Weekend reading links

1. R Ramkumar raises questions about the claims that India's agriculture has not only survived Covid 19 but has also manage to grow strongly, and can therefore be a driver of recovery. On the higher procurements being used to indicate strong sectoral growth, he writes,

As per official data, only 13.5% of paddy farmers and 16.2% of wheat farmers in India sell their harvest to a procurement agency at an assured Minimum Support Price (MSP). The rest sell their output to private traders at prices lower than MSP. One should, then, be looking not at procurement but market arrivals. I compared total market arrivals of 15 major crops in India between March 15 and June 30 in 2019 and 2020. The market arrivals of all the 15 crops were lower in 2020 than in 2019. It was only in paddy, lentil, tomato and banana that market arrivals in 2020 constituted more than 75% of market arrivals in 2019. In wheat, barley, potato, cauliflower, cabbage and lady’s finger, market arrivals in 2020 were between 50% and 75% of market arrivals in 2019. For gram, pigeon pea, onion, peas and mango, market arrivals in 2020 were less than half of market arrivals in 2019. In wheat, the most important rabi crop, only 61.6% of the arrivals in 2019 was recorded in 2020.

Some of the reforms measures suggested though are questionable.

2. Ananth points to Andrew Sullivan,

In the past, we might have turned to more reliable media for context and perspective. But the journalists and reporters and editors who are supposed to perform this function are human as well. And they are perhaps the ones most trapped in the social media hellscape. You can read them on Twitter, where they live and and posture and rank themselves, or on their Slack channels, where they gang up on and smear any waverers. They’ve created an insulated world where any small dissent from groupthink is professional death. Watch Fox, CNN or MSNBC, and it’s the same story.

Point out missing facts or context, exercise some independence of judgment, push back against the narrative — and you’ll be first subject to ostracism and denunciation by your newsroom peers, and then, if you persist, you’ll be fired. The press could have been the antidote to the social media trap. Instead they chose to become the profitable pusher of the poison. Or worse, perhaps they still haven’t realized that this is what they have become: purist, preening propagandists for their own tribe.

He's spot on with this assessment. Two things. One, when one is part of any grand narrative, one tends to lose objectivity. It's the Gramscian hegemony. Two, in recent times, as polarisation has increased dramatically, people subscribing to different narratives become even greater captives of the hegemony and lose even their limited contacts with the other set of views.

So, ironically enough, never has it been more important and also easier (in the sense that there are two clear polar opposite views on the horizon) than is see what is a balanced view.

He also writes,

My bet on the extinction of liberal democracy in America therefore remains in place, and ahead of schedule. We may even at some point realize that it has already actually happened. We just didn’t see it in our newsfeed.

This assessment on "extinction of liberal democracy in America" appears excessive. We under-estimate the resilience of democratic institutions in the US (especially those on individual rights which have emerged through several iterations). Even all those turnings of Howe/Strauss still happened within certain boundaries of individual rights and free enterprise, which were not breached. Over time, liberal democracy has come to be misinterpreted as excessive individualism and excessive role for markets. 

In reality today, we all know liberal democracy, in terms of rules of the game (in both society and markets) being set by genuine representative democratic forces is long gone in the US (perhaps, started in the eighties and nineties with the economics of Reagan and the social movements of Republican Right by the likes of Newt Gingrich). So the correction, with all its messiness, is due. But to say that liberal democracy itself in the US is going to become "extinct" appears a stretch.

3. This is a very nice summary of the internal security and control threats facing President Xi Jinping in China. It is clear that the increased authoritarianism is facing resistance. 

4. Global renewable energy dependence on China,

China now produces more than 70% of the world’s solar modules. It is home to nearly half its manufacturing capacity for wind turbines. It dominates the supply chain for lithium-ion batteries, according to Bloomberg NEF, controlling 77% of cell capacity and 60% of component manufacturing.

And how China deploys its oil security strategy,

In some instances competition for Chinese demand may be straightforward. When it embarked on a price war with Russia this spring, Saudi Arabia slashed prices on shipments bound for China. The country’s biggest refiners are mulling a plan for a buying consortium to strengthen their negotiating power with the Organisation of the Petroleum Exporting Countries. China will probably also flex its financial muscle as petrostates buckle under debt. It has issued oil-backed loans to crude-rich countries such as Angola and Brazil for more than a decade. 

5. Amidst the search for reasons on China's aggressive border tactics with India, Premvir Das argues that the Chinese are trying to shackle India on the land frontier so as to increase their maritime flexibility in the Indian Ocean Region.

6. Foreign auto manufacturers continue to exit India on the face of the lower than estimated domestic demand, Harley Davidson being only the latest.

India's taxes on vehicles are among the highest in the world.

Here is the challenge. On the one hand, the country has a very low direct tax base, which makes it locked into a regime of high share of indirect taxes. And within indirect taxes too, the tendency has been to maximise taxes on goods and services which are not mass consumption. In fact, in the Indian context, "luxury" category starts much earlier - after all, if Toyota's SUV's are 'luxury', then what do you categorise the real luxury brands?

On the other hand, there is the negative effect of high taxes, in so far as it depresses consumption. Further, automobiles, especially the mid and upper market segments, are an important source of manufacturing strength, both in terms of job creation as well as providing a strong foundation for manufacturing value-chain in general. 

In this context, Devangshu Dutta raises concerns about the health of automobile manufacturing sector in India in light of the pandemic,

The automobile value-chain contributes about 40 per cent to India’s manufacturing. Every vehicle has many different parts, all of which are manufactured by different units, and assembled in the factory. It is the only industry with a value chain present across the entire economy. At the primary level, it contributes to the off-take of industrial metals, which means it’s a driver for mining. It also absorbs high-end electronics, leather, rubber, paints and glass. At the tertiary level, in services, it’s a huge contributor to the finance industry. Auto financing is the commonest unit in retail financing deals and every commercial vehicle is financed. It’s also a major contributor to other services segments, including marketing and advertising, as well as creating steady demand in maintenance and repair. And of course, it’s a big driver for fuels and lubricants. When the auto industry is not doing well, it’s a clear sign that the economy is not doing well. It’s also a “bootstrap sector”: A strongly performing auto industry leads to higher overall economic growth and stronger consumption demand because the industry is a major employment generator.

