Saturday, November 2, 2019

Thinking through on the Indian Economy's problems

More thinking aloud about the ongoing problems with the Indian economy. 

What to do about the Indian economy? Is the slow-down cyclical or structural? If cyclical, what are the solutions? If structural, what are the reasons? And what are the prescriptions?

Only the naive can claim there are unique answers to any of these questions. What follows is, instead, an attempt to understand the direction of enquiry and perhaps even the broad outlines of some answers.

As a starting point, let's get out of the way what is not disputed. Most people agree on the following.

One, there is an economic slowdown. Two, its immediate manifestation is the declines in consumption across a range of sectors. Three, worsening (and contributing to) it is the clogged credit markets - both the banks and NBFCs, the latter increasingly important for working capital requirements in several sectors, are struggling from NPAs and heightened uncertainties. Four, all signatures of private investment has been trending downwards, and investments in new projects are at a fifteen year low. Capacity utilisation too is very low and declining. Five, the government's ability to prime the pump is limited given the already high fiscal deficits. Six, worsening the problem, tax revenues seem to be declining, further weakening the government's ability to stimulate. Seven, external trade as an engine of growth has long since stalled. Finally, as if all this was not enough, state governments too have been reining in expenditures, as they struggle with rising fiscal deficits.

In other words, C, G, I, and NX are all sputtering. So all the constituents of output growth are struggling simultaneously.

There is of course no agreement on what are the reasons for this state of affairs. Much less on what can be done to pull the economy out of this. This should be no surprise.

Worsening the situation a negative spiral of self-fulfilling prophecies appear to have gripped the economy and its actors. Consumer and business confidence, as captured in RBI surveys, are at very low levels. The confidence fairy has disappeared.

For sure, as the saying goes, we tend to be irrationally exuberant and pessimistic when faced with good and bad times respectively. Even discounting for the doomsday predictions, we can say with reasonable confidence that the economic sentiments are very weak. The problem with such situations is that such negative loops can be self-fulfilling - consumers will cut back purchases, businesses will freeze investments, and each reinforces the other.

The economy can remain entrapped in this grid-lock for a significant time. For a country like India, with weak safety nets, this can be even more damaging in terms of the human suffering and welfare losses. The confidence fairy, therefore, has to be brought back. And this requires action in the immediate.

What can be done in terms of immediate measures to revive growth? As I prefaced, I am not suggesting any specific answers. The typical levers available to revive the economy when faced with an aggregate demand problem are fiscal and monetary policies. Both are constrained, the former due to the limited fiscal space available and latter due to transmission problems from clogged credit markets. As Andy Mukherjee wrote, the "credit and fiscal crises are joined at the hip".

Given the problems faced by banks and NBFCs, it is unrealistic to expect monetary policy on its own to be much effective. In fact, highlighting the gravity of the credit squeeze, Niranjan Rajadhyaksha writes
The Bank of International Settlements provides a very useful data series on what it calls the credit gap, which measures the extent to which the ratio of credit-to-GDP has deviated from the historical trend as calculated by the Hodrik-Prescott filter. The credit gap has been negative for 22 consecutive quarters now, or the credit-GDP ratio has been below trend. Compare this with 55 quarters of a positive credit gap from the three-month period ended December 2000.
Therefore, only the government may have the power to break the doom-loop. This power will have to be exercised, even if it stretches its ability (in terms of the fiscal space). While the 3 per cent FRBM requirement for fiscal deficit is not arbitrary, it is also not a figure cast in stone. So, as a starting point, greater public spending, cannot be avoided.

But there has to be a very high premium associated with this public spending. It will have to acknowledged as being deployed to create the stimulus required to breakout off the grid-lock and also buy the time required to implement the necessary structural reforms. A wasting of the opportunity in terms of not undertaking the deep structural reforms will merely make the economic prospects worse.

Therefore public spending has to be tailored to maximise the boost to consumption and investment. In other words, it should seek to target instruments with the highest fiscal multipliers and target population or consumption groups with the highest marginal propensity to consume.

If fiscal policy will have to do the heavy lifting to provide the thrust, the question arises about the types of fiscal spending. Accordingly, within fiscal policy, capital expenditures, have the highest multiplier. It will have to focus on shovel-ready projects, especially of the public sector units and perhaps city governments. The more promising instrument, in terms of boosting incomes, may well be transfers. However it has to be used carefully and with exit options which can be practically exercised.

There are also limits to the effectiveness of traditional fiscal policy levers like tax cuts. The conventional wisdom around middle-class spending on consumer durables, vehicles, housing etc, leading to a virtuous loop of consumption, investments and economic growth may be on shakier grounds this time. For a start, as discussed earlier, the middle class itself is very small. Second, unlike the early years of the millennium, there may be limited pent-up demand, and also given the limited broadening of the base in the last two decades, the middle-class consumption story may be in its latter stages. Finally, as the RBI survey indicates, consumer confidence is at a six-year low. It is unlikely that a small dose of "income effect" (either by tax cuts or something else), will provide a significant shot at growth revival.

This leads us to the rural consumers and the idea of taking a leaf out of the 2009-11 stimulus which largely involved transfers to them. As demonstrated by that experience, such transfers are fraught with risks and build-up of economic weakness. However, given the high MPC of such types of transfers, they cannot be avoided. 

