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Manufacturing growth puts India among top three emerging economies

Revival in exports and festive cheer have taken India to the third position in the latest update of Mint’s Emerging Markets Tracker

A steady recovery in the manufacturing sector helped India climb two notches to the third position among key emerging markets in September. Only China and Brazil rank better, shows the latest update of Mint’s emerging markets tracker.

The manufacturing growth reflected in the first year-on-year rise in exports in seven months, and the highest reading of the purchasing managers’ index in over eight years. In September, India’s merchandise exports rose 6% on-year to $27.6 billion.

Exports had last shown a year-on-year rise in February, even before the World Health Organization declared covid-19 a pandemic. In April, the first full lockdown month, exports fell 60%, but the contraction had been easing since.

However, the growth in September should be taken with a pinch of salt, given a low base. Among the other emerging markets that have reported their exports data for September, only China (10% growth) fared better than India. Latest available data for all other emerging markets show exports were still below last year’s levels.

Mint’s Emerging Markets Tracker, launched in September last year, takes into account seven high-frequency indicators across 10 large emerging markets to help us make sense of India’s relative position in the league table. The seven indicators 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 weightage to each indicator.

The rise in exports lifted India’s manufacturing PMI, which had already returned to the expansion path in August. The reading improved further to 56.8 in September, the highest since early 2012.

Only Brazil, with a PMI reading of 64.9, performed better. A reading above 50 denotes expansion.

Other real activity data, too, such as automobile sales and railway freight loading, point towards recovering economic activity in India. These improvements have likely been driven by further easing of localized pandemic-related restrictions, slower spread of the coronavirus, and the onset of the festive season in India.

The weekly Business Resumption Index, compiled by Japanese brokerage Nomura, shows the progress broadly continued into October. But this was largely due to sharply rising workplace mobility, one of the indicators in the index. The other data points, such as power demand and labour force participation, have been sluggish.

Nomura warned that the improvement might signal just a “faux recovery" limited to festive consumption. The brokerage firm also fears coronavirus picking up again during festivals could undo the gains made.

Meanwhile, retail inflation, a concern for the last few months, may have peaked in September, economists suggest. India’s consumer price index-based inflation rate, which breached the central bank’s upper limit of 6% in April, rose to 7.3% in September. Only Turkey’s inflation rate of over 11% was higher among emerging markets.

Inflation could start softening after December with a decline in vegetable prices, easing of supply chain disruptions, weak demand and a favourable base effect, ICICI Securities Primary Dealership said in a report.

The Reserve Bank of India, too, expects inflation to return to its target range in the ongoing quarter, and further decline to 4.5% in January-March 2021.

The RBI also expects India’s economy to start posting growth again by the last quarter of the financial year. However, the deeper-than-expected GDP contraction in the first quarter could weigh down the full-year growth rate: the RBI expects GDP to contract 9.5% in 2020-21, while the International Monetary Fund projects a 10.3% contraction, the worst among EM peers.

There are other financial metrics that India has done relatively better on.

Stock market capitalization rose 2.5% sequentially in September, the highest among the EM economies considered in the tracker. The growth came despite net capital outflows during the month.

The positive performance of the markets can partly be attributed to increased activity among domestic investors, both retail as well as high-net-worth-individuals (HNIs), in the last few months. Going forward, the financial markets could experience volatility due to the US presidential elections and a second wave of coronavirus in Europe.

The Indian rupee also appreciated 1.5% against the US dollar in September. The Mexican peso (2.4%) and Chinese yuan (1.7%) were the only two emerging market currencies in the tracker that outperformed the Indian rupee.

With India’s coronavirus situation now improving and mobility returning to pre-pandemic levels, the focus has shifted to pacing up economic recovery. India’s relative performance against other emerging economies will depend on its ability to sustain domestic demand, as well as the gains made against the virus, even after the festive season has passed by.


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