India’s economy is “vulnerable” because of its increasing fiscal deficit and retail inflation, and indirect exposure to the Russia-Ukraine war, according to a report by Nomura on Emerging Markets.
The report has analysed the resilience and vulnerability of 20 major EM economies, taking into account recent stressors and the countries’ fundamental financials.
Poor fiscal health
The report said that while budget deficits have ballooned in nearly all countries due to the pandemic, resulting in higher public debt ratios, some countries such as India are in a worse shape than others. It clubbed India with Brazil, Hungary, South Africa and China, while it grouped the better offs as Russia, Peru, Chile and Turkey.
To control inflation and reduce its impact on poorer households, India may need to consider increased subsidies for fuel.
The report stated “large net importers of food and energy may need to impose price controls or increased food and fuel subsidies to limit the rise in inflation, thereby cushioning the cost-of-living impact on poorer households but at the cost of larger budget deficits”.
It stated, “The surge in commodity prices – notably food prices, which have a much larger weighting in the CPI baskets of EM countries than their DM counterparts – will result in more EM countries joining the double-digit inflation camp (Russia could soon join Turkey with over 50% inflation). Even in Asia, where inflation has been relatively low, prices are set to accelerate”.
The country’s indirect-exposure to the Russia-Ukraine war comes from its fertiliser imports. Thirty percent of India’s fertiliser imports come from Russia and Belarus.
Hanging on commodity prices
In the overall assessment, India has been placed among economies that have “relatively sound fundamentals and will benefit once commodity prices decline”. The other countries in this group are China, South Korea, Thailand and the Philippines.
Titled ‘Beware of painting all EMs with the same brush’, the report has classified the 20 countries into three. Countries with weak economic fundamentals and high negative exposure to Russia and Ukraine via high commodity prices as vulnerable; countries with fairly healthy fundamentals, limited exposure to the two warring countries and that could benefit from high commodity prices as resilient; and countries that have relatively sound fundamentals and will benefit once commodity prices decline as ‘commodity-dependent group’
India falls in the commodity-dependent group. Hungary, Romania, Turkey, the Czech Republic and Russia fall under the ‘vulnerable’ group and Brazil,Peru, Mexico, South Africa and Indonesia come under the ‘resilient group’.