India slips further in emerging market rankings in June

At a time when foreign investors have become increasingly cautious about investing in emerging markets, India’s rank among its peers has fallen further, according to the latest update of the emerging markets tracker from Mint. Weaker manufacturing activity, relatively below-average exports and high inflation have pushed India’s position in the rankings down.

India topped Mint’s emerging markets tracker in April, but the fierce second wave knocked India down to 4th in May, which slipped further to 5th in June. The tracker, launched in September 2019, takes into account seven high-frequency indicators across 10 major emerging markets to help us understand India’s relative position 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.

As the delta variant spreads in the developing world, most emerging markets with low vaccine coverage face risks of slowing economic activity as they are forced to re-impose mobility restrictions. India also faces the prospect of a further rise in covid infections, having just seen the worst of wave two.

Even as emerging markets struggle to revive growth, the recovery in developed markets has fueled inflation fires, pushing up the prices of key industrial products and commodities. Price pressures continue to intensify around the world, but the impact of rising commodity prices, one of the main drivers of inflation, has been felt more in emerging economies, because food and energy constitute a large part of their consumption baskets.

A few emerging markets have already tightened monetary policy this year and it may only be a matter of time before others, including India, are forced to do the same. The stronger dollar, amid uncertain Fed policy, only adds to inflationary concerns, as a stronger dollar translates into higher prices for commodity importers.

Sensible point

Unlike developed markets, inflation in emerging markets like India has not been accompanied by a strong rebound in output or demand growth. Indian manufacturing activity, as measured by the Purchasing Managers’ Index (PMI), held up well in April, just above the expansion bar (50) in May, before slipping into contraction in June, one of the worst reads of the 10 largest emerging markets. . Only Malaysia had a worse reading than India last month, according to the latest data. The latest outlook report from IHS Markit shows that Indian companies are the most negative when it comes to the prospects for profitability, improved employment and research and development (R&D) spending. They also view supply chain bottlenecks and low market confidence as threats to the outlook.

Although domestic demand remains subdued, Indian companies have been doing less well than other emerging markets in terms of growing exports. While India’s exports have been more robust in 2021 than in 2020, export growth has been slower than most of its peers.

High oil prices are another big concern for oil-importing economies like India. The rupee depreciated 0.5% in June amid a strengthening dollar and higher oil prices. With the exception of Brazil and Russia, all other currencies underperformed the greenback. The uncertainty surrounding the Fed’s policy will further strengthen the dollar, putting pressure on emerging market currencies, especially the rupee.

Silver lining

Besides the recovery in world trade, a source of comfort for India is its enormous currency cushion which protects the economy from excessive turbulence in the currency markets. It also means that India’s 14-month import coverage remains in a comfortable position, albeit lower than that of Brazil, Russia and China.

Reserves will be put to the test in the event of a 2013-type taper tantrum, when the currencies of emerging market economies such as India fell sharply as investors rushed to liquidate their assets from the markets. emerging markets in anticipation of a reduction in the Fed’s asset purchase program. . There are similar fears now, but the difference is that the Fed is much more accommodating today and much more tolerant of inflation than it was eight years ago. Other big central banks such as the European Central Bank (ECB) have also made conciliatory noises and could actually increase asset purchases even if the Fed slows down those purchases.

The global outlook could therefore turn out to be more favorable than feared, although some volatility could persist in the weeks to come. But domestic challenges remain, for India and for most other emerging markets. Even as they face the growth-inflation trade-off, most emerging markets need to step up their vaccination campaigns to be able to avert another deadly wave of covid. For India, too, efforts to combat and contain the pandemic remain essential to economic recovery.

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