8. Does the constant tinkering with import duties to provide 'level playing field' to domestic producers serve any purpose at all? The government raised duties on 46 items in February 2018, 37 items in July 2019, and 16 more in February 2020. AK Bhattacharya writes,

In spite of that, however, imports of these 46 items have not seen any collapse in the two years since the increase in the Customs duty. Quite to the contrary, imports of footwear, watches and clocks, food processing items (mainly fruit juice) and perfumes & toiletry preparations have increased in the last two years over what these were in 2017-18... It is possible to argue that the impact of the duty hike on imports would be seen over a longer period of time and the trend in the last two years is not a reliable indicator. But the larger question is whether domestic manufacturers have been offering indigenous substitutes for the items, whose imports have now become costlier. Or whether imports are continuing to take place, though at a slower pace, but with the added cost of imports being passed on to the consumer, making Indian manufacturing even more uncompetitive in terms of costs and efficiency.

From Ajit Ranade,

In the last three months, India’s import duty on masur dal has been cut from 30% to 10%, raised back to 30%, and then decreased again to 10%.

9. Harish Damodaran sums up the crux of the agriculture market controversy,

For farmers, arhatiyas (many of them bigger farmers) and labourers in the mandis, the gains from “freedom” are theoretical. The losses from APMCs being rendered unviable — which can happen if trade moves outside and the government stops buying gradually — are practical and real. What if the neighbouring mandi does not earn enough market fee and turns into a BSNL vis-a-vis a Jio or Airtel?... Will the dismantling of APMC monopoly actually lead to their becoming redundant? Secondly, would they result in corporate agri-businesses establishing direct connection with farmers and eliminating market intermediaries?

He appears to reject both questions, based on experience from Bihar and elsewhere, and from the example of the market for milk.

Good primers in Business Standard and Indian Express on the agriculture reforms.

10. A good article by Tanya Thomas on the likely problems for solar projects with land acquisition. This is most certain to become a contentious area in the years ahead as the development of the large volumes of recently awarded projects starts. Two issues in particular:

One, a significant part of what governments have in their land banks as vacant governments lands are actually not vacant. They are cultivated or used by people, either occasionally or fully. Two, given the massive share of SECI projects awarded to Adani, it is most likely to become controversial in the months and years ahead as contentious land acquisition cases come to a boil.

11. The SEBI circular on multi-cap funds has become controversial. As this article highlights, it appears ill conceived and pushed through without adequate discussion and thought. SEBI's concern was that multi-cap funds with an AUM of Rs 1.5 trillion, which by definition are about dynamic asset allocation by fund managers and for which the SEBI had accordingly not fixed any allocation rule, were found to be essentially large cap funds. SEBI reacted by issuing a circular mandating their asset allocation to be 25% each in small and mid-cap stocks.

This benchmark rule abruptly changes the rules of the game. Besides, it is also impractical to undertake such asset reallocations given the narrow capitalisation and profits as well as limited liquidity of the stocks of the companies in the small and mid-cap segments.

The industry’s response is that there is no existing benchmark which has a 50% weight to mid- and small-cap stocks. “The profit of small-cap companies ranges between 7-11%, and 15-22% for mid-caps and the rest from large-caps. Our submission is that Sebi should definitely go for a minimum allocation to large- mid- and small-cap stocks, but it should be linked to the profit pool of the BSE or Nifty 500 companies," said the CEO of a large fund house. Within the top 500 stocks, the proportion of large-, mid- and small- stocks is roughly 77%, 16% and 7% respectively. With a 50% weight in mid- and small-cap stocks, multi-cap funds will find it difficult to beat broad market indices such as the Nifty 500.

Also, the issue of mis-labelling by consistently keeping large-caps unreasonably high appears to have been confined to a few funds. So instead of issuing a blanket circular, the errant ones could then have been taken to task and the rules on multi-cap enforced accordingly,

Data from Value Research shows that three-fourths of the funds in the multi-cap category have a higher allocation to mid- and small-cap stocks than the 23% weight they have in the top 500 stocks in the market. Among the eight remaining funds, the data shows that only four funds have consistently had a weight of over 77% in large-cap stocks in the past three years. As such, in a category with 35 funds, a circular is being issued to address a problem seen primarily in four funds, and to some degree in a few other funds. Enforcement would be a far better solution, provided wrongdoing is found.

12. Sailesh Dobhal points to the growing importance of ESG investing and how it could make businesses more responsible.

I am not as optimistic. I'm inclined to think that the rot inside capitalism, specifically the big corporates and their capture of the establishment, is too deep and with very high stakes to be disturbed by marginal tinkering. In fact, such tinkering, like the Business Roundtable and Larry Fink's platitudinous articles, is precisely the preferred strategy for these businesses. ESG is a good catch-all safety valve to keep discontent within the container.

13. It's a sign of the desperate search for yields that alternatives assets and their trading platforms have been blooming. One trend has been the rise of the financial market in fractional ownership of highly valued assets like paintings, antiques, memorabilia and various types of collectors items, and so on. Start-ups incorporate themselves, acquire the assets in auctions etc or take minority stakes in an asset belonging to a private owner or gallery, and then sell shares on the assets. Following regulatory easing on mini-IPOs, there have been a few such issuances. Sample one,

Masterworks, founded in 2017, has sold 15 artworks with valuations of at least $1m during the pandemic, says Scott Lynn, its founder. That includes $1.5m-worth of shares sold in a company formed around a single artwork by Brian Donnelly, a former street artist known as Kaws. The price per share was only $20 but the risk factors in the IPO offer document were 15 pages long. The company has no history and expects no revenues, and the painting may be sold at a loss, it warned. Other mini-IPOs have been of works by Andy Warhol and Banksy.

Or sample this

Rally Rd turns alternative assets into SEC-registered securities, like mini-IPOs, which in turn enable investors to buy small stakes, sometimes as little as $5, in collectible assets like trading cards, art, shoes, watches, and more.

More financialisation.

14. As the Covid 19 medical and economic casualties mount, Economist has two stock taking articles, one global and another on poorer countries. This assumes significance for India,

From 1990 until last year the number of extremely poor people fell from 2bn, or 36% of the world’s population, to 630m, or just 8%. Most of those left in poverty were in sub-Saharan Africa (see map) and in countries riven by conflict. By contrast, almost half the newly destitute will be in South Asia.

It is hard not to come to the conclusion that India is the worst performing developing country in Covid 19 response on both economic and medical terms. In fact, Debraj Ray, Minu Philip and Samant Subramanian even question the performance on the case fatality rates (CFRs). They compare the performance of India with 17 other countries by adjusting for demographic differences, and find that India's performance is among the worst.

