Despite improvement, India still in bottom half of EM league table

India moved up three rungs to the sixth position among key emerging markets last month, the latest update to Mint’s emerging markets tracker shows. A decline in inflation and uptick in manufacturing activity aided India’s rise in December.

A sharp fall in vegetable prices and a favourable base effect helped bring down overall inflation numbers in December. However, a possible rise in commodity prices in the coming months means that the outlook for inflation remains clouded. Unless inflation is contained and other indicators see a fast improvement, it will be difficult for India to climb up the emerging markets rungs in the coming months.

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 the 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 weightage to each indicator.

One bright spot in December was manufacturing activity. For the past five months, India’s manufacturing PMI has stayed above 50, a reading that separates expansions and contractions in activity. Only Brazil (61.5) was above India in the emerging markets league tables on this count. The sales growth in the manufacturing sector was the highest since April, leading to a quick decline in post-production inventories. Despite the growth in factory orders and production, job growth failed to pick up in the sector, the PMI data suggests.

After declining in November, exports picked up marginally in December (0.14%). In comparison, exports grew at much higher rates in China (18.1%) and Indonesia (14.6%). In a promising sign, India’s pace of export growth in the first half of January was 10.9% over the corresponding period last year, wrote economists at Nomura in a note dated 18 January.

The rise in exports comes at a time when ratings agencies and investment banks have upgraded their growth forecasts for India, citing a decline in covid cases and the ongoing vaccination drive. India’s GDP for the quarter that ended in September fell 7.5% compared to the year-ago period but the quarters that ended in December and March are likely to see expansion compared to the year-ago periods.

Despite the pandemic shock and the largest-ever contraction in its GDP, India’s financial markets had stayed buoyant for most of last year. India had received higher net portfolio inflow in equities compared to most other emerging markets. Only China ($104 billion) saw a higher net portfolio investment than India ($23 billion) during January-December 2020, Bloomberg data shows.

For most of 2020, India’s stock-market capitalization saw robust growth, aided by the foreign inflows. December was no different, with India seeing a 10% month-on-month (m-o-m) rise in stock market capitalization. Only Brazil (15.6%), Turkey (11.8%), Russia (11.2%), and Thailand (10.9%) saw better m-o-m gains in their stock market capitalization.

After depreciating in December, the Indian rupee gained a little (0.9%) against the US dollar in December. Brazilian real (5.1%) appreciated the most among all emerging market currencies.

Overall, the prospects for India’s economic outlook appear brighter than they did a few months ago. However, the economy will need greater policy support to speed up the recovery, and became a more competitive market than peers.