Asia | Economics & Growth | Emerging Markets
COVID-19 is significantly impacting Asian economies. But India’s relatively small manufacturing base and low integration into global supply chains leaves it much less exposed to the economic fallout. A small share of tourism exports also insulates the economy from a potential slump in global tourism, while lower oil prices will act as a tax cut.
Last year witnessed a protracted slowdown in economic growth, but that also looks to be bottoming out. The services PMI hit a seven-year high in January and business optimism has improved. Credit growth remains sluggish, but the earlier negative credit impulse has eased.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
COVID-19 is significantly impacting Asian economies. But India’s relatively small manufacturing base and low integration into global supply chains leaves it much less exposed to the economic fallout. A small share of tourism exports also insulates the economy from a potential slump in global tourism, while lower oil prices will act as a tax cut.
Last year witnessed a protracted slowdown in economic growth, but that also looks to be bottoming out. The services PMI hit a seven-year high in January and business optimism has improved. Credit growth remains sluggish, but the earlier negative credit impulse has eased.
India’s Slowdown: A Key Component of Sluggish Global Growth
India’s rapid growth slowdown has increasingly weighed on global growth. The IMF attributed the “lion’s share” of its January downgrade in global growth expectations to the downward revisions in its forecasts for India. India’s 8% share in the global economy means every 1pp reduction in GDP forecasts will reduce global growth by almost 0.1pp.
In contrast to the slowdowns seen elsewhere last year that were driven by trade and manufacturing, India’s slowdown was largely domestically generated. An earlier crisis in the shadow-banking sector resulted in a sharp pull-back in credit extension and consumption growth, while rising unemployment also restrained spending. But some of India’s structural constraints could now serve it well. In particular, its smaller manufacturing base and lower integration into global value chains will limit the economic impact of the coronavirus compared with elsewhere in Asia. Lower foreign participation in equity and bond markets also leaves it more insulated from swings in global markets.
A Relatively Closed Economy
Despite India’s status as a leading exporter of services, the economy remains relatively closed. Total trade stands at just over 40% of GDP, ranking in the bottom 15% globally. A relatively low reliance on imported components means exports are unlikely to suffer much from any virus-related disruption in trade flows. And with around just 1% of GDP in tourism receipts services exports are much less exposed compared with the double-digit shares in Hong Kong and Thailand. Moreover, India’s trade spat with the US last year – with the loss of preferential treatment for exporters and India’s retaliation with tariffs – may have aggravated the slowdown in exports growth for that period, but exports have slowed through much of the last decade.
Growth Now Starting to Pick Up
India’s growth slowdown has most likely bottomed out. Friday’s release of GDP data for fiscal Q3 (Oct-Dec) is expected to bring an end to six quarters of rapid deceleration in economic growth. More timely data have also been relatively upbeat. The services PMI reached a seven-year high in January and the manufacturing equivalent the highest in almost eight years. Demand and business optimism have improved and the earlier sharp contraction in credit is starting to ease.
Five consecutive rate cuts from the central bank last year have also helped to stabilise the economy, albeit with rate cuts not fully passed on due to ongoing strains in the banking sector. Fiscal stimulus in the form of a corporate tax cut was also welcome.
Last year’s jump in inflation – currently at 7.6% YoY, the highest in more than five years – is also likely to have peaked. The earlier run-up in food prices has slowed with the supply shock in vegetables now easing. Overall, last year’s unfavourable trend of slowing growth and rising inflation should now reverse.
Markets Also More Insulated
Thanks to India’s contained economic exposure to the coronavirus and its brightening prospects for the domestic economy, Indian markets have held up reasonably well during the recent bout of turmoil. INR is down just 0.3% since the start of the year and broadly flat this week. The BSE Sensex has weakened, down 3.5% this week, but less than some others in Asia. And India’s stock market is the only one in Asia seeing foreign inflows this year. Low foreign ownership and the domestically orientated economy are proving a boon – for now, at least.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)