Fall in exports, surge in inflation puts India behind EM peers3 min read . Updated: 19 Nov 2020, 09:08 AM IST
India fell four rungs to the eighth position in the emerging market league tables in October, marking its worst performance since June. India’s position is likely to improve once the September quarter GDP numbers are released and are factored in the rankings
India fell several notches to the eight spot among key emerging markets in October, marking its worst performance since June, the latest update to Mint’s emerging markets tracker shows.
India was at the bottom of the heap in June. Since then, improvements in factory production and buoyancy in the financial markets elevated India’s rank in the league tables. In September, India ranked fourth among the 10 emerging markets covered in the tracker. But the trend reversed in October, the latest available data show.
India’s rank slipped in October partly because some countries reported improvements in their Gross Domestic Product (GDP) growth during the September quarter. India, which has not yet reported GDP numbers for the September quarter, still stands at the bottom of the heap on this front because of a sharp GDP contraction of (-) 24% in the Jun-ended quarter.
The Reserve Bank of India expects the contraction in India’s GDP to slow to (-) 8.6% in the Sep-ended quarter.
This would still be a sharp contraction compared to the Sep quarter GDP growth of some Asian economies such as China (4.9%), Indonesia (-3.5%) and Malaysia (-2.7%).
India’s relative economic position also slipped because of a sharp decline in merchandise exports and a surge in inflation. Barring Turkey, where inflation is at double-digits, India has the highest inflation among emerging markets peers. The gap between India and the emerging markets average has been growing over the past few 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 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.
Thanks to the acceleration in inflation and a downturn in exports, India’s overall performance in the real economy segment has weakened. The decline in India’s merchandise exports was largely due to a drop in the shipments of petroleum products but growth in non-oil exports slowed too.
Renewed lockdowns in advanced countries could further hurt exports.
India’s manufacturing Purchasing Managers’ Index (PMI), however, remained a bright spot in an otherwise dismal real economy. At 58.9, India’s manufacturing PMI was the highest since mid-2008 and also higher than those of most other emerging economies. This was the third straight month of increase in India’s manufacturing PMI. If the uptrend in PMI is any indication, India’s GDP numbers in the September quarter should see an improvement even if growth is unlikely to materialize.
Across emerging markets in Asia, economic recovery is likely to be gradual and fragile, and would hinge on continued policy support, economists at Barclays said in a note to clients dated 13 November.
Thanks to monetary easing in the US and a weak dollar, the rupee appreciated against the dollar for the fourth successive month in October. But the rate of appreciation slowed (0.1%). The Chinese yuan (1.6%) and Mexican peso (1.8%) appreciated more but most other EM currencies depreciated against the greenback. In the first half of November, the rupee too depreciated mildly as RBI purchased dollars to keep the rupee competitive in the face of rising inflation.
India’s foreign exchange reserves continue to provide a bulwark against rupee volatility. India’s foreign exchange reserves rose $7.8 billion to touch a record high of $568 billion in the week ended November 6, supported by foreign investment inflows.
October saw net portfolio inflows of about $2.5 billion in India’s stock market, and November has seen a continuation of that trend so far.. While India’s stock market capitalization grew in October, the month-on-month rise was the weakest in six months. Mexico (4.6%) and Philippines (3.7%) saw higher growth in their stock market capitalization last month. But it is worth noting that India is the only market that has seen a consistent rise in its stock market capitalization over the last six months.
While the unlocking of the economy has helped demand recover, it has also triggered a fresh wave of infections in some parts of the country. The course of the pandemic, in India and the world, and the timeline for a vaccine , will continue to shape investor and consumer sentiments in the months to come.