It's safe to say that but for NREGS and PDS (and the various national social assistance programs involving pensions to different categories of population), India would have been savaged by Covid 19.

This on the differences between developed and developing countries on the economic response is striking,

Poor countries on average have spent just $4 a head on programmes to help the poor during the covid-19 crisis, compared with an average of $695 per head of the population in rich countries such as Britain, France and America, according to World Bank estimates.

15. Ananth points to this article on a speech by a senior Chinese official on recent decision to integrate the Communist Party more into the functioning of private businesses.

First, he calls for ‘a working mechanism for the Party to lead the human resources department and giving full play to the leading role of Party organizations in selecting and employing personnel.’.. The new Party-led HR should be able to prevent ‘the appointment and dismissal of the enterprise’s personnel by the professional managers’... ‘Private enterprises may establish a monitoring and auditing department under the leadership of the Party organization, which is responsible for supervising the implementation of enterprise compliance and the enterprise management system’... the Party-led union should ‘advocate enterprises to invest more of the production proceeds into employee motivation, employee training, improving the labor environment and enhancing humane care’.

The existing de facto subordination of private businesses to the Party has now become de jure.

16. Finally, John Mauldin puts scary numbers into the US debt and deficit scenarios. He estimates  government debt to reach $50 trillion or even $60 trillion by 2040, and deficits to be $2 trillion even in good years.

Since almost all major countries in the world will be experiencing a synchronised debt overhang, it will be interesting to see what will be its aggregate impact. 

Labour laws and the Red Queen effect

The Parliament has passed three labour codes, including the Code on Industrial Relations 2020 that will allow firms with less than 300 employees to retrench them more easily, raising the limit from earlier 100. These companies will no longer be required to frame standing orders for their employees.

A standing order is a legally binding collective employment contract and holds significance as it contains key work-related terms and conditions and is meant to prevent arbitrary dismissal of employees... Under the present law, companies hiring at least 100 workers need to frame what is known as a “standing order”, which has to be placed on a notice board at or near the entrance of the unit and disseminated to all the workers, specifying the conditions of work and the retrenchment norms. The government has proposed to increase this threshold to 300. The standing order states the classification of workers in an establishment, manner of informing workers about their legal rights, such as work hours, holidays, wage rates, etc, and conditions for terminating their employment. It also spells the grievance mechanism for workers. “The standing order acts as a collective rights document stating the most important terms and conditions in a standardized manner for workers. According to a Supreme Court judgment, these are statutory in nature and overrides even the individual contracts between employers and employees in that particular unit,” labour economist and XLRI professor K.R. Shyam Sundar said. Sundar said the standing order deters companies from dismissing workers arbitrarily as there are instances where the courts have reinstated workers who have moved court basis the standing order.  

This is a good example of how a legislation, while an essential starting point, is unlikely, by itself to realise the desired objective. In fact, in the absence of other dynamics, the legislation can actually worsen the situation.  

A good description of the challenge comes from a recent book by Daron Acemoglu and James Robinson (also this presentation) which explains the emergence and sustenance of of liberal democracy through the metaphor of Red Queen effect from Lewis Carroll's Through the Looking Glass where the Red Queen tells Alice that she has to keep running just to stay still. They describe how liberal democracies are a result of  long and constant struggles and co-operation between state and society along a narrow corridor where neither allows the other to gain dominance. 

Labour standards anywhere are similarly a race and struggle between labour and capital, intermediated by the state and society. If labour law reforms have to become successful and lead to productivity enhancement and job creation, the race has to be balanced. The balance of power between capital and labour has to be maintained along a narrow corridor, and it's the state's responsibility to create the enabling conditions. These enabling conditions are not just about creating new laws, which are essential to start any reform, but more importantly also about facilitating the conditions for labour to be able to demand their rights and capital follow the spirit of any reform and concede the basic rights of labour. It is also for the society (and public debates that lead to social narratives) to create the conditions/container that do not allow one party to become too powerful and force the bargain on the other.

In case of India's labour legislation, an equilibrium had emerged through several struggles between labour and capital whereby, in case of firms with less than 100 workers, the latter largely adhered to the spirit of the law while exercising the letter of law while retrenching workers. The state and society, in different ways, contributed to the emergence of this balance. The same balance is now required to be established between capital and labour in those firms which would have acquired the freedom to retrench workers. It requires struggles and negotiations between capital and labour.

In a system and at a time where capital invariably has, for a variety of reasons, the upper hand in negotiations with labour, the playing field is heavily tilted against labour. Sample the indiscriminate manner in which several states have proposed complete scrapping of labour regulations for a few years to attract investments. Also, how mainstream media and opinion makers constantly paint labour regulations as responsible for India's manufacturing laggardness.

Therefore, when the state and society too end up supporting capital in the struggle between capital and labour, the outcome is most likely to be beneficial neither for capital nor labour, much less the economy and society. In fact, such reforms could then end up creating more damage than business as usual.

Bonds in infrastructure financing

The idea of bond market financing of infrastructure has been a enduring argument. As I have blogged several times earlier (see this and this), while in theory bond markets are better placed to finance infrastructure assets, reality points to banks being the main source across the world and bond markets being a marginal financier. 

An ADB report analyses 11,054 projects (involving 23,991 financing facilities/instruments) with a total cost of $2.8 trillion (January 1994 prices) in 152 countries and 31 sectors which achieved financial closure between January 1994 and May 2019. 

More than 75% of projects use loans (8,529 projects), followed by debt (4,972 projects, about 45% of the sample), equity (2,865 projects, about 25% of the sample) and lastly bonds (951 projects, about 9% of the projects). 

As a percentage of aggregate project amount in January 1994 prices, loans amount to 59.5%, other debt 19.4%, equity 12.4%, and bonds 8.7%. 

In fact, the total amount of annual bond financing is less than even $20 bn!

So what is the lesson from this for India. Some headline takeaways

1. Focus on infrastructure financing as a two-step process. Finance the greenfield investment with syndicated bank loans. Then refinance through other capital sources, including bonds, where projects are commercially viable.

2. Instead of chasing chimera of bond markets, get used to the reality of banks being the predominant financier for infrastructure projects. Put in place mechanisms to support banks appraise projects (greenfield ones) better. 

By all means engage actively to broaden and deepen bond markets, but with the full realisation of its limitations, as global experience points to conclusively.

