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As the world reels from the pandemic that originated in China, the Chinese economy seems to have made a rapid recovery, moving back to the top of the league tables in March, the latest update of Mint’s Emerging Markets Tracker shows. India, which was ranked second in February, has slipped six rungs to the eighth position, just above Russia and Mexico. The decline was largely due to a sharp fall in India’s merchandise exports and stock market capitalization.

Mint’s Emerging Markets Tracker, launched in September last year, 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 manufacturing purchasing managers’ index (PMI) and real gross domestic product (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 weight to each indicator.

Emerging markets tracker
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Emerging markets tracker (Graphic: Ahmed Raza Khan/Mint)

India’s merchandise exports shrunk by 34.6% in March, the sharpest fall on record. Meanwhile, China’s exports saw a softer decline in March falling 6.6% as against a cumulative decline of 17.2% in January-February. Most emerging economies imposed nationwide lockdowns in March to curb the rapid spread of the covid-19 contagion. China had already contained the outbreak by early March and began scaling back quarantine measures that other countries were imposing.

China also saw a sharp improvement in its manufacturing PMI from 35.7 in February to 52.0 in March. India’s PMI (51.8) in March, while still signalling expansion, marked a sharp deterioration from February (54.5). The remaining eight emerging markets saw a contraction in manufacturing activity, with their PMI falling below the 50 mark in March. A PMI reading above 50 indicates expansion of economic activity while a reading below 50 indicates contraction. The Philippines, which imposed lockdown measures earlier than others, had the lowest PMI of 39.7.

With the nationwide lockdown in India extended by at least three weeks till 3 May, its PMI is also likely to slip into the contraction zone next month. Economists have already begun scaling back forecasts on India’s growth and some expect it to enter a recession.

“All systemic emerging markets, except for China, will slip into recession," said the Paris-based Institute of International Finance (IIF) in a report on 9 April. “This includes India, where a strict national shutdown will result in a contraction of 0.3% in 2020-21." IIF expects sharper contractions in economies such as Brazil (-4%), Mexico (-5.8%), Russia (-5.1%), and Turkey (-2.7%).

Even as the slowdown in the real economy unfolds, the sudden halt in capital flows in equity and debt markets has stressed many emerging economies, including India. Since the covid-19 crisis struck, there have been capital outflows on an unprecedented scale in emerging economies. Foreign investors sold over $83 billion worth of emerging market shares and bonds in March, the largest monthly outflow on record, IIF data shows. As a result, stock market capitalization and currencies have fallen sharply across economies.

With the exception of China, all emerging economies saw double-digit declines in their stock market capitalization. India’s stock market capitalization shrunk 22% month-on-month. However, compared to other emerging economies, India’s currency decline appears modest, with the rupee falling only 4% against the dollar last month. This is partly because of the Reserve Bank of India’s intervention in the forex market and partly because of India’s relatively stable external sector position. Unlike commodity exporters such as Brazil and Russia, the fall in commodity prices during the crisis has worked to India’s advantage.

India’s current account deficit (0.2% of GDP in the December quarter) is low compared to most other emerging economies. India also has larger reserves compared to several other emerging markets. Over the next couple of months, the trajectory of emerging markets will depend both on the trajectory of the virus and the response of the respective economic managers in each country.

India has responded with alacrity when it comes to administrative measures to tame the virus, but has been behind the curve in shaping an effective economic response to the crisis.

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