India climbed three rungs to the second position among key emerging markets in February and stood just behind Philippines last month, the latest update to Mint’s Emerging Markets tracker shows.

India’s rise was as dramatic as China’s fall, which slid five rungs to the seventh spot among the ten markets considered by the tracker. Economic disruptions caused by the novel coronavirus outbreak led to China’s fall. Supply chain disruptions meant that other Asian economies too suffered.

Given that India is relatively less integrated with Chinese supply chains compared to other emerging markets, India emerged relatively unscathed last month. But as the contagion spreads, and asset prices crash globally in anticipation of larger disruptions, India’s own economic position could shift sharply in the coming months.

Given that India is relatively less integrated with Chinese supply chains compared to other emerging markets, India emerged relatively unscathed last month
Given that India is relatively less integrated with Chinese supply chains compared to other emerging markets, India emerged relatively unscathed last month

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Mint’s Emerging Markets Tracker, launched in September last year tracks 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 or 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.

India’s rise owed partly to the resilience of its financial metrics. India was relatively less affected last month by the emerging markets sell off. Compared to other economies with stronger ties to the Chinese economy, the Indian stock market was relatively unscarred. The rupee too fared relatively better compared to other emerging market currencies. But all that is history now, as the contagion spreads in India, and both stock indices and the currency come under pressure.

So far in March, the fall in India’s stock market capitalization (-13%) compared to the month ago period has been sharper compared to Malaysia (-9%) and Philippines (-10%). Meanwhile, Chinese stocks have remained surprisingly resilient this month, as investors anticipate that the worst may be over for China, which seems to have managed to tame the spread of the coronavirus. Data for March so far shows a 3% month-on-month growth in China’s stock market capitalization.

“On an aggregated quarterly basis, (non-resident portfolio) flows to China have remained positive, obscuring what is quite a negative picture elsewhere," said an International Institute of Finance (IIF) report dated 12 March.

Even in February, China’s stock market capitalization fell only 1 percent compared to the month ago period. But China’s real activity indicators took a beating. Exports in China plummeted 17% in the first two months of the year compared to the year-ago period, the biggest fall since February 2019. The cumulative data for January and February this year does not fully reflect the extent of the recent weakness. The decline in February is likely to have been much sharper compared to January but data has not been provided separately for February yet.

China’s manufacturing PMI also plunged in February to an all-time low of 35.7, as government-imposed factory shutdowns weighed heavily on the country’s manufacturing performance. Economists expect China’s gross domestic product (GDP) growth to decline by at least half in the Jan-Mar quarter, with very few economists expecting GDP growth to rise above 3 percent.

The sharp decline in real economy variables exposes the true cost of the health shock in China, and gives a foretaste of what might happen to other emerging markets as they struggle to contain the pandemic. India’s exports grew 2.9% in February after five months of contraction and its PMI remained robust at 54.5 last month. But March and April could be very different.

The silver lining amid the turmoil has been the fall in crude prices, which gives a leg-up to oil-importers such as India and allows the government some fiscal room to launch a stimulus. Unless Indian policymakers react proactively to contain both the spread of the virus and its impact on the economy, India may find it very difficult to sustain its relative position among emerging markets in the coming months.

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