3. Promote different bank-based financing by simplifying and making it easier to undertake syndication, takeout financing, and other ALM minimising approaches.

4. Establish public financed infrastructure DFIs with the expectations and along the lines as discussed here.

The missing dynamism and scale in private sector - the case of corporate India

Why has India struggled to realise its latent economic potential? The typical answers largely blame political system and bureaucracy. It is surprising that an almost equal contributor to the problem, corporate India, escapes even a mention. 

For a country of India's size and its several baseline advantages at independence compared to its peers, despite all the acute challenges of political and bureaucratic deficiencies, infrastructure bottlenecks, and capital constraints, its corporate sector performance should count as deeply disappointing. Even by the standards of its emerging market peers, India's private sector's performance has been poor across several dimensions.

The objective of the post is not to apportion blame, but to draw attention to this important and hardly mentioned fact about the Indian economy.

I have blogged here, here, and here highlighting corporate India's persistent failures to produce world class entprereneurship, create global brands, and innovate and expand technology frontiers. I have blogged here, here, here, and here about the failure of the country's startup eco-system to generate innovators and innovations which have had a significant impact on the country's development or push the frontiers of innovation. I have also blogged here and here about India's deficit of high quality entrepreneurship which leads to scale, this and this about its persistent corporate governance problems, this about how while market participants game the regulations bureaucracy responds with more regulations. I also blogged here that even Indian capitalists appear to avoid making risk capital investments in India. 

Beyond copycat entrepreneurship, India's much hyped start-up eco-system has struggled to produce anything of note either in areas of cutting-edge technology or in addressing critical challenges to national development goals. India's IT sector, despite being well-placed at the beginning of the IT boom, has failed to produce any major business or consumer products. Corporate India, despite the presence of established companies at the time of independence, has failed to produce any major global consumer brand. 

A complementary manifestation of the private sector weakness is the trend of business concentration across sectors, which has been more marked in India than even in the US.

In a recent oped Akash Prakash pointed to an Ambit Capital study which showed that Indian companies are small than even by emerging market standards,

She has looked at 2,865 (ex-banking, financial services and insurance or BFSI) listed companies and found that approximately 40 per cent had revenues less than Rs 100 crore. Surprisingly, despite the growth in the economy, this ratio has not changed at all in the past decade. The share of small companies is not declining. In all, 55 per cent of our listed companies had revenues between Rs 100 crore and Rs 10,000 crore and less than 4 per cent of our companies had revenues greater than Rs 10,000 crore. We have only 12 companies (ex-BFSI) with revenues greater than Rs 1 trillion. The story is similar for the BFSI universe as well. Too many midget firms, not enough global scale companies. Even in the unlisted space, despite limited data, the average size of companies is even smaller. When one compares India to other large EM countries, the disparity is stark. While we have 40 per cent of our companies with revenues less than Rs 100 crore, the median among large EM countries is 12 per cent of their companies. Fifty five per cent of our companies have revenues between Rs 100 crore and Rs 10,000 crore, but the EM median is 64 per cent. Less than 4 per cent of our companies have revenues greater than Rs 10,000 crore, whereas the EM median is 15 per cent. Clearly, our corporate sector is skewed towards smaller companies than our peers...  

Just look at the 12 companies with revenues over Rs 1 trillion. They are all either public sector units (PSUs) in the energy space, or firms like Tata Steel and Tata Motors, which have acquired their way to global scale, or multi-product conglomerates like Reliance Industries Ltd and Mahindra Group. The only exception is Tata Consultancy Services, which has acquired global leadership in a sector. There are few companies with scale, focused domestically on one single industry.

This is echoed by a recent report by the consultant McKinsey, which had this sobering assessment about India's large firm (annual revenues greater than $500 million) universe,

India has about 600 such firms. Their labour productivity is 11 times higher than that of the overall economy. They are 2.3 times more productive than midsize firms (revenues between $40 million and $500 million), and their profitability is 1.2 times greater. They account for almost 40 percent of total exports and employ 20 percent of the direct formal workforce. They provide jobs with better benefits than other companies do... Large Indian firms contributed revenues equivalent to 48 percent of nominal GDP in 2018. Large firms on average contribute 1.5 to 1.6 times more in other outperforming emerging economies, including China, Malaysia, Thailand, and Vietnam—and 3.5 times more in South Korea.

This pattern holds in a number of key sectors. For example, the revenue contribution of India’s 27 large construction firms is 11 percent of the sector’s nominal gross value added (GVA). Other outperformer economies have between two and ten times the number of large firms (adjusted for size), and their revenue contribution is roughly seven to 12 times larger. The story is similar in retail trade, where India’s 48 large firms make a revenue contribution of 38 percent of nominal GVA. Adjusted for size, that is about one-half to one-quarter the number of large firms in peer economies, whose revenue contribution is up to 13 times larger. India’s large firms have also not achieved their productivity or profitability potential. Overall productivity levels are on average one-tenth to one-quarter those of peers in other outperformer economies across sectors... The profitability of India’s large firms, measured as return on assets, has been falling since 2012, from 1.9 to 1.2 percent, particularly driven by a few sectors such as financial services and construction, among others. Profits are also concentrated within a few large firms. Our analysis shows that just 20 of the country’s roughly 600 large firms contribute 80 percent of the total profit of large firms...

India has a “missing middle” of midsize firms that typically grow into formidable competitors of larger rivals and, as happens in other emerging economies, eventually topple some of them from their perch. For example, peer emerging economies have almost twice as many midsize firms per trillion dollars of GDP with revenue between $40 million and $500 million. As a result, peer economies end up with 1.6 times the number of large firms with revenues more than $500 million, compared to India, per $1 trillion of GDP. The upward mobility of small and midsize firms matters because it influences the degree of competitive pressure to which large firms are subjected. The higher such pressure, or contestability, the greater the likelihood that only the most efficient and high-performing firms will survive at the top. In some other emerging economies, it is harder for big firms to stay at the top... In order to achieve higher and system-wide productivity, India would need to raise the level of contestability and enable 1,000 or more small or midsize firms to scale up to large firms, and 10,000 or more small firms to scale up to midsize

Small size is complemented with low R&D spending by even the largest firms. Sample this from 2017 on corporate India's R&D spending,

Huawei’s R&D expenditure (around $6.5 billion) is about the same or more than that of Indian industry, while Microsoft spends (around $12 billion) about the same as the Indian government.

