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I’m not out of the woods yet
As in other parts of Asia, the worst of India’s recession is certainly behind it, yet a large part of the economy is still reeling.
The five most affected Indian states at the time of writing are Maharashtra, Karnataka, Andhra Pradesh, Tamil Nadu, and Kerala, in that order, coincidentally accounting for about 40% of the country’s GDP and economic activity in some of these and other states remain. partially stagnant. In Maharashtra, home to the financial capital Mumbai and with the largest share of total GDP, that is, 14%, the existing lockdown has been extended until December 31, 2020.
India’s exports plummeted by a whopping 17% year-on-year in the first 10 months of 2020, the steepest in Asia and sadly lacking the export support that some of its Asian neighbors have recently started to enjoy. The decision to stay outside of the Regional Comprehensive Economic Association (RCEP) trade agreement will also deprive the country of any potential benefits from this intraregional free trade, although there may not be much to reap here given existing bilateral trade agreements, which reduces partly the incremental profits. Therefore, the small share of exports in GDP and the low exposure to China insulate it from the risk of any trade or technological war.
Without a material improvement in the underlying economic fundamentals, it will be a tough road for the INR going into 2021.
Meanwhile, weak domestic demand and low global oil prices should sustain weak imports and narrower trade deficit trends well into 2021. The current account posted a record $ 20 billion surplus in 1Q20, which With a huge foreign exchange reserve of over $ 500 billion, the external payments situation should remain comfortable. However, this has not prevented international credit rating agencies from downgrading the outlook on India’s sovereign rating due to slow growth and deteriorating public finances. In turn, the negative over-rating has been an additional blow to an embattled Indian rupee, maintaining it as one of the underperforming Asian companies, the status it has maintained for the past few years. Without a material improvement in the underlying economic fundamentals, it will also be a tough road for the INR until 2021.
