India is not one of the most attractive emerging markets right now

We have to be aware. The situation is like catching a falling knife because the current measures are extremely damaging to the world economy. Forecasting right now is difficult due to the huge uncertainty. It’s like shooting at a moving target with a blindfold. Nevertheless, we have some figures to remember, because a few weeks ago, we started a scenario analysis. In this scenario analysis, we have tried to reproduce how the virus affects different parts of the world economy.

We have hypothesized about, for example, exchange rate fluctuations, closings in countries (via less hours worked per worker), disruptions in world trade, unfavorable sentiment and behavior of consumers and investors and the negative effects on productivity. At the conclusion of this assessment, the virus was only widespread in China, Italy and South Korea. However, we thought things could easily get worse and also calculated an adverse pandemic scenario. We adopted it as the reference scenario.

We forecast that global growth will stabilize at 0.7% in 2020 (before the crown, we estimated 2.9%). We forecast that China’s growth will reach zero in 2020 (pre-crown: 5.7%). Most countries will end in recession, with Japan -2.5% (pre-crown: 0.5%), Italy -1.9% (pre-crown 0.1%) and Germany -1 , 2% (0.6% pre-crown)). For India, we forecast growth of 3.6% during the 2020 calendar (5.7% before the crown). In terms of fiscal year 2020/21, this represents 4.2% of growth, which coincides very well with what BofA has just published.

We must again emphasize that our forecasts are surrounded by a lot of uncertainty and that there are several downside risks. However, there are too many unknowns at this time to make a meaningful estimate of the economic impact at this stage.

Some risk scenarios: 1) the current health crisis could also become a financial crisis. A financial crisis can result from the simple fact that businesses and individuals are raising capital rather than spending, thus disrupting the flow of money through the economy. There are already signs that the two are threatening to happen simultaneously – prompting extraordinary actions by the central bank that still fail to limit the problem. 2) Extended lockouts. If this is the case elsewhere, or worse considering the different political systems in force, this will increase the economic impact exponentially. The European Central Bank (ECB) has said that a month of foreclosure in the euro area will reduce annual economic growth by 2.1 percentage points (ppts). If we use our eurozone pre-crown estimate of 0.9% yoy, a one month lockout would cause economic contraction of 1.2% in 2020, which roughly matches our forecasts. However, an extended lockout of three months, for example, could plunge the eurozone into a recession of almost -5.5%. 3) In a prolonged shutdown scenario, an increase in the shortage of food and medicines cannot be excluded either. While it seems likely that food safety will be a top priority for governments, this is not easy to achieve in a crisis where others are facing the same problems.

For India, our forecasts assume that the virus will also spread to India, but we do not assume that India will be the next virus hotspot in Asia. We do not exclude that this is possible (given the high population density and health care which are less abundant than in many Western economies). In this case, we could see substantial rebound effects across Asia (even touching the ground in other parts of China). In all of these scenarios, we also need to go back to the drawing board.

We would say that the coronavirus is more and more a simultaneous shock of supply and demand. Central banks as well as budgetary decision-makers are invited to intervene and act. But obviously, it’s a problem they can help pave, but they can’t fix the root source. Again, the financial markets currently judge most of the time that their actions are indicative of the magnitude of the problem, rather than offering a real solution.

India, like other emerging countries, is experiencing the full force of the global flight to secure assets. The rupee plunged in March and we still expect volatility in emerging financial markets. Our EM Vulnerability Heatmap shows that India is not currently one of the most vulnerable, but also not one of the most attractive.

There are structural problems that the Modi government must resolve in order to bring economic growth to acceptable levels (after the current crisis) and attract a sufficient amount of investment abroad. First, labor market problems will continue to put downward pressure on participation rates and hamper a better distribution of work between different industries. Second, there are unresolved balance sheet problems in four segments of the economy: infrastructure companies, the banking sector, non-bank finance companies, and the real estate sector, as explained by the former chief economic adviser. Subramanian. These problems are likely to continue to dampen credit growth and investment. Finally, we expect the average annual contribution of total factor productivity (TFP) to be lower than that of the past five years. This is partly explained by the anticipated slowdown in the growth of inward foreign direct investment (FDI), against the backdrop of a reverse globalization trend and the increasingly protectionist position of India and, of course , the relocation of globally dispersed supply chains, which have proven to be very vulnerable due to Covid-19. All of this will pose challenges for India as an investment destination.

That said, it is possible that India may benefit to some extent from the latest threat mentioned. International companies have discovered the hard way how vulnerable their globally integrated supply chains are. This was already becoming clear due to trade tensions between the United States and China, but was fully exposed by the COVID-19 virus epidemic. The disruption of international trade can encourage international companies to diversify their production in several countries. Companies want to rely less on China, because their only manufacturing center could move (part of) their production to other countries, such as India. The magnitude of this upward potential is difficult to assess.


Hugo Erken is responsible for international research at RaboResearch Global Economics & Markets. The views are hers.

(As told to Puneet Wadhwa)


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