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India topped the emerging markets (EM) league table for the second straight month in December, thanks to robust exports and superior manufacturing activity, the latest update to Mint’s monthly EM tracker showed. India was followed closely by Indonesia on the rankings.

Mint’s Emerging Markets Tracker, launched in September 2019, considers seven high-frequency indicators across 10 large EMs to assess India’s relative position in the league table. It is updated around three weeks after the end of a particular month, once all data become available.

Regaining lost ground
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Regaining lost ground

Disruptions caused by a resurgence in cases of the Omicron variant of coronavirus is clouding economic outlook as it has forced several countries, including India, to reintroduce travel curbs and other containment measures. This could pose a risk to near-term growth prospects for EMs and may reflect in the tracker when it is updated next month. Early high-frequency data indicates some moderation in activity for India.

Despite losing some momentum, both manufacturing and services activity in India remained in the expansion zone in December, with the growth of new work and production staying sharp. Further, the resilient demand for Indian goods pushed outbound shipments to an all-time high of $37.8 billion, helping the country achieve three-fourths of its export target for 2021-22. The growth was broad-based (39.3% year-on-year), with 10 major commodity groups recording an expansion above their pre-covid levels.

However, equity markets turned volatile in late December on concerns over the spread of the Omicron variant, leading to a massive outward flight of foreign capital (approximately $3 billion). Domestic entities, including mutual fund investors, extended their support with 21,922.5 crore worth of investments during the month to limit the damage.

Most EM currencies felt the pressure of a strengthening US dollar. The Indian rupee fell 1.1% in December, even as some, such as China, Mexico and the Philippines, managed to stay afloat.

Inflation continued to stay high across EMs as pent-up demand unlocked and disruptions in production and supply chains continued. This is prompting the normalization of monetary policy as more countries join the rate-hiking club. Some easing of supply chain disruptions and shipping charges is underway, but the waning of pandemic-induced inflation is expected to be delayed until the latter part of 2022, as the Reserve Bank of India said in its latest bulletin. In India, retail inflation shot up to 5.6% in December as the base effect waned.

As the US Federal Reserve inches closer to a rate hike, emerging markets will most likely have to contend with a liquidity squeeze that could impact capital flows. As far as India is concerned, domestic money continues to flow: domestic institutional investors have pumped in 6,587 crore against FPI outflows of 962 crore in the year so far.

Aggregate demand conditions stay resilient with an uptick in bank credit. Other constituents of demand such as exports and imports are also exceeding pre-pandemic levels. On the supply front, rabi sowing has exceeded last year’s level and the normal acreage. However, headwinds are emerging from a rapid surge in infections amid upbeat consumer and business confidence. Continued covid flare-ups, diminished policy support, and persisting supply bottlenecks could sharply decelerate global growth, potentially hitting emerging markets as well, the latest Global Economic Prospects (GEP) report by the World Bank said.

“The pace of recovery in emerging markets and developing economies is likely to remain uneven, with output and investment remaining well below pre-pandemic trends in many economies, particularly small states and those facing fragile and conflict-affected situations," the report said.

The Indian economy is expected to expand by 8.3% this fiscal, and 8.7% and 6.8% each in the next two years on improving investment outlook, particularly manufacturing, which could benefit from the production-linked incentive (PLI) scheme, and more infrastructure investments.

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