India slips to bottom of EM rungs for the second time in six months

India slipped to the bottom of the heap among key emerging markets in November despite reporting better-than-expected GDP figures for the September quarter, the latest update to Mint’s emerging markets tracker shows.

The ranking, the worst since June, indicates that India is finding it harder to regain lost ground compared to emerging market peers. Exports, for instance, had risen in September, but have contracted two months in a row now. Most emerging markets have reported declines in exports during the pandemic months, but India’s numbers—8.7% year-on-year contraction in November—have been worse.

China has been the big outlier among emerging markets, with exports growing 21% in November, the sixth straight month of growth and the best since February 2018.

India’s manufacturing purchasing managers’ index (PMI) continued to show an expansion in November but the pace was slower, as it touched a three-month low of 56.3.

Despite the decline, India’s PMI was still higher than all other emerging economies barring Brazil (64). A reading of over 50 denotes an expansion.

India’s GDP contracted 7.5% in July-September, a significant improvement since the 23.9% contraction in the first quarter. This was also slightly better than market expectations, and encouraged the Reserve Bank of India (RBI) to revise the full-year slowdown projection from (-) 9.5% to (-) 7.5%.

However, the extent of India’s economic slowdown is still worse compared to most other emerging markets in the tracker. 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.

The relative underperformance in the real economy was accompanied by a slight setback on financial metrics, where India had fared better than other markets for the past few months.

The Indian rupee depreciated (-1.1%) the most among emerging market currencies against the US dollar in November. But the losses were mostly concentrated in the first half of the month. The currency began gaining in the second half, and the trend has continued in December. Continued intervention by the RBI in recent months has led to sizable addition to India's forex reserves, while keeping the rupee in a narrow band despite considerable uncertainties, said Siddhartha Sanyal, chief economist and head of research at Bandhan Bank.

India’s stock market capitalization continued to grow for the seventh straight month, but the month-on-month growth (5%) was one of the lowest among emerging market peers. Thailand (13%) and the Philippines (12.7%) saw greater gains in their stock market capitalization.

Despite weak demand, India’s retail inflation remained elevated in November. At 6.93%, it showed signs of easing after the nine-month peak of 7.61% in October, but still remains much higher than peers. Only Turkey (14%) had higher inflation. While the RBI has continued with its accommodative stance, members of its monetary policy committee (MPC) flagged inflationary risks in their last meeting in early December.

In a special report dated 18 December, Japanese brokerage firm Nomura said that it expects the inflationary pressures, largely driven by food prices, to moderate next year. Inflation could return to the 4.5-5% bracket in 2021 due to a likely correction in vegetable prices, buffer stock of cereals, and normalization of supply chains, the report said. A strong base effect is also likely to play a role, as inflation has remained above the RBI’s target range for nearly the whole of 2020. Despite the drop in food inflation, Nomura expects core inflation to be sticky at 5% next year as firms could start raising prices to repair their balance sheets. This would complicate the task of RBI in the months ahead.

On balance, the road to recovery still appears to remain bumpy. It remains to be seen how far the upcoming Union budget is able to address some of the risks to the recovery, and make the road smoother.