The R&D spending of even the largest corporates like Reliance and the software majors is a tiny portion of their total income. 

In this context, the point about the much smaller than hyped size of the Indian market is also important. After all, the strength of the private sector is also related to the demand for their produce. A recent news reported that Toyota has decided not to expand its India operations. It follows Ford and GM exiting independent production in India, leaving local manufacturing confined to the compact car makers like Maruti Suzuki and Hyundai. One of the reasons being high taxes on vehicles making ownership prohibitive,

In India, motor vehicles including cars, two-wheelers and sports utility vehicles (although not electric vehicles), attract taxes as high as 28%. On top of that there can be additional levies, ranging from 1% to as much as 22%, based on a car’s type, length or engine size. The tax on a four-meter long SUV with an engine capacity of more than 1500 cc works out to be as high as 50%.

It is hard to believe that this alone is the reason for such a big decision. However, that's beside the point. Even with the high taxes, given the country's population and low base of vehicle ownership, and absence of alternative lower cost vehicles, demand should never have been a problem for vehicle manufacturers, at least for several more years. This also points to the issue of India's far smaller market than estimated, a fact that we've highlighted in Can India Grow?. In fact, the Toyota India Vice Chairman points exactly to this,

India needs to have demand for a product before asking firms to set up shop, yet “at the slightest sign of a product doing well, they slap it with a higher and higher tax rate.”

Andy Mukherjee makes the point nicely,

India must break out of this vicious cycle in which taxes are high, consumer demand is low, investment and job creation are constrained, and wage incomes are insufficient to boost purchasing power at the bottom of the pyramid. Taxes are hence exorbitant and have to be collected from a small consuming class that can afford a $23,000 Toyota sedan — and fill it up with highly taxed gasoline that costs three-quarters more than what Americans pay. 

Both these also highlights the capital accumulation challenge facing the Indian economy. India does not possess the capital foundations to sustain high growth rates for long periods, and needs to accumulate capital on multiple dimensions - financial, physical, human resource, and institutional. And corporate sector, which has been sorely deficient till date, needs to step up to play its role. 

Weekend reading links

1. While all the attention on China has revolved around President Trump's actions, the Australian government under Scott Morrison has been at least as bold by seeking to completely redefine the country's relationship with China.

The country has a $172 bn trading relationship with China, and $51 bn surplus, making Australia, on the face of it, extremely vulnerable to Chinese actions. But Australia has turned the tables and leveraged its position as the supplier of 60% of Chinese iron ore imports, to basically take on China's aggressions on the country's interests. And popular opinion has been strongly in support of the government's actions. (HT: Ananth)

2. Excellent grahical  story in NYT of the Beirut port explosion that killed nearly 200 people. The shocking thing was that everyone was aware that ammonium nitrate, oil, acid, kerosene etc were stored carelessly in the port hangar constituted a grave danger, pointing to the rampant corruption and dysfunctionality of the Lebanese state. The materials were sitting in the hangar since October 2014. Since then, the port and customs authorities had contacted everyone concerned in Beirut, including the judiciary, alerting them of the dangers and requesting that it be shifted out, but to no avail.

3. SEBI last week issued a circular mandating that must-cap funds must invest atleast 75% in equities by February 2021, up from 65% now, and have 25% each in large-caps, mid-caps, and small-caps. This naturally raised concerns since most of the multi-cap money is invested in large-caps. Debashis Basu exposes the folly of the directive,

Assets under management of multi-cap funds are Rs 1.53 trillion. This means funds will need to have 25 per cent of that in small-cap stocks, which means putting in over Rs 38,000 crore. Funds currently have about Rs 11,240 crore invested in small-caps. So, they need to buy around Rs 27,062 crore of small-cap stocks. Is this practical? How big is the small-cap universe? According to the Sebi classification, the top 100 companies in terms of market cap are large-caps, the 101st to 250th are mid-caps, and 251st onwards are small-caps. The market capitalisation of the 251st to 500th company is Rs 9 trillion. Most of them are not investment-worthy. Even if they were, there is no liquidity. Promoters own 50-75 per cent of the capital. Where will multi-cap funds find small-caps to invest such large amounts? And if there are so many opportunities, why haven’t they invested in them? Here is another bit of data. While Sebi wants multi-cap funds to invest another Rs 27,000 crore in small-caps, the assets in small-cap funds are Rs 52,000 crore. This means a sum that is 50 per cent greater than the current assets of small-cap funds will now have to be additionally bought by multi-cap funds from a list of small-cap stocks.

Hard to understand where such ideas crop up from. It'll inform a lot about the problems with state capacity and competence if we can know more about its origins and the processes that led to this directive.

4. C Rajamohan writes about the implications for India from the changing alignments in the Middle East,

India’s framework of non-involvement, however, is unlikely to survive the present wave of structural change in Afghanistan and Arabia. As the old order begins to crumble in the greater Middle East, the question is no longer whether India should join the geopolitical jousting there; but when, how and in partnership with whom.

5. Despite the ongoing boom in equity markets, India's IPO sales have remained muted over all of last decade, even as follow-on offerings by incumbents have risen. In particular, since the beginning of the year, there have been 18 IPOs raising $2.1 bn, whereas there have been 52 follow-on offerings which raised $30.2 bn

This is one more pointer to the trend of the big businesses being able to attract more capital and grow bigger, thereby leading to business concentration across sectors.

6. The rise and rise of zombie companies in the US on the rise of the long period of ultra-low interest rates and the ongoing stimulus program and market interventions by the Fed.

At the end of last year, 13 per cent of companies in the Leuthold 3000 Universe index — akin to the Russell 3000 index of US companies — had staggered along for at least three years with a repayments shortfall, up from 8 per cent at the end of 2008.

On zombie firms, this BIS study finds,

Using firm-level data on listed non-financial companies in 14 advanced economies, we document a rise in the share of zombie firms, defined as unprofitable firms with low stock market valuation, from 4% in the late 1980s to 15% in 2017. These zombie firms are smaller, less productive, more leveraged and invest less in physical and intangible capital. Their performance deteriorates several years before zombification and remains significantly poorer than that of non-zombie firms in subsequent years. Over time, some 25% of zombie companies exited the market, while 60% exited from zombie status. However, recovered zombies underperform compared to firms that have never been zombies and they face a high probability of relapsing into zombie status.

