India fares better than Asian emerging markets peers


In May and June, as India struggled to contain the second wave, several Asian peers experienced a robust economic recovery on the back of a rebound in global trade. But the spread of the virus, and in particular the Delta variant, has led to a reimposition of lockdowns across the continent, slowing down most Asian economies. In contrast, India, which recovered from the second wave by June, has seen its economic indicators improve in July, helping it move past its Asian peers in the emerging markets league table.

Only Mexico and Russia – beneficiaries of the global commodity boom – were ahead of India in July, the latest update to Mint’s emerging markets tracker shows. While the risk of a resurgence remains acute even in India, at the moment, India’s case count appears to be relatively lower compared to most other emerging markets. Other Asian markets, including China, have been hit hard by rising infections and mobility restrictions.

While India’s vaccine coverage is still below several large emerging markets such as Mexico and Brazil, it is higher than that of Asian peers such as Thailand, Indonesia, and the Philippines. Thus, despite rising oil prices, and high inflation, India’s score-card at the moment looks brighter than most emerging markets.

At a time when manufacturing activity contracted in most parts of Asia, India reported an expansion, with the Purchasing Managers Index (PMI) rising to 55.3, second only to Brazil’s 56.7. Stock markets also recovered from their June levels, even though foreign investors were net sellers across emerging markets including India last month. Apart from Mexico, India was the only economy to see a month-on-month rise in its stock market capitalisation.

Foreign investment flows have picked up in India so far in August. Declining cases and rising economic momentum seem to be helping. Concerns about regulatory action against Chinese tech firms may also be driving greater interest in India where both investors and regulators appear to be extremely indulgent towards tech firms.

Opening Up

The key differentiator for India remains a low covid case count. It is the decline in caseloads and the opening up of the economy that have allowed manufacturing activity to roar back to life after disappointing in June. Improved production and sales also boosted job creation. Merchandise exports also registered healthy growth, and not just over the depressed base of July 2020. Compared to July 2019, it grew by 16% on an annualised basis. Yet, India’s export performance pales in comparison to some of its emerging market peers such as Russia and Mexico, which are making the most of an oil market boom, and have experienced phenomenal export growth over the past few months (July export data for Russia and Mexico are still awaited). Nonetheless, India’s export performance was better than most Asian peers, and that has contributed to India’s improved rank in the league tables.

Mint’s emerging markets tracker, launched in September 2019, 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. The final rankings are based on a composite score that gives equal weightage to each indicator.

Trouble Spots

Even as India’s economic momentum picks up pace, overall demand and consumer sentiments remain weak. This has prompted the Reserve Bank of India (RBI) to overlook inflationary pressures in the economy to prop up growth even as it revises its inflation outlook upwards. While headline inflation eased last month, inflation could still emerge as a big headache in the medium term, especially since policymakers appear unable or unwilling to clamp down on it. Several other emerging markets such as Brazil, Russia, and Turkey are also staring at an inflationary resurgence but central banks in these economies have been far more proactive in combating inflation than RBI. In Turkey’s case, its market-friendly central bank chief lost his job earlier this year, partly because of attempts to tighten monetary policy in the face of political disapproval.

Rising inflation, slow vaccination, and a rampaging virus have dampened the outlook for most emerging markets across the world over the past couple of months. Lingering uncertainties around Fed policy have not helped matters, leading many investors to park their funds in safe-haven greenbacks. Most emerging market currencies, including the Indian rupee, depreciated against the US dollar in July. This may only worsen inflationary concerns for import-dependent economies such as India.

Still, India appears to be in a relatively better position compared to other emerging markets. But this can’t be taken for granted. Effective pandemic containment measures and speedy vaccination will be key to ensure that India’s economic momentum sustains.

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