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The 24% contraction in India’s Gross Domestic Product (GDP) in the June quarter has pulled its rank in the emerging markets league down by two notches. As of August, India stood at the fifth rung among the 10 economies considered in Mint’s Emerging Markets Tracker, the latest update shows.

India’s contraction of 24% in the June quarter was the worst among its peers. All other emerging economies, barring China, contracted in the range of 5-19%. China grew 3%. The recovery in India could be slower compared to some of its peers because of a higher coronavirus infection rate and continued localized restrictions on mobility.

“India stands out as an economy where the spread of covid-19 shows no signs of slowing, a trend that may result in a weaker recovery in economic activity," said Barclays in a report on 18 September. The investment bank now expects India’s GDP to contract 6.5% in 2020, against its earlier forecast of a 4% contraction.

Other analysts also now expect a deeper contraction in India’s economy in the ongoing financial year. This could keep the country’s overall rank in the emerging markets tracker depressed in the coming months.

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 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.

From being at the top of the league tables in February, just before the lockdown, India had fallen right to the bottom of the tracker by May and continued to linger near the bottom till June. Previous editions of the tracker put India at the third spot in July, but this rank has been revised to fifth based on new GDP data released in August. The position remained unchanged last month, the latest update shows.

After increasing consistently in the last three months, India’s exports declined, sequentially, in August. Compared to last year, India’s merchandise exports were down 13%. Among the countries for which exports data is available for a comparable period, this was the steepest on-year contraction.

But despite the decline in exports, new business received by Indian manufacturers expanded at the fastest pace since February, according to IHS Markit, which publishes the Purchasing Managers’ Index (PMI) data.

India’s manufacturing PMI increased to 52.0 in August, signalling growth in the sector for the first time in five months. Only Brazil (64.7) and Turkey (54.3) outperformed India on this metric.

Meanwhile, the fears of stagflation that were rising in the past few months could soon fade as India’s retail inflation could now be nearing its peak, analysts say. In recent months, the retail inflation had been consistently breaching the 6% upper bound set by the Reserve Bank of India.

The rise in vegetable prices in September may delay that peak, but retail inflation could start softening over the next six to 12 months due to easing supply constraints and weak demand, economists Sonal Varma and Aurodeep Nandi of Nomura said in a recent report.

India’s financial metrics have shown greater buoyancy compared to real-economy indicators. Stock market capitalization, for example, grew by 6%, which, along with China, was the best growth among EM peers.

The Indian rupee, too, continued to appreciate against the greenback for the second straight month in August. The rupee has appreciated even more in September so far as the central bank has cut back on dollar buying even as the dollar has weakened, thanks to loose monetary policies of the US Federal Reserve.

Foreign exchange reserves continued to rise as well, touching a lifetime high of $541.66 billion in the week ended 11 September, Reserve Bank of India (RBI) data showed. India’s forex reserves had crossed $500 billion for the first time ever in June.

But if rising virus cases in India hamper the efforts to encourage economic activity, India could find it difficult to reclaim the top spot in the league tables. Going ahead, the pace of reopenings and the ability to flatten infection curves will determine India’s economic recovery and its relative attractiveness among emerging markets.

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