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Countries with fewer cases and lesser restrictions saw a quicker manufacturing recovery
Countries with fewer cases and lesser restrictions saw a quicker manufacturing recovery

Manufacturing slump pulls India down in EM league tables

Among ten large emerging markets, India ranks eighth, the latest edition of Mint’s Emerging Markets Tracker shows

Despite relaxing mobility restrictions since early May, India’s economic momentum continues to lag behind emerging market peers, the latest edition of Mint’s emerging markets tracker shows. India continued to be near the bottom of the league tables in May, with the sharp contraction in manufacturing activity pulling down India’s score in the tracker.

Although economic activity in May improved over April, manufacturing activity, as measured by the Purchasing Managers’ Index (PMI) improved only slightly, from 27.4 in April to 30.8 in May. Among ten major emerging economies, only Indonesia’s PMI was lower than that of India in May.

Even as covid-19 continues to spread across emerging markets, most countries, including India have been forced to relax lockdown restrictions to revive their economies. Countries with fewer cases and lesser restrictions saw a quicker manufacturing recovery, the data shows.

But there are exceptions to this. Mexico has more cases (per million) compared to India, had similar levels of restrictions in May, but it saw greater manufacturing activity last month. In contrast, Indonesia has reported fewer cases and has had fewer mobility restrictions. Yet, its manufacturing sector seems to have suffered more.

India’s relative weakness in the manufacturing sector is the key reason behind India’s low rank in the emerging markets tracker. Only Turkey and the Philippines fared worse than India in overall rankings. This is the third successive month India was among the bottom three in the list.

Mint’s Emerging Markets Tracker, launched in September last year, takes into account seven high-frequency indicators across ten 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 weight to each indicator.Sour

Source: Bloomberg
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Source: Bloomberg

India’s weakness in the manufacturing industry is also reflected in the sharp fall in its exports. Data released on Monday showed India’s merchandise exports fell 36.5% in May, having contracted 60% in the previous month. Most other emerging economies have not yet released exports data for May. As of April, the contraction in India’s exports was the steepest.

India’s GDP growth in the March end quarter (3.1%) was higher than most peers and has helped India’s overall ranking. But it is likely that the June quarter will be far worse for India than some other countries, given the relatively higher stringency of lockdown in the country for most of the June quarter.

Most economists expect a sharp contraction in the June quarter, and only a slow recovery in the subsequent quarters. According to a report released by the World Bank last week, India’s economic output is expected to shrink 3.2% in the ongoing financial year. The bank expects emerging and developing economies to shrink 2.5% in 2020, their first contraction as a group in at least sixty years. Among the broader regions, Latin America and the Carribean are expected to suffer the biggest drop (-7.2) with sharp contractions in Brazil (-8%) and Mexico (-7.5%). East Asia and Pacific is expected to emerge relatively unscathed (-0.5) thanks to their close ties to China, which is expected to expand its economic output by 1%. South Asia is expected to contract -2.7% in 2020.

Despite declining growth prospects, financial metrics have seen slight improvements across emerging economies, with foreign funds returning to invest once again. India’s stock market gains in May were relatively muted compared to other large emerging markets. India’s stock market capitalization increased 4% over the previous month in May. In comparison, the stock market capitalization of Mexico, Turkey, and Thailand increased in the range of 7-8% month-on-month in May.

The Indian rupee strengthened marginally against the dollar in May after four months of depreciation. The rupee appreciated 0.7% in May after depreciating 2.4% in April. This is largely because of the decline in the value of the US dollar since late March when the US Fed eased monetary policy. The currencies of China, Brazil and Turkey continued to depreciate against the dollar in May.

The biggest relief for India is the increase in its forex reserves, which recently crossed the $500-billion mark, a historic high. It is now just below Russia, Brazil, and China in terms of its import cover. This gives adequate cushion to combat external shocks.

The rise in import cover however masks economic weaknesses. The increase in the cover has more to do with the shrinking import bill on account of trade disruptions and a sharp fall in global oil prices, than the rise in dollar flows.

With covid-19 cases and deaths still mounting, the outlook for the economy remains uncertain. Even as some states have managed to relax mobility restrictions considerably, others are beginning to tighten restrictions once again. Till India is able to control the epidemic, the economic outlook will remain clouded.

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