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With the Indian economy recovering from the lows of 2020, India’s rank in the emerging markets league tables has also moved up. India occupied the second position among large emerging markets in February, the latest update to Mint’s emerging markets tracker shows. This is the second consecutive month in which India has managed to climb to the top.

For most of 2020, India occupied the bottom rungs of the tracker. 2021 so far has been markedly different.

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.

India’s recovery over the past few months has been in both real economy and financial metrics. Barring China and Turkey, India was the only country to record positive GDP growth figures in the December-ended quarter. The Philippines (-8.3%) fared the worst. The manufacturing purchasing managers’ index (PMI) for India has also shown a sharper recovery compared to other countries. Only Brazil (58.4) had a better PMI reading than India (57.5) in February.

In general, Indian businesses are more optimistic about profitability over the next twelve months than other emerging counterparts, a tri-annual survey by IHS Markit showed. That optimism is shared by foreign investors, who have poured billions of dollars into Indian stocks at a time when most other emerging markets have witnessed a sell-off. This has boosted India’s stock market capitalization levels and has allowed the rupee to outperform other emerging market currencies.

The 2021 bet on India is premised on two big assumptions. One that pandemic management in India continues to be better than other emerging markets such as Brazil and Mexico, which have struggled with both testing and vaccinations. Second, that the upheaval in US bond markets will not lead to a sharp sell-off in Indian markets. Both these assumptions will be tested in the coming weeks.

With India in the grip of a potent second wave, restrictions on mobility are back in some states. If such restrictions spread, it would dampen both economic activity and investor sentiments. Rising global bond yields pose another threat. Among emerging markets, India and the Philippines are the most vulnerable to capital outflows at this juncture, a recent report by S&P Global Ratings said.

Local bond markets are also in choppy waters, with the Reserve Bank of India berating bond investors in its monthly bulletin earlier this month. Bond markets are anxious about what’s happening overseas but also concerned about rising public debt levels and the ever-present threat of inflation in India.

After easing in January, inflation climbed up again in February. Several other emerging markets have seen inflation rising in recent months but India still has a higher inflation rate than most others.

Lacklustre exports is another worry for India. The bounceback in trade over the past few months could work in favour of emerging markets, a Moody’s report dated 12 March said. But compared to most other emerging markets, Indian exports have seen a slower recovery so far. Exports rose less than 1% in February, after rising 6% in January. China’s exports grew at a phenomenal rate of 150%, albeit on a low pandemic-ravaged base. But other countries in the continent have also seen faster uptick in exports, with Indonesia (8.6%) and Malaysia (7.6%) leading the pack.

Raising export competitiveness is going to be a long term challenge for India. In the near term, the country’s ability to quickly quell the second surge and fasten the pace of vaccination will be key to maintaining the economic momentum. That will also be key to ensure that fidgety global investors keep the faith, and their money, in India.

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