By Rohit Srivastava
The idea to Measure and Map India’s economy along with the EW view was given to in 2003 but I decided that the time to do so would be a decade later. Rightly so I started the process in 2010 with the publication of the Economic Winter of India reports 3 completely detailed reports are online with the latest published in Dec 2018. i also write winter updates from time to time But let me get you up to speed quickly with what this is all about. The economic cycle was considered to have 4 seasons along an entire cycle from birth and back and then repeat. The use of seasons to describe a cycle is probably meant to highlight that the cycle goes on and on. The length was considered 50 years but it is not a fixed time it can be 70-80 years now based on the life expectancy of mankind and other factors. It is therefore about the events that follow each other from one season to the next
Here is an analysis of India’s seasons and where we are within then.
The Kondrateiff seasons and India
Kf Spring – Spring represents the birth of an economy which for India would have started a little before or around Independence.
Spring is the bull market during which the economy grows on new found growth prospects to exploit all its resources. Interest rates start on a low base and trend higher as demand for money grows to fund growth. Prices of assets commodities and labor expand. For India the time up to 1990 would represent such a period. GDP compounded at 6% during this period.
Kf Summer – Summer is when the economy reaches full bloom. All resources are being exploited and the expansionary phase of the past
results in visible price inflation catching up with wages. To control it, interest rates move up substantially often slowing down the economy. By the end of Spring price inflation will eventually appear to have been controlled and interest rates can go lower again. 1994- 2001 represents such a period in India. 1966-1981 represents the same for the US. For those who have been following the market for the last decade you will remember how analysts were often comparing the 70’s Dow chart with the 90’s India chart to predict how the Dow then took off later and went up 10 fold over the next 20 years [during the Kf Autumn]. Well India went up 8 times since 2001 in 7 years. What I want to highlight is that in terms of the Kf cycle they were comparing the same state of markets [Kf summer]. The outcomes
therefore were also similar, but time wise one lasted much longer. There is a belief therefore that India’s bull market that started in 2001 is going to last for decades and we are seeing a temporary halt right now, however the size of the bull market is often ignored. Time was smaller in India because we quickly went from a closed to open economy and are doing a very fast catch up job with lost time. In terms of wave structure too if you see the chart above wave 3 was the longest however wave 1 was a small bull market relatively, and therefore wave 5 equals wave 1 in size and that is good enough. India’s debt to GDP was just over 50% by the end of the Summer].
Kf Autumn – The myth that inflation is under control is what kicks off the Autumn. This feeling of control allows for monetary action to start again. Note that this is the only time when lower interest rates are associated with rising asset prices. During spring interest rates start on a small base and expand slowly as the economy expands, demand for finance leads interest rates. During Autumn rates are lowered to kick start economic activity and the belief that prices can be kept under control allows for credit based bubbles to reach full scope. Falling rates push all asset prices up from equities bonds and real estate to possibly commodities and wages. As credit levels expand exponential nurturing debt with cheap finance is the essence of keeping the Autumn bubbles alive. But as discussed above they will eventually burst. 2001-2010 is the Autumn for India. In terms of credit 2010 appears like the right time of the cycle to end, though from a stock market perspective it can be debated whether the 5th wave based on Elliott waves ended in 2008 or 2010. It differs between Sensex and Nifty. India’s debt to GDP had crossed 135% and is now close to 140% This excludes items like NBFCs, non banking FDs, non banking corporate debt, derivatives markets and other lenders and borrowers. Bank credit and Govt debt along add up to close to 140%. If we put everything together it could shoot past 150%
Kf Winter – As always winter will come. The most painful period as bubbles burst causing economic upheavals and hardship. Fear and distrust force reduced lending activity despite lower interest rates. Quality debt is back in vogue. The process of unwinding of debt before another cycle starts can take from a few years to decades depending on the degree. The U.S. deflation from 1929-1949 took 15 years for debt, but stock markets bottomed in 1934, i.e. in 4 years. However a grand super cycle occurs when a 5 wave rally of one larger degree occurs. This means after 3 consecutive Kf waves in a country it completes a larger degree 5 wave rise lasting 210 years and will correct/consolidate for a longer period. In the U.S. 1720-1784 is shown as the Grand-Supercycle degree wave 2 by Robert Prechter in his book “Prechter’s Perspective”. That was 50-60 years of depression/consolidation. Since then US has been in a Grand supercycle degree wave 3 till year 2000. Wave 4 could potentially be as large in time. But for countries like India that are in their first Kf cycle since independence and things are not so bad. Yes I think India will see its own Kf winter, i.e. deflation or depression, however after 2-3 years once it completes a supercycle degree wave 2 correction, a larger degree supercycle wave 3 bull market lasting 70 years can emerge. This is when decoupling will happen for India and maybe China. The recent 2010 Indian budget has started talking about reducing the fiscal deficit and that is a deflationary trend signal. How debt gets reduced may vary from cycle to cycle. Bubbles can be pricked internally through tightening or externally through events not in our control.
Now that I have given enough perspective to the Kf cycle and where India is placed within it lets discuss the impact on India and the stock market. it is my belief that India will find it hard to escape the Kf winter that is likely to follow. As India was late to enter the Global Kf-Autumn, it will has taken time to enter the Kf winter. One of the reasons that India’s cycles are years apart from the west is that we were a closed economy but since the 80’s we started the process of opening up. In 1991 we jump started the process with reforms and have been catching up very fast with the world cycle. So while the Indian Summer occurred 10 years after the US summer ended, our winter is now starting 3 years later. 2010 shall mark the beginning of India’s Kf winter of deflation and depression as the external
environment starts to worsen. Attempts to finance its own fiscal deficit internally might stress the economy and attempts at price inflation will lead to dumping of goods by other nations or social revolt. Raising interest rates will lead to reduced lending and if we try diverting savings to finance the government the corporate sector will starve. So we are walking a tight rope which will break more due to external factors than domestic ones. Non financial problems like the one with our neighbors can also be a hidden trigger. Basically our high fiscal deficit and 160% debt/GDP is now exposed to various external risks that can stall further monetary expansion and thus force a period of deflation before we can start growth all over again.
India’s biggest strength that will eventually bring us out of this mess is our demographics. A young population is willing to take hard steps and suffer the pain needed to quickly move ahead. Ageing populations in the west and Japan prefer not to suffer pain and postpone it as far as possible which will make them take much longer.