Assessing the Resilience of Emerging Markets: Insights from India

In a recent address at the Business Standard BFSI Insight Summit, Dr. Poonam Gupta, Deputy Governor of the Reserve Bank of India, highlighted the remarkable economic and financial resilience of emerging markets (EMs), with a specific focus on India. Her comments come at a time when the global economic landscape has been rife with unprecedented policy uncertainty, yet paradoxically showcases a surprising resilient nature among many economies.

The Current Global Economic Landscape

Dr. Gupta noted that the global economy has demonstrated immense resilience amidst fluctuating trade policies and geopolitical tensions. The significant surprises in global growth rates and mostly benign inflation levels across nations, apart from advanced economies, have created opportunities for monetary policy easing globally. Despite evolving complexities within the financial landscape, including heightened roles of non-bank financial intermediaries, the underlying stability of banking sectors remains a central theme.

Key Factors Behind Economic Resilience

The International Monetary Fund (IMF) pinpointed a few critical factors contributing to this unexpected resilience among emerging markets. Among them are improved policy frameworks, milder-than-forecast tariff outcomes, and limited retaliatory actions by partner nations. As a result, the effective policy-making frameworks implemented in EMs have played a pivotal role in not only bolstering their own economic stability but also fostering resilience on a global scale.

Learning from Past Crises: India’s Evolving Policy Frameworks

Reflecting on her academic past, Dr. Gupta recounted the economic turmoil of the 1990s that led to a series of crises across several nations, including Mexico and Brazil. Such historical imbalances highlighted the pitfalls of unsustainable macroeconomic frameworks, characterized by fixed exchange rates and lax fiscal policies.

Emerging economies have since undertaken extensive introspection and reform to foster sounder macroeconomic management. In the early 2000s, many EMs shifted towards cautious external sector management, adopting more flexible exchange rate policies, reducing liability dollarization, and fortifying foreign exchange reserves.

The Shift Towards Robust Economic Policies

As a direct result of these shifts, EMs have steadily built resilience against a range of external shocks, including the COVID-19 pandemic and ongoing geopolitical tensions. This evolving framework has enabled coordinated responses to fiscal and monetary challenges, showcasing that while risks linger, particularly with public debt levels, structural reforms have laid the groundwork for sustained growth.

India’s Maturing Economic Resilience

Dr. Gupta articulated how India exemplifies this resilience through its progressive policy frameworks. Since liberalizing its exchange rate in 1991, India's economic management has transitioned towards a more market-driven approach. The diverse nature of its balance of payments, resilient current account, and steadily managing capital inflows have bolstered investor confidence.

India's commitment to fiscal consolidation, particularly following the pandemic-induced fiscal stimulus, is evident in its stable public debt composition. The adoption of a Flexible Inflation Targeting framework in 2016 also underscores India's reformative measures leading to stabilized inflation expectations and improved monetary policy transmission.

Positive Growth Trajectory and Economic Indicators

The optimistic economic outlook for India is further validated by recent performance indicators. With a projected GDP growth of 6.8% for FY2025-26 and an inflation rate at an eight-year low of 1.5%, the Indian economy showcases promising potential for sustained expansion. The consistent growth trends, alongside a significant reduction in inflation variability, are indicative of successful policy reforms executed over recent years.

Challenges for Emerging Economies Ahead

While the structural foundation for resilience is palpable, emerging economies face mounting pressures on their growth prospects. The diminishing utility of external trade as a growth driver necessitates a pivot toward domestic sources of growth. The challenges are manifold, including high underemployment rates and persistent gender gaps that impact productivity and economic inclusivity.

Furthermore, rising public debt levels, although manageable, pose long-term risks to developmental financing. Given these challenges, the focus for EMs must shift towards enhancing productivity, easing the business environment, and fostering inclusive growth.

Digital Public Platforms: A Tool for Economic Empowerment

In a related discussion, Shri Sanjay Malhotra, Governor of the Reserve Bank of India, underscored the role of Digital Public Platforms (DPPs) in cementing economic resilience. He emphasized India’s strides in utilizing DPPs to foster inclusive financial landscapes.

Key initiatives, such as Aadhaar for digital identity and the Unified Payments Interface (UPI) for seamless transactions, exemplify how digital infrastructure can democratize access to services and enhance the operational efficiency of the economy. These platforms have not only improved financial inclusion but have also significantly lowered operational costs across various sectors.

International Cooperation and Collaboration

India’s approach towards fostering Digital Public Platforms is underscored by a commitment to global collaboration. By offering the Modular Open-Source Identity Platform (MOSIP), India encourages other nations to develop their own digital ID systems. Moreover, strategic cross-border initiatives, including payment linkages with other countries, indicate India’s intention to enhance economic ties and facilitate smoother trade relations.

The principles of inclusivity and interoperability underpin India’s DPP framework, ensuring that both public and private sectors can leverage these systems for sustainable economic growth.