7. Nice illustration of the pandemic relapse in Europe.

8. Very good article on how Germany manages crises with the least turmoil.

I defy anyone to name any other nation that could have absorbed 17m poor neighbours with so little trauma? Germans paid for Aufbau Ost (Rebuilding the East) through a solidarity tax, the Soli, a surcharge which only now is being phased out. They paid it with little fuss. It is estimated that by 2030 at the latest GDP per capita will have equalised. In any case, the differential between the once-decrepit East Germany and the West is less than it is between the north of England and London. Good governance; high skills; solid public finances; regional strengths; social solidarity — and a new-found characteristic, compassion. The Germans have shown the world how these attributes help deal with the crises they have faced, of which Covid-19 is only the latest. The measure of a country — or an institution or individual for that matter — is not the difficulties it faces, but how it surmounts them. On that test, contemporary Germany is a country to be envied. It has developed a maturity that few others can match...

She told citizens what she, her ministers and scientists knew and what they didn’t. She never blagged. Germany’s success in dealing with the crisis is due in part to Merkel’s style of leadership. But it is about more than that. It is about the role of the state and society. It is about social trust... Langsam aber sicher, slow but sure, is the abiding principle that dominates public life. Create consensus where you can; value thoroughness in a politician over rhetorical flourishes. Everything in politics and public life is designed to mitigate risk. In a newspaper interview in 2004, shortly before becoming chancellor, Merkel was asked what emotions Germany aroused in her. She replied, “I am thinking of airtight windows. No other country can build such airtight and beautiful windows.” This is about more than buildings. It is a metaphor for constructing a country, a society, where reliability is the most prized asset.

This about balanced regional development is interesting,

The Mittelstand — the hundreds of thousands of small and medium-sized enterprises dotted around hundreds of small and medium-sized towns — employs around three-quarters of the country’s workforce and produces more than half the economic output. Manufacturing never became a dirty word. Advanced engineering is central to Germany’s sense of success — and of place. Companies of all sizes are spread around the country — Adidas is in Herzogenaurach near Nuremberg, BASF’s is in Ludwigshafen; software giant SAP is in a place called Walldorf... Local employers in Germany are required to act as good citizens. They are not thanked for sponsoring sports teams and music clubs. It’s required of them. Mitmachen. Loosely translated: to get stuck in. Wealth is not secreted in the capital city. Unlike France or Britain, Germany is the only country where GDP per capita is lower in the capital than in the country at large. Without Berlin Germany would be 0.2 per cent richer. (By contrast, the economy of the London metropolitan area contributes a third of the economy’s entire economic output).

9. Four very good articles chronicling the rise of Reliance Jio, and its implications for India's telecoms market. This and this from Vedica Kant, and this and this from Ben Thompson.

10. Fascinating account of the shareholding structure at Baba Ram Dev's Patanjali and its recently acquired Ruchi Soya. It is for all practical purposes a completely family owned and run business, perhaps with all the problems associated with it.

11. BS has a list of the top 25 global venture fund leaders. An interesting feature is that pretty much all of them are funds floated by technology, pharma, or energy companies. In other words, funds established primarily to manage cash surpluses that have been generated by their parent companies. It's fair to believe that their investments would be motivated primarily by their main business  considerations.

12. Ananth has a very good article that rightly questions the inflation targeting framework. Instead the recommendation is to continue with the existing multiple indicators approach,

If central banks redefine their mandate as control of overheating rather than targeting a rate of inflation over which they have very little control, they will be helping the economy better. Overheating manifests in credit growth, in asset markets (financial and real), and in trade deficits even if it does not manifest in the rate of inflation all the time. Focusing on overheating more broadly also helps in ensuring financial stability which an inflation targeting regime does not achieve. Of course, it is important to bear in mind that changes to policy regimes should not be capricious and not be dictated by proximate experiences alone. Doubtless, they play a role in triggering a review. But we should be careful not to overweight it. Just as the high inflation rates of 2008 to 2013 played a role in India opting for an inflation targeting regime, recent anxieties about India’s growth outlook near-term and medium-term should not be the principal motivations for a review of the inflation targeting regime. In other words, the alternative chosen should be seen to work both during low and high inflation regimes. India’s multiple indicators approach that was in vogue from 1998 to 2016 offers itself as the choice.

13. The race for Covid 19 vaccine is certain to create its set of mis-steps, calamities, and even frauds. It remains to be seen what would be the fate of the 20 seconds saliva test, Virolens test, of obscure UK tech firm, iAbra,

The device is manufactured in Hartlepool, in the north-east of England, by a listed UK company, TT Electronics, whose share price rose more than 40 per cent on last week’s announcement, valuing it at £439m... The Virolens test is “based on microscopic holographic imaging and artificial intelligence (AI) software technology”, according to iAbra, which is a highly specialised field of structural biology. The company says the technology “uses a digital camera attached to a microscope to analyse saliva samples, with the data run through a computer which is trained to identify the virus from other cells”... iAbra seems an unlikely company to deliver such a product. Mr Compton, who grew up in Bedfordshire and left school aged 17, said he was “always a computer kid”, and wrote his first computer program aged seven. He had several IT jobs, first at Italian telecoms company Tiscali, then at Capita and BSkyB, but never any formal training. He said he came up with the idea for the Covid-19 testing technology while standing at Dubai airport with his sister. None of the other employees has any expertise in viruses or microscopy, though one has a PhD in physics.

The test has so far not received any external validation. The article points to several areas of concern, which cannot but not bring to mind the comparison with Theranos.

14. Another company struggling to shake off comparisons with Theranos is Nikola, the truck start-up, which without even producing one vehicle has stock market valuation higher than Ford. A short-seller's report has described it as an "intricate fraud" and has cast serious aspersions on its founder Trevor Milton. Some of the allegations are plain shocking at the nature of the fraud,

The report on Thursday claims that, among other things, Nikola had bought electrical inverters from a supplier while claiming it had made them in-house, covering the branded label with tape during a demonstration video. In another instance, the short seller said Nikola faked a product video in 2018 by rolling its Nikola One truck along a downhill stretch of highway, to disguise the fact that the vehicle had no working engine, and filming it to appear it was being driven. A person familiar with the video confirmed to the Financial Times that Nikola had filmed its promotional video showing a moving truck by letting it roll down a hill in an isolated area in Utah, then edited the video to make the terrain look flat.

This FT story too points to a likely clean-up coming. Interestingly, amidst all this controversy, GM has announced a $2 bn deal with the start-up!

