Mumbai/New Delhi: The current slowdown seems to have dented India’s attractiveness among emerging markets considerably, with the country slipping two positions to ninth among key emerging markets.

The rankings are based on Mint’s Emerging Markets Tracker, launched last month 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. The selection of the emerging markets 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.

The seven indicators 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.

In recent months, India’s metrics have deteriorated considerably, and in August, India was already at the seventh spot. September saw a further slide, with all emerging markets except Turkey, ranking ahead of India. China displaced the Philippines from the top position, buoyed by a recovery in its stock markets, and despite a decline in exports.

Turkey, which in the midst of a severe economic crisis, was the only economy among this list which fared worse than India in September. The latest World Economic Outlook update released by the IMF identified Turkey among the four most fragile economies affected by severe macro-economic distress (the others being Argentina, Iran, and Venezuela).

Despite being just a notch above Turkey, India’s score is significantly higher, largely because its real activity indicators still appears impressive compared to other large emerging markets. India is still among the top half of the league tables when it comes to growth (as of the June-ended quarter) and manufacturing PMI (as of September), with the indicator signalling expansion in manufacturing activity, even if not at a frenetic pace.

(Graphic: Ahmed Raza Khan/Mint & Pooja Dantewadia/Mint)
(Graphic: Ahmed Raza Khan/Mint & Pooja Dantewadia/Mint)

An expanded version of this graphic can be seen here

India’s decline is largely because of financial sector indicators, with stock market capitalization falling even as it rose in most other emerging markets. The slowdown in company earnings and the stress in the financial sector weighed on market sentiment, and new revelations of financial shenanigans have continued to keep markets on tenterhooks. As financial flows were weak, the rupee’s weakness continued in September even as some of the other currencies strengthened against the dollar.

While inflation in India is on the higher side, it is not yet out of whack despite the sharp rise in food prices last month. India’s import cover remained largely unchanged.

Among the real economy indicators, India’s export performance is among the weakest, with the country among the worst-performing economies. While all economies have been affected by the global trade slowdown, this does not entirely explain India’s sub-par performance.

China, the biggest victim of Donald Trump’s trade war, saw a more modest decline in export growth compared to India in September. And some emerging economies (Mexico, Turkey, and the Philippines) actually witnessed a small bump in exports last month.

India’s weakening momentum has unsurprisingly led to downgrades in growth forecasts from several multilateral institutions and ratings agencies, with the IMF the latest to join a long list of such agencies. The latest IMF World Economic Outlook update forecasts India’s growth at 6.1% for the current fiscal, 120 basis points lower than what was forecast in April. Only three of the large emerging markets —India, Brazil, and Russia—saw such a large decline in their growth forecasts over this period, with growth estimates cut by the same amount (120 basis points) for each of these economies. One basis point is one hundredth of a percentage point.

The latest IMF update has also warned of a global slowdown, forecast at 3.0% for 2019, its lowest level since 2008-09, and a 30 basis points decline in the growth estimate compared to the April update. Coming from an institution that is usually gung-ho about global economic prospects, the IMF’s message sounds almost ominous.

With a global economic slowdown, intensifying weakness in domestic consumption, a revenue-constrained government, and a continued slowdown in private investments, all the drivers of India’s growth engine appear to be losing steam.

It remains to be seen how far the recent corporate tax cuts and monetary easing by the central bank will help revive sentiments and aggregate demand. Till credible signals of recovery emerge, India is likely to remain an under-performer among emerging markets, and likely attract lesser fund flows compared to other markets.

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