Reversing months of decline, India rose several notches to finish second among key emerging markets in October, improving its relative attractiveness vis-a-vis other markets. Only the Philippines ranked ahead of India last month, the data show.

These rankings are based on Mint’s Emerging Markets Tracker, launched two months ago to track seven high-frequency indicators across 10 large emerging markets, and help us make sense of India’s relative position in the emerging markets league tables.

India’s ranking rose because of improvements in India’s financial sector indicators. Emerging signs of weaknesses in several other large emerging markets have also helped India’s cause, making India’s economic score-card look better than its peers. However, it is uncertain whether the relative improvement will last, given that domestic demand conditions in Asia’s third-largest economy continue to be weak.

The seven indicators considered in Mint’s Emerging Markets Tracker encompass both real activity indicators (such as PMI manufacturing and real gross domestic product or GDP growth) as well as financial metrics (such as exchange rate movements and changes in the stock market capitalization). The final rankings are based on a composite score, which gives equal weights to each of the seven indicators.

The selection of the emerging markets in Mint’s Emerging Markets Tracker is based on the International Monetary Fund (IMF) classification of emerging and developing economies
The selection of the emerging markets in Mint’s Emerging Markets Tracker is based on the International Monetary Fund (IMF) classification of emerging and developing economies

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Last month’s improvement was driven by an improved stock market performance, with India’s stock market capitalization rising modestly at a time several emerging markets saw declines. Foreign fund inflows also helped the currency to gain strength, helping improve India’s score on this front.

India’s relative outperformance was also helped by its relatively modest export decline. Thanks to a low base effect, India’s exports contracted less than most other economies last month. In contrast, several commodity exporters such as Brazil and Russia witnessed sharp declines in export growth.

The selection of the emerging markets in Mint’s Emerging Markets Tracker is based on the International Monetary Fund (IMF) classification of emerging and developing economies. The 10 emerging markets selected were the largest economies in this group for which consistent and comparable time series data were available.

In both export and financial sector performance, India was among the laggards in the past two months. On both fronts, October brought better tidings for India. Whether or not this would sustain remains to be seen. A low base effect in coming months may help India’s performance but improving outlook for the global economy may help other markets more than India.

India’s real sector indicators still look decent as it is one of the few countries that shows expansion in manufacturing activity as per the Purchasing Managers’ Index (PMI) data. Most economies saw a contraction in manufacturing (a reading below 50) last month.

India’s June quarter real gross domestic product (GDP) growth at 5% is also higher than what many emerging markets experienced although this was lower than India’s own past growth figures. It is worth noting that for most other countries, the September quarter numbers are already out and have been considered here. Several economists expect the September quarter growth numbers for India to be lower than the previous quarter and this would weigh on overall rankings in the coming months.

What happens to growth in the quarters ahead remains the trillion dollar question. That will ultimately shape India’s macroeconomic score-card and its attractiveness among emerging markets. Some economists expect growth to be better in the second half of the current fiscal year (Oct-Mar) while others expect a lacklustre performance in the second half, and have cut back their growth projections.

How India’s credit crunch eases in the coming months will likely have a large bearing on both financial and real indicators, given its central role in the growth slowdown. However, the prognosis so far does not appear bright. The credit crunch only intensified in the September-ended quarter as the slowdown in the non-bank sector was compounded by slowdown in bank loan growth, an 11 Nov Credit Suisse report said. Given that the banks have not fully accounted for bad loans to non-bank financial companies (NBFCs), the outlook on credit growth remains clouded.

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