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India slips to third spot in emerging market rankings in October

Barring the impact of crude prices, economic recovery in India largely remained on track in October, boosted by festival-led demand (HT_PRINT)Premium
Barring the impact of crude prices, economic recovery in India largely remained on track in October, boosted by festival-led demand (HT_PRINT)

Surging crude oil prices have played spoilsport in recent weeks, undoing the gains from the festive mood and pushing India down in Mint’s emerging markets tracker in October. The country had topped the list in the three prior months.

For three months starting July, India outpaced emerging market (EM) peers on economic recovery as the second covid-19 wave subsided and business sentiment improved. However, surging crude oil prices have played spoilsport in recent weeks, undoing the gains from the festive mood and pushing India to the third position in Mint’s emerging markets tracker in October.

The rise in crude prices worked in favour of Russia, the world’s third largest producer, helping it ascend to the top. The Russian ruble strengthened 2.2% against the dollar on a month-on-month basis, marking the biggest gain among the 10 EMs considered in the tracker. For India, a net importer, rising energy prices weighed on the rupee, which depreciated on a month-on-month basis for the first time since July.

China, Indonesia and Malaysia were the only other countries that saw their currencies rise against the dollar in October. Indonesia jumped to the second spot, aided by high commodity prices and signs of recovery following a devastating second wave. The Southeast Asian economy is the world’s largest exporter of coal and palm oil.

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.

India’s rankings for the three months ending September may get updated when GDP data for the quarter is released on 30 November.

Largely on track

Barring the impact of crude prices, economic recovery in India largely remained on track in October, boosted by festival-led demand. The manufacturing purchasing managers’ index (PMI) rose to an eight-month high, while the services PMI left behind the scars of the pandemic and rocketed to over-a-decade high.

Merchandise exports remained on a firm footing, rising 43% from a year ago and 27% since October 2019. However, India was not alone in benefiting from strong exports growth as Russia, Indonesia, and Turkey also posted impressive figures.

 

Despite a moderate rise, retail inflation (4.48%) stayed in the comfortable vicinity of the Reserve Bank of India’s (RBI’s) medium-term target of 4.0% again. This may provide some room to the central bank’s monetary policy committee before it embarks upon policy tightening.

While investors remain concerned about the imminent tapering of bond purchases by the US Federal Reserve, EM economies have mostly been able to shrug off any adverse impact so far. Indonesia stood out with impressive equity flows as covid-19 restrictions were eased. China’s stock market performance was hit by concerns over the Evergrande crisis, but it now seems to be abating. In India, stock markets performed decently, with several initial public offering (IPO) listings making huge gains. But there were jitters as investors remained concerned about steep valuations and the beginning of monetary policy normalization.

Challenges Ahead

India is showing optimism over the economic momentum after the deadly second pandemic wave, and hopes are pinned on the revival of demand. But there are many challenges, too, that may spoil the party.

To begin with, rising crude oil prices may not only cause price pressures, they could also weaken macroeconomic stability. On top of their inflationary impact, demand recovery may also prompt firms to pass on the high costs of raw materials to consumers.

Then there are the fading base effects and an emerging reversal in low food prices, both of which could push inflation higher in coming months. A large chunk of the retail inflation basket of goods is already rising at 6% or more, a Mint analysis this week showed.

Should inflation breach 6%, pressure could mount on the RBI to change its accommodative stance. So far, India has been at an advantage: inflation has already forced some other EM peers such as Russia, Brazil and Turkey to start hiking interest rates. India may soon find itself in a similar position, considering the inflationary risks in the pipeline.

Apart from their price pressures, unresolved supply-side issues also threaten to impact production and, in turn, growth. Raw material shortages have already hit production in industries, such as automobiles, exerting pressure on profit margins. According to Nomura, these downside risks could shave 1 percentage point off India’s GDP growth in 2021-22.

The supply-chain bottlenecks, however, are likely to impact growth of other emerging market economies as well. Nevertheless, aided by low base effect, India is expected to emerge as one of the fastest growing economies this year.

The story on the vaccination front is different, though: India is behind most of its EM peers. China, Brazil, Turkey, Mexico and Russia have fully vaccinated 30-74% of their population, whereas India lags at 28%. The pace of administering doses dropped significantly in October, down to 5.6 million per day from 7.9 million the previous month.

This means a resurgence in Covid-19 cases may still have the potential to derail India’s economic recovery. The arrival of a fifth wave in highly-vaccinated France only serves as a warning that risks are far from over.

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