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Photo: Mint
Photo: Mint

India among top three emerging markets globally

India’s rise in ranks is powered by the surge in financial flows to the country. It remains to be seen whether real economic activity picks up to justify that optimism

For the first time since covid-19 was declared a global pandemic in March, India found itself among the top three emerging markets in July, the latest update to Mint’s emerging markets tracker shows. After lingering near the bottom of the emerging market rankings for three months, India moved up three notches to the middle of the league tables in June. In July, it moved up two notches further to the third spot, just behind China and Brazil, driven by a booming stock market and an outperforming currency.

India’s average market capitalization increased 7.7% to $1.9 trillion in July from $1.7 trillion in June as foreign investors poured in $1.2 billion into local equities in July. The gush of foreign inflows, which continues in August also boosted the local currency at a time when other emerging market currencies depreciated against the dollar.

Graphic: Mint
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Graphic: Mint

Mint’s Emerging Markets Tracker, launched in September last year, takes into account seven high-frequency indicators across ten 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, such as exchange rate movements and changes in stock market capitalization. The final rankings are based on a composite score that gives equal weightage to each indicator.

The improvement in India’s financial metrics come at a time when India’s real sector metrics have yet to recover fully. Corporate earnings in the June-ended quarter touched multi-year lows.

India’s Purchasing Managers’ Index (PMI) for manufacturing slipped in July (46.0) after a rebound in June (47.2), showing the impact of localised lockdowns on manufacturing activity in the country. Even as India’s manufacturing contracted last month, other large emerging markets such as Brazil (58.2), Turkey (56.9) and China (51.1) reported an expansion. India’s PMI reading was better than that of only two emerging markets considered in the tracker: Thailand (45.9) and Mexico (40.4).

After reporting a trade surplus in June, India’s trade balance slipped back to deficit in July as gold imports shot up. India’s export performance appears better than that of many other emerging markets so far but it is worth noting that export data for July is available only for India, and two other countries: China and Brazil. Both reported better exports than India did last month.

India’s GDP growth in the March ended quarter (3.1%) was higher than most peers and has helped India’s overall ranking. But it is likely that the June quarter will be far worse for India than some other countries, given the relatively higher stringency of lockdown in the country for most of the June quarter.

Meanwhile, retail inflation in India increased to 6.9% in July, way higher than Reserve Bank of India’s upper tolerance level of 6%, due to supply disruptions. At 6.9%, retail inflation was higher than all emerging market peers barring Turkey, where inflation is running at double digits.

The expectation of sharp contraction in India’s GDP along with rising inflation may have raised the spectre of stagflation but the weakness in domestic demand suggests that inflationary pressures may be transient.

The growth challenge is more significant. It remains to be seen how far the pick-up in real economic activity justifies the optimism shown by the financial markets. Even though mobility levels remain below pre-pandemic levels, they have been rising over the past few weeks, a 17 August report by Sonal Verma and Aurodeep Nandi of Nomura noted. Nonetheless, the recovery is uneven, and there is a risk of ‘reversal in momentum’ from a second wave of COVID-19 cases, the economists warned.

The pace of recovery in economic activity will depend to a large extent on India’s ability to contain the pandemic. As Mint’s State Economy Tracker for July showed, states which have been able to contain the pandemic better have also witnessed a sharper economic recovery.

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