After dominating the rankings for two consecutive months, India has slipped three rungs to fourth place among the world’s major emerging markets. In May, India fell behind Brazil, China and Russia, the latest update of Mint’s emerging market tracking shows.
While most emerging markets were hit hard by Wave 2, India suffered more, with much greater loss of life and livelihoods. Unlike the first wave, the second wave blockades were blocked late and the economic impact of the blockades was widely felt in May. Mobility fell, as did several key economic indicators, lowering India’s rank in the rankings.
As the second wave recedes and vaccinations accelerate, there is hope that things will turn around in the months to come. However, there are also dark clouds on the horizon. The US Federal Reserve has signaled that it may cut back its quantitative easing program to curb high inflation.
The situation, similar to that seen in 2013, could be damaging for emerging economies, including India, but it may not be the same chore as before. Some macroeconomic indicators are doing better than in 2013. The current account deficit position is much more comfortable. India actually declared a trade surplus in 2020. The currency cushion is now much higher and retail price inflation, although rising, is still below 2013 levels.
Still, there is a big reason for Indian investors to be concerned: the budget deficit and government debt levels are now much higher than most other emerging markets. As demands for a second-wave budget response increase and the government resorts to larger borrowing to finance such measures, public finances may once again become India’s Achilles heel.
There is also some anxiety on the growth front. India’s real gross domestic product (GDP) in the March quarter showed an improvement of 1.6% compared to growth of 0.5% in the previous quarter. However, disruptions caused by the current wave could weigh on economic output in the first quarter of this fiscal year, and demand could remain sluggish beyond the current quarter. Several multilateral agencies have reduced their growth forecasts for fiscal 2022, as has the Reserve Bank of India.
Although India’s financial metrics – market cap and exchange rate – remained resilient throughout Wave 2, the real economy bore the scars of foreclosure. The purchasing managers index fell to 50.8, a 10-month low. This figure is lower than what most other emerging markets recorded in May, although being above the 50 mark it still signals expansion. Likewise, although exports have grown rapidly, the growth rate has been lower than that of many emerging market peers. The underperformance of these indicators lowered India’s overall ranking.
Mint’s Emerging Markets Tracker, launched in September 2019, takes into account seven high-frequency indicators across 10 major emerging markets to help us understand India’s relative standing in the emerging market rankings. The seven indicators taken into account in the tracker encompass both real activity indicators, such as the manufacturing purchasing managers index (PMI) and real GDP growth, and financial measures. Final rankings are based on a composite score that gives each indicator equal weight.
India’s GDP figures for the March quarter were higher than most other emerging markets, but that is likely to change for the June quarter, given the much bigger blow India took. during the current quarter compared to other markets.
So far, Indian financial markets have performed well. In May, the market capitalization rose 6.1%. Only Brazil did better. The rupee has also been relatively stable, although the currency may now come under pressure as the dollar strengthens.
The RBI’s easy money policy has satisfied the markets as it has helped inflate asset prices. But now even retail price inflation is accelerating, and it may not be easy for the central bank to maintain its accommodative stance for long. Rising global commodity prices and accommodating monetary and fiscal policies have raised price barometers globally, and India appears to be among the hardest hit at the moment.
Only Turkey and Brazil have higher inflation than India among the major emerging markets. Brazil responded with sharp rate hikes. Turkey’s inability to do so, due to political pressure, made the pound the worst performing emerging market currency. India also faces tough choices as recovering global demand continues to put pressure on commodity prices. The weaker rupee will further exacerbate inflationary pressures by raising the prices of imported raw materials.
In addition to RBI’s accommodative stance, it is the flow of foreign capital that has supported stock markets since the start of the pandemic. The earlier-than-expected Fed policy tightening could slow or even reverse these flows. Emerging markets with fragile economic or health indicators are likely to be the hardest hit in such a scenario.
The bottom line: India needs to speed up vaccinations quickly, and it needs to be cautious about its debt and inflation measures.
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