{"id":212,"date":"2016-06-10T11:04:27","date_gmt":"2016-06-10T11:04:27","guid":{"rendered":"https:\/\/financetapmi.wordpress.com\/?p=212"},"modified":"2026-05-26T21:36:18","modified_gmt":"2026-05-26T20:36:18","slug":"is-the-ageing-dragon-a-blessing-in-disguise-for-indian-economy","status":"publish","type":"post","link":"https:\/\/tapmi.finance\/index.php\/2016\/06\/10\/is-the-ageing-dragon-a-blessing-in-disguise-for-indian-economy\/","title":{"rendered":"IS THE AGEING DRAGON A BLESSING IN DISGUISE FOR INDIAN ECONOMY?"},"content":{"rendered":"

By\u00a0Shulin V K Satoskar<\/strong><\/p>\n

Edited by\u00a0Madhu Veeraraghavan<\/strong><\/p>\n

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Introduction<\/strong><\/p>\n

China\u2019s devaluation of Yuan, last week, represented the largest depreciation of the currency for 20 years and sent tremors down the Dalal Street. The \u201cKiss of the Dragon\u201d was felt across already subdued economic conditions throughout the world. Notably, Nobel Laureate and renowned economist Paul Krugman described the decision as \u201cthe first bite of the cherry\u201d envisaging that more could follow. The World\u2019s largest economy could be weaker than the 7% a year growth that official figures suggest.<\/p>\n

In my attempt to explain the slowdown in Chinese economy and a great opportunity for India to bank upon, I have used the concept of business cycles and its impact on economies.<\/p>\n

Business Cycle<\/strong><\/p>\n

A business cycle is defined by the fluctuations in an economic activity over a period and covers expansion\/recession in any economy. An expansion phase is marked by rising indicators like income, employment, industrial output.<\/p>\n

Cyclical fluctuations in economic activity are features of most economies. One of the reasons why nations fail to achieve a sustainable economic growth rate is because the policy makers underestimate economic cycles. Hence, an improved understanding of the economic cycles and policies interaction is imperative in formulating forward looking monetary policy.<\/p>\n

Economists are often puzzled by the Growth-Inflation paradox. Most agree<\/p>\n

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that sustained growth rate cannot be achieved above a threshold rate of inflation; there are no models that accurately estimate on what constitutes the \u201cThreshold\u201d. Figure 1 captures an economic cycle in Indian economy from 2005-10. Inflation rate (depicted by the Green line) and Business Cycle (depicted by blue) further help identify the counter-cyclical nature of Growth-Inflation tradeoff with inflation rate almost mirroring the business cycle at identical turning points. Such an economic cycle (typically over a period of 6 years) is known as a Juglar Cycle or J-Cycle. Indian economy currently finds itself at its peak as indicated by the rising trend of the Juglar cycle in 2015, with lower inflation levels, tailor made for a super normal growth stage. However, Juglar peaks are often short lived (1-2 year, see period 2005-07 and 2009-10) and troughs are relatively lengthier (2-3 years, 2010-13).<\/p>\n

\"I1A2D1\"<\/p>\n

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There is also a pattern of symmetry around which the cyclical trend oscillates over a period. This is termed as Kondratieff cycle or K-Cycle and usually extends over a period of 42 years. Hence, a K-Cycle typically has 7 J-Cycles. Figure 2 captures a K- cycle in the Indian economy and the breakout started around 1974. A rising trend is indicated by the green trendline below. Such a trend is typical of a robust economy.<\/p>\n

\"I1A2D2\"<\/p>\n

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Chinese economy, on the contrary, has experienced a slowdown in consumption in the recent years. The J-cycle from 2010 to 2015 accurately captures this falling trend in Figure 3. Chinese economic cycle has not picked up significantly, in spite of recording a lower inflation rate. Recent RMB devaluation and interest rate cuts further confirm the ineffectiveness of policies introduced during the \u2018troughs\u2019. Also, the \u2018trough\u2019 looks abnormally extended with little signs of recovery.<\/p>\n

\"I1A2D3\"<\/p>\n

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Summary of Findings<\/strong><\/p>\n

From the CRISIL research reports and World Bank data, it can be inferred that:<\/p>\n

\u2022 Domestic investment in China has shown signs of saturation and there is little room for stimulus (Investment accounted for 47.2% of GDP in 2010 and 46% in 2014). India has huge room for public investment and can absorb trillions of dollars in infrastructure alone.<\/p>\n

\u2022 A very popular argument among economists is that China has an ageing population which is expected to drive the labor costs up further by 2020.<\/p>\n

\u2022 Going by IMF figures of 2013, consumption expenditure 70.4% of GDP in India compared to that of 49.6% in China.<\/p>\n

\u2022 Chinese debts have risen to alarming levels (101% from 2007 to 2014). India on the contrary is relatively safe at 5% increase.<\/p>\n

\u2022 With a subdued demand across the world, China can rely on export driven growth strategy at its own peril. India\u2019s consumption driven strategy leaves a good headroom from potential upside.<\/p>\n

\u2022 Pressures of the property bubble are already felt in China as real estate prices are on a decline.<\/p>\n

\"I1A2D4\"<\/p>\n

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The Road Ahead<\/strong><\/p>\n

India is now one of the strongest growing economies and remains better positioned compared to its peers. Our country with a stable political environment recorded a sharp decline in inflation and managed to reduce Current Account Deficit (CAD) significantly. prime minister\u2019s foreign visits have managed to win the foreign investor\u2019s confidence yet again indicated by rising FII\/FDI inflows. A combination of tactical measures like \u00a0the\u00a0mobilization of NRI deposits, RBI\u2019s success in building forex reserves, restriction on gold imports and slowdown in imports augur well for maintaining sustained growth rate. Currency devaluation war, how- ever, is one major external shock that remains a cause for concern. However, global sentiment still remains bullish on Indian economy on account of the following factors:<\/p>\n

\u2022 RBI Governor, Mr. Raghuram Rajan has succeeded in building a strong monetary policy discipline that focusses on inflation targeting which in turn strength- ens the rupee.<\/p>\n

\u2022 With the Land Acquisition Bill, FDIs and GST reforms round the corner, Indian growth story is expected to continue.<\/p>\n

\u2022 India Inc\u2019s earnings are expected to be 7% this year. Estimated reduction in corporate taxes and GST replacing state taxes will push the earnings upwards.<\/p>\n

Major Challenges<\/strong><\/p>\n

\u2022 Currency devaluation war is one major external shock that remains a cause for concern<\/p>\n

\u2022 Subdued global demand can hit India\u2019s exports further impacting the economy<\/p>\n

\u2022 Impending decision by the US Fed to raise interest rates has the potential to cause volatility in capital and forex markets<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Going by the business cycles and the empirical data on macroeconomic variables, Indian economy certainly is in a good shape compared to its northern neighbour. However, the onus lies on the government to bank on a great opportunity that the \u2018peak\u2019 of economic cycle has to offer.<\/p>\n

References<\/strong><\/p>\n

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  • CRISIL Research Reports on Indian Economy<\/li>\n
  • Science of Monetary Policy: Some perspectives on Indian Economy by M J Manohar Rao<\/li>\n
  • \u00a0www.worldbank.com<\/li>\n<\/ul>\n
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    \"IMG_7666\"About the author:<\/strong><\/p>\n

    The author was a Banking and Financial Service student of batch 2014-16. He is currently\u00a0Management Trainee at CRISIL Research. His area of interest is economic research, \u00a0capital market, stock picking, and fund management. You can contact him at\u00a0shulin.kamat@gmail.com<\/span><\/strong>.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n