15. A CBI Court in Jodhpur has rejected the CBI's closure report which did not find enough evidence to launch prosecution, and revived the 2002 privatisation of Laxmi Vilas Palace Hotel by ordering the registration of cases against the Minister and Secretary concerned and the District Collector to take immediate possession of the property and manage it through an organisation of the Government of India which has experience of the same.

The systemic damage from such judgements are enormous. The property is now one of the leading five star hotels in the state. It is most certain to again reinforce the decision paralysis within government. It's easy enough to ask the Collector to take over a fully functioning hotel and manage it, but it is a massive administrative exercise even to get some agency to manage it, leave aside the management quality. And then there are the economic damages associated.

16. More things change, more they remain the same. Never mind all the deregulation on the purchase, storage and movement of agriculture produce, with elections round the corner, a rise in onion prices leads to the inevitable abrupt export restrictions. This time, apart from farmers, the decision also seems to have angered Bangladesh, which depends on Indian exports. Besides, at a time when India is trying to boost its exports, how does it work when its traders renege so abruptly on their commitments?

The decision itself appears questionable on merits. 

17. As their income tax exemptions expired in April 2020, Bibek Debroy writes about India's 373 notified Special Economic Zones.

18. Scott Galloway unmasks Peter Their, who Tyler Cowen elevates as one of the "five most influential public intellectuals", and Palantir, which is just about to go public. 

An assessment of India's emerging monopolies in infrastructure

While dealing with the pandemic and its consequences is occupying much of the attention, this post will focus on the possible implications of the ambitions of the two Indian businessmen who have the greatest appetite to assume risks and scale.  

In recent weeks, Mukesh Ambani has been on a remaking of Reliance Industries Limited and expansion spree into the digital space, making it clear that he wants to be the WeChat and Alibaba put-together with a physical retail footprint (not to mention being the telecom operator itself). He has accordingly struck several partnerships with the leading global investors and businesses in the relevant space, and more is being gradually unfurled. And he sits on a cash hoard from selling stakes. It's not too difficult to imagine a near future when the Reliance Group brings under its umbrella the Indian equivalent in terms of operations of Amazon, Facebook, and Netflix.

On a less spectacular note, but equally important series of events has been the emergence of the Adani Group as India's largest infrastructure company, with a presence almost everywhere outside of telecommunications. In recent times, the Group has emerged as the country's largest prospective airport operator. The originally commodity trading and then mining focused Group, dominates ports and is an important or the largest operator in thermal and solar electricity generation (largest global solar developer by capacity), electricity transmission, city gas distribution, and even railway operations.

While their respective ambitions are mega scale, the difference now lies in their respective finances as well as execution track records. While Reliance is debt-free and accumulating a cash hoard, Adani is massive over-leveraged and is surviving for now on the back of the large amounts of projects across sectors it has managed to win in public tenders as well as through debt-financed purchases. Similarly, while Reliance's track record of large-scale execution is very impressive, that of the Adanis is yet to be proven. 

Interestingly, as if by mutual design the areas of interest of both Groups do not overlap.

It's clear that between them, these two Groups now dominate some of the commanding heights of the economy - energy, transportation, telecommunications, and digital market places. Besides, each of these sectors globally are characterised by less-than-transparent capitalism and the two Groups in question have been targets of allegations of crony capitalism and being favoured by the governments of the day. 

This makes it easy enough to argue that the nation's economy, these sectors in particular, are being sold off to crony capitalists. And for sure, it is difficult also not to agree that there is some merit in the allegations. Among Indian companies, both Groups have benefited from state and central governments over the years. 

But let me point to at least five complicating factors:

1. The sectors under discussion, infrastructure and digital market places, are characterised by oligopoly and monopoly even in the developed countries. Let's not be under any false illusion about the corrosive influence of the digital behemoths in the US and how they have captured the policymakers and gatekeepers and are laying the rules of the game. The inherent nature of the digital economy poses problems unless we reimagine them completely.   

2. The evolution of these sectors, especially infrastructure, even in developed countries of today have been characterised by crony capitalism and/or state-owned firms. Every developed country has had their Gilded Ages and China is going through its own Gilded Age. We are now seeing the Indian version. See this on how pervasive crony capitalism is with infrastructure sectors has always been in India.

It is an implicit acknowledgement of this reality that Jeff Bezos, the richest man in the world, has thrown in the towel on going it alone in India and instead is piggybacking on the most connected and powerful Indian business competitor. The same applies to Facebook and Google. 

3. India's economic growth requirements are immense and it also wants rapid growth. All these sectors are critical building blocks for a large economy. And these two companies have the appetite and ambition to assume massive risks and deploy vast volumes of capital and conduct business at global scales.  

4. A disappointing feature of India's capitalism has been a chronic deficit of entrepreneurship with the appetite to scale. Almost all the historical Indian Groups, except perhaps the Tatas, have largely stayed on in their respective spheres and remained focused on the Indian market. In that respect, Mukesh Ambani and Gautam Adani have been standouts in putting capital at risk and attempt to scale rapidly into newer areas and important sectors.  

5. In the digital marketplace, the alternative to Mukesh Ambani's monopoly may be Amazon's or Facebook's. Even just recently, as Flipkart was struggling, we were all worried that India's e-commerce marketplace will have only one winner, Amazon. Further, most other sectors, including private banking are dominated by foreigners. In the circumstances, having an Indian owner for the dominant firms in these sectors, especially digital economy, makes some sense. I know global citizens and orthodox economists will scorn at this, but in the real world, I think these are important.

In summary, I'll quote from an excellent article by Ben Thompson of Stratechery,

On one hand, Jio brought the Internet to hundreds of millions of Indians that would never have had access, and the benefits of that investment are only going to increase as Jio’s services and partnerships come on line. On the other hand, locking in a monopolistic player, particularly in the context of a government that has shown a desire for more control over the flow of information is a real downside. The economic outcomes are just as muddled. Monopolies always have deadweight loss; then again, if an efficient market means that all of the profits flow to Silicon Valley, why should India particularly care about efficiency? In a Jio-mediated market it is U.S. tech companies that make less than they would have, and not only does India collect more taxes along the way, Jio’s vision of being a national champion abroad could be a huge win for India in the long run.

