Indian economy keeps its shine, with some red flags

As things stand, India remains the world’s fastest-growing major economy. (Image: Pixabay)
As things stand, India remains the world’s fastest-growing major economy. (Image: Pixabay)


  • India’s strong footing, especially at a time when recession bells are ringing in Europe, may prove useful to the Narendra Modi government ahead of elections. The country remains on top in Mint’s emerging markets tracker.

India maintained its top position among major emerging market (EM) economies in the February edition of Mint's monthly EM tracker, buoyed by robust domestic growth and a sharp rebound in exports. The rupee's performance against the US dollar, while modest, outshone that of its peers, as did the achievements of the domestic stock market, enhancing India’s overall score.

This solid standing, especially at a time when recession bells are ringing in Europe, is particularly advantageous for the Narendra Modi government as it approaches the Lok Sabha elections. However, the recent weakening of the rupee, elevated food prices, and weak private consumption raise red flags.

On the EM tracker, which ranks 10 countries on seven indicators, India stood out mainly due to the 8.4% GDP growth in October-December, 11.9% growth in exports, and 4% month-on-month rise in stock market capitalization. Scoring 83 out of 100, India significantly outpaced its closest competitors, the Philippines (65) and Brazil (64).

The EM tracker is one of two economy trackers run by Mint. In the second tracker, which tracks the economy’s performance over time, eight of 16 high-frequency indicators had a better reading in February than their five-year average trend (were in “green")—an improvement from January.

These included the purchasing managers’ index, non-food credit, and inflation. However, sharp declines in passenger vehicle sales (an indicator of urban demand) and tractor sales (an indicator of agricultural demand), and lack of steam in labour-intensive export sectors pose concern.

Market dynamics

Despite bouts of volatility, India's stock market has emerged as one of the best performers globally this financial year, propelled by consecutive strong GDP figures. A surge in global equity markets, especially in the US, has further contributed to this momentum.

“The robust GDP growth rate along with rising profitability of corporate India led to a rally in markets," said Harsimran Sahni, executive vice-president - head treasury, Anand Rathi Global Finance. Besides, the expectation of continuity of the Modi government has led to positive market sentiment, Sahni added.

Meanwhile, the performance of the rupee has been relatively stable in recent months, but its decline to a record low last week has caused furore in the hot election season despite India’s robust foreign exchange reserves. “The recent intervention from the Reserve Bank of India (RBI) in the forex market (to curtail the depreciation) has led to the positive impact on the rupee, thus contributing to stability," Sahni said.

Gaining momentum

After being under stress for most of 2023, merchandise exports have witnessed a gradual improvement in the past three months. In February, India’s exports grew 11.9% year-on-year, its highest level since June 2022. The increase was led by a 54.8% growth in electronic goods, a 22.2% rise in pharmaceuticals and a 15.9% increase in engineering goods. 

“Overall, exports are displaying resilience in the face of unfavourable global conditions. To be sure, they are getting support from a depreciating rupee," Crisil said in a report released last month. 

However, the report said that despite the encouraging numbers, a sense of caution is warranted. "Rising global tensions and unevenness in global growth mean maintaining export momentum will not be an easy task," it added.

Meanwhile, exports in eight labour-intensive sectors tracked by Mint remained under stress with a decline of 2.7% last month, highlighting the need for the attention of policymakers.

Steady inflation

India's headline retail inflation was stable at 5.1% last month, while core inflation, which excludes food, and fuel and light groups, eased by 20 basis points to 3.4%. However, inflation remains significantly above the RBI’s medium-term target of 4%, with additional risks from volatile food prices. Food items have nearly 40% share in the inflation basket and tend to influence the headline rate.

Moreover, uneven rainfall impacting crop production along with seasonal trends have added uncertainty to inflation’s trajectory towards the target. Even after a dip in momentum in recent months, food inflation has averaged 7.4% in April-February. “Large and repetitive food price shocks are interrupting the pace of disinflation that is led by the moderation of core inflation," the RBI’s monetary policy committee said last month. As such, economists do not expect the central bank to start easing the policy repo rate until the conclusion of the elections.

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