November as a fall in crude oil prices and geopolitical tensions sent its currency and stock markets in the red. The Russian ruble saw the second biggest month-on-month decline against the dollar, exceeded only by Turkey’s lira.

Although India stands at the top, the economic situation could worsen in coming months due to the impending risks from the Omicron variant of the coronavirus. India has reported over 500 cases of the new variant, which is more than its peers. More worryingly, more than 50% of the population is yet to be fully vaccinated, which puts India at a greater risk even as the government has announced vaccination for children above 15 years of age from 3 January. On this front, China, Russia, Malaysia, Brazil, Thailand, and Turkey are way ahead, with 44-78% of their population fully vaccinated against coronavirus.

India’s growth story, which is currently supported by robust exports, may also face headwinds due to fresh lockdowns announced in many western countries. Reimposition of restrictions to control the spread of the new variant also poses risks to the domestic recovery. Many states like Delhi, Uttar Pradesh, Karnataka, Madhya Pradesh and Gujarat have already announced night curfews to contain the spread of the virus.

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.

Recovery on track…

The recovery in economic activity was on track in November, with both manufacturing and services activity expanding at a fast pace. India’s composite PMI, a weighted average of manufacturing and services PMIs, rose to its highest since January 2012, signalling continuation of robust recovery from the damage caused by the covid-19 pandemic.

India’s GDP had already reached the pre-pandemic levels by the end of September largely boosted by private investments and strong exports growth. An 8.4% year-on-year growth in the September quarter brought India back to the levels seen in the same quarter two years ago. Merchandise exports remained firm, recording a growth of 27.7% on year in November. However, India failed to outpace Russia and Indonesia on this front.

One of the biggest advantages India had during the month was inflation, which remained under the Reserve Bank of India’s upper tolerance level of 6% again, giving the rate-setting panel the space to stay accommodative again and focused on economic growth. Many other emerging market economies such as Russia and Brazil have already started hiking their interest rates, while India is unlikely to do so until the beginning of the next financial year. The record low repo rate of 4.0% for a longer period could support growth for a few more months.

but worries remain

However, inflationary risks in the upcoming months due to vagaries of food prices, high fuel costs, and supply-chain issues have seemingly forced the central bank to start normalizing the loose policy. The RBI has shown concern over the Omicron variant, but inflation is likely to surpass the 6% mark from December itself, putting pressure on the central bank to hike the policy repo rate sooner than later. With the western countries, including the US Fed, already having turned more hawkish, risks of flight of foreign investments out of the country are alive. India has so far shrugged off such an impact, unlike its emerging market peers, but the story may change in coming months.

While India is expected to emerge as the fastest growing economy this year, with most organizations projecting a 9.5% growth, another covid-19 wave could potentially derail the recovery. The pace of vaccination against covid-19 was only 5.9 million doses per day in November as opposed to 7.9 million doses two months ago. The Omicron variant is spreading quickly, having already reached 19 states.

The ferocity of the new variant is not known yet. However, countries such as Russia, Brazil and Turkey have already started giving booster doses. India has also announced it will administer ‘precaution’ doses for frontline workers and co-morbid patients above 60 years from 10 January. This should help protect India’s population against the new variant albeit the bigger challenge of vaccinating a higher percentage of population remains.

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