It is increasingly impossible — or at least irresponsible — to evaluate the tech industry, in particular the largest players, without considering the geopolitical concerns at stake. With that in mind, I welcome Jio’s ambition. Not only is it unreasonable and disrespectful for the U.S. to expect India to be some sort of vassal state technologically speaking, it is actually a good thing to not only have a counterweight to China geographically, but also a counterweight amongst developing countries specifically. Jio is considering problem-spaces that U.S. tech companies are all too often ignorant of, which matters not simply for India but also for much of the rest of the world.

I am not rationalising anything but merely putting all the different factors together to help us make a balanced assessment and make informed collective choices. 

The real problem with such dominance of the commanding heights of the economy is the likelihood of market abuse and exploitation. And the reputations of neither Group gives any comfort in this regard. Besides, the weak institutional strength and corrupt political system means that once allowed into positions of dominance, these firms can become entrenched and impervious to efforts to rein them in.

So, if these trends are allowed to play out, what are the regulatory safeguards to be put in place to limit anti-competitive practices and monopolistic market abuse? More importantly, what can be done to encourage competitors to consolidate, strike partnerships, and emerge as counterweights to these dominant firms? For example, is it perhaps appropriate in the circumstances to guide the emergence of an alternative to the Reliance digital empire in the form of one consisting of Airtel and Flipkart/Walmart? How can the next round of airports privatisation keep in mind the issue of competition as well as delivery, given the Adani's dominant market share and also overflowing pipeline of projects for delivery?

These are matters on which societies should have vibrant debates and then make choices and live with them. These debates are necessary because they have an important bearing on the trajectory of evolution of these markets, and given their importance, the evolution of the economy itself.

Update 1 (19.09.2020)

Airtel and GMR are the only two private competitors in the way of monopoly of Reliance and Adani. It's important that policies don't discriminate against them or hurt them as to drive them out of business. It's important that the next round of bidding on airports limit the number of airports that can be allotted to one bidder. Similarly, even with the Supreme Court ruling, it may be necessary for the government to resolve the AGR dues issue keeping in mind the sectors long-term health.

The intractable problem of affordable housing

The commonly suggested policies on affordable housing have broadly revolved around vertical development, reducing the cost of construction, lowering taxes and fees, easing the process of clearances and permissions, and mandates on affordable housing (minimum shares for affordable housing). Then there is the idea of supporting on rental housing, with the likes of vouchers. All the reports and recommendations by various organisations are confined to these.

While these are all useful and should be implemented, I am not sure they can make much dent on the problem of affordability for the vast majority of population in the foreseeable future, even if implemented well. I feel that these measures will, at best, make housing affordable for the top 20%, instead of the current 10%! Its impact down the ladder will, if at all, be minimal.

The Economist has an article on the challenge of affordability of housing in Seoul. Property prices have risen sharply in recent years, provoking government intervention.

The government, spying a speculative bubble, has introduced around two dozen measures to cool the market over the past three years. In December it banned mortgages on properties worth more than 1.5bn won (around $1.3m), roughly the price of a mid-size flat in Gangnam. It has also lowered the maximum loan-to-value ratio for flats worth more than 900m won from 40% to 20%. Last month it announced plans to increase property taxes for expensive homes and owners of multiple properties, as well as capital-gains levies on short-term sales. The overall effect, though, has been muddled and counterproductive... In part the problem is that the government’s efforts to cool the market have been offset by monetary easing by the central bank. In order to cushion the economic fallout from covid-19, the Bank of Korea has cut interest rates, encouraging some South Koreans to pile into property. Meanwhile, the tax proposals have angered existing investors, and are likely to restrict supply. Parallel efforts to alleviate the shortage of high-quality housing by building more of it have been slow to get off the ground. Prices, therefore, have continued to rise.

The article's conclusion on dealing with the issue is important, 

Increasing supply is likely to be a much more promising way of bringing house prices down than intricate policy interventions, says Hahm Joon-ho, a former member of the Bank of Korea’s monetary-policy board now at Yonsei University in Seoul... “More and more people want to live in high-quality apartments. Seoul does not have enough of those—and so we need to build more.”

I agree with the point on supply. It is perhaps the only way to sustainably keep prices affordable, an essential requirement for any effort in that direction.

Property prices in many cities across the world, including in India, are so prohibitive that they are completely out of reach of all but the upper middle class rich. When property prices have become so high, policies that seek to lower the cost of building or owning houses, while doubtless required, may have limited impact on the problem of affordability. The decline required to make housing affordable would be more than any cost reductions. Even the increase in supply will have to be significant to make a dent on affordability. 

In the absence of meaningful efforts at increasing supply, policies to lower costs will still leave the market well away from becoming affordable for the middle class. In fact, perversely, it could even have the effect of encouraging the rich to pile even more into property (which has now become more affordable for them), thereby possibly driving the prices up further. 

The only meaningful response to affordability in most cities is to considerably increase supply. This can be done by directly increasing supply, or creating the conditions for increased supply (primarily land, by making more available or by allowing much higher vertical development). The rest all are tinkering with marginal impacts.

On increasing supply, leaving it to the market forces too may not work. Take the example of vertical development. For sure, much higher FAR will lead to an increase in supply. But, given the pent-up  and fast growing demand, and the inherently slow-acting nature of market response, this is likely to be a case of too little and too delayed (given the scale of the problem).

Similarly measures to reduce cost is unlikely to have much impact for at least two reasons. One, housing prices, especially in bigger cities, are less about cost. The price-cost wedge has widened sharply as cities have grown. Two, the prices are so high that cost reductions will only have limited impact.

There are perhaps only two responses which are likely to have significant impact, even if confined to those who are directly benefiting from it. One, large volumes of public housing, constructed by government agencies (Housing Boards) and sold on cost-plus basis. The Singapore model or some such type is the only approach to make a large dent on the issue of affordability for the vast majority. But there are limits to how much can be done on this, given the prohibitive fiscal costs, weak state capacity, and political economy problems.

Two, regulatory restrictions on price. This will have to be largely on the rental side. It's been a feature of recent times that major global cities have gone back to adopting rent control regulations. They are doing it because there is no choice available to make housing even remotely affordable. Instead of mocking them, as ivory tower academics and well-heeled opinion makers do, it may be appropriate to at least empathise, even if not agree with them.

Stepping further back, even these measures are mere palliatives. The only sustainable solution is to have more cities which are engines of growth. Too many developing countries (and Indian states) are chronically dependent on a handful of cities as primary engines of growth. Most aspirational Indians will want to be in perhaps no more than 20-25 cities. That's too small for a country of 1.3 billion. Without more cities emerging with opportunities, housing affordability will remain a problem.