India’s economic momentum lags most emerging market peers
As India relaxes one of the most stringent economic lockdowns in the world, the economic damage is becoming increasingly apparent. After a sharp slide in the emerging market league tables in March, India continued to languish at the bottom of the heap in April, the latest update of Mint’s Emerging Markets tracker shows.
A sharp contraction in manufacturing and in exports, along with a subdued stock market, pulled India down in April. Only Turkey and Mexico fared worse than India among the countries considered in the tracker.
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.
Based on data as of April, India is the worst performer on the real economy metrics—PMI manufacturing and export growth. India’s merchandise exports fell by a record 60% in April, the sharpest fall across the ten emerging economies tracked here. Exports of most other emerging economies have fallen in the range of 5-25%. Only Thailand and China saw a growth in exports in April.
India also saw the sharpest contraction in manufacturing, as recorded by the Purchasing Managers’ Index (PMI). India’s PMI fell to 27.4, the lowest among all EMs. Only China—with manufacturing PMI at 50.8—saw an expansion in manufacturing activity in April. All other economies witnessed sharp contractions in manufacturing activity, with their PMIs ranging from 27.5 (in Indonesia) to 36.8 (in Thailand).
To be sure, India and a few other emerging economies including Brazil and Turkey, have not yet reported their GDP (gross domestic product) growth for the Jan-Mar quarter. So their overall scores do not fully capture the hit from covid-19. That said, unlike China, these economies went into lockdown mode much later. Hence the growth hit is likely to be sharper and more evident only in the June-ended quarter.
In a note to clients on 17 May, Goldman Sachs said it expects India’s economy to shrink 45% in the June quarter and by 5% in 2020-21. India’s latest economic policy announcements may help the economy recover over the medium term but is unlikely to boost growth in the short-term, the investment bank said.
Goldman also expects sharp declines in the GDP of Thailand (-6.6%), Malaysia (-5.5%), Mexico (-5.6%) and Russia (-5.0%) in 2020, a separate note said. The growth hit is expected to be more benign for Indonesia (-2.1%) and Philippines (-2.7%) while China is expected to grow 3% in 2020.
So far, the stimulus packages announced by these emerging economies range from 1% to 18% of GDP. But beneath these headline figures, fresh fiscal spending to boost demand is small for almost all emerging markets (0.3% to 2%) barring Thailand. Of India’s 20 trillion rupee economic package–equivalent to 10% of its GDP–announced over the past few days, the additional fiscal spending is estimated to be roughly 1% of GDP.
Despite declining growth prospects, financial metrics have seen improvements across emerging market economies. According to an Institute of International Finance (IIF) report dated 4 May, emerging markets attracted net portfolio inflows worth 17.1 billion dollars in April, a sharp recovery compared to the record outflows in March worth 83.2 billion dollars. The recovery was however mainly supported by debt flows and equity flows into China.
Currencies of most emerging economies saw softer declines against the greenback in April, helped by a weakened dollar. Philippines’ peso strengthened compared to a month ago (0.5%), Russia’s ruble also stabilized (-0.5%). The Indian rupee depreciated 2.4% in April compared to 4.1% in March. India’s stock market capitalization fell more than most in April (-6.8%), and pulled down India’s ranks. In May so far, India’s currency and stock market capitalization metrics have improved slightly over April but it is unclear how far the recovery will sustain.
Can emerging markets, including India, leverage their small fiscal packages to sustain an economic recovery? Markets may not be entirely convinced that they can, and will put pressure on policymakers for more measures.
How policymakers respond to that, and how the virus trajectory shapes up in the coming months, will determine the rankings in the months ahead.