Some commentators talk about selling public assets to finance the government deficits. The idea of governments exiting certain areas should be welcomed and certain assets should be sold. However, it should also be borne in mind that the performance of the private sector in many areas has been no better. Further, for various strategic and other considerations, government may have to retain ownership in certain sectors.

But more importantly, wanting to privatise does not translate into actual privatisation, for a variety of factors, mostly on the demand-side. While some of the best performing public sector entities, especially on the petroleum and natural gas side, will naturally attract considerable foreign and domestic interest, the same cannot be said about the rest. In these cases, the market interest will be there only if there are windfall gains. In any case, the markets do not have the depth to absorb large volumes of privatisation in quick time. This too will take time.

However, in the meantime, some of the better performing public sector units may have an important role to play in the economic revival. In the absence of fiscal space within governments, these PSUs could expedite or front-load some of their planned and approved investments. This, especially from those in petroleum and gas, power generation and transmission are significant amounts. Similarly, government facilitation can possibly help expedite the planned infrastructure and capital expenditures in the private sector.

But this is hardly the garden variety cyclical weakness. There are too many signatures that the slow-down is structural. So what are these structural problems?

If we peer deep into the structure of the Indian economy, it is difficult to argue against the biggest challenge to long-term economic growth. With V Ananthanageswaran, I have argued in Can India Grow?,
The short story is that India faces acute capital deficiencies on multiple fronts as well as much under-appreciated adverse global structural headwinds which pose serious constraints to the achievement of sustainable high growth rates. High growth can be achieved only as episodes of over-heating followed by years of pain and lower growth from cleaning up the excesses. In the circumstances, the most prudent strategy may be to target a long period of moderate growth by focusing on steady economy-wide physical, human, and institutional capital accumulation and opportunistically riding on emergent global tailwinds.​.​
Among these deficiencies, the demand-side deficiency is acutely self-limiting to growth. The middle class is vanishingly small as a share of population. And national economic growth is supposed to be underpinned by middle-class consumption. It is stunning that there has been such limited acknowledgement among the opinion makers about this problem. 

This blog has written countless times about the "missing middle-class". The Economist had a cover story and briefing on this last year. Worse-still, as Rahul Jacob writes, even this small middle class seems to be shrinking.
... almost three decades after reforms started in 1991, the very notion of a middle class is more of a vague national aspiration than an actuality in India. “The middle class in our minds is actually the upper class," says Rama Bijapurkar, the well-known marketing consultant. Bijapurkar repeats the witticism that the middle class in India is “more sociological than logical." She prefers the term Middle India. That is a better description for people who are merely in the middle of the population in income terms but not at all a middle class. Those with a per capita income between $10 and $20 a day belong to the global middle class, according to a 2015 Pew Research Centre report. This would translate into the top 3% of India’s population.
This fact should be borne in mind whenever we make prescriptions about the Indian economy. It is still a country where the vast majority are very poor.  

Call it the home-market problem or whatever, the real issue is that India's middle-class is surprisingly small, even tiny as a proportion of population compared to its peers. This is perhaps the single biggest structural limitation to the country's sustained economic growth. It is growth constructed on a very narrow base. 

This may have multiple reasons. And it is most likely that all of them are relevant, and it will be impossible to disentangle the exact contributions of each. In any case, one of them is this,
When market forces are left to themselves, farm yields tend to stagnate or even fall. Demand for land increases faster than supply, so landlords lease out land at increasing rents. They also act as money lenders at high rates of interest. (This also adds to their holdings when debts cannot be paid and they seize the land that had been pledged as collateral.) Tenants, facing stiff rents and costly debts, with little or no security of tenure, cannot make the investments, like improving irrigation or buying fertiliser, that would increase yields. The landlords could make the investments, but they make money more easily by exacting higher rents and by usury. Land inequality leads to low long-term growth, which reduces the income of the poor but not of the rich. So, radical land reform is vital.
In fact, for those looking for a practical and actionable road-map for long-term structural reforms, one need not look farther than Joe Studwell's excellent book. How many economists could have written such a book?

The high growth period of 2003-11 were built on release of pent-up demand, massive public investments in infrastructure, and large transfers through welfare programs. As the present problem highlights, that growth did not lead to any significant broadening of the middle-class. It appears to have largely increased incomes through temporary transfers from the government, especially to rural citizens. The attendant consumption boost and investments supported the high economic growth rates. Once the transfer spigots dried up, rural incomes tanked, and household savings fell by more than six percentage points, it took the wind out of economic growth. Exogenous factors and shocks merely exacerbated the problems.

In light of above, the debate on whether the slowdown is cyclical or structural misses the point. The current slowdown has both cyclical and structural features. Further, as discussed earlier, all the major engines of growth appear to be sputtering. 

This brings us to the point about specific structural reforms. The list is long. A listing of many of them are here, here, and here. The approaches to be adopted too are outlined in there.

In this context, one note of caution will be to refrain from using the sledgehammer. Like with everything else in nature, change too has to take its time. Too quick a change will do more harm than good. And unlike physical systems, we are dealing with social systems inhabited by people. And human suffering should be minimised.

Take the example of the credit market reforms. Logically, the RBI's slew of actions on recognition and resolution of banking sector problems - SMA, AQR, PCA framework, February 12 circular etc - cannot be faulted. For sure, they have undoubtedly laid the foundations for a better financial intermediation. But the question is at what cost and whether it could have been phased out more gradually? Perhaps not. But we cannot ignore the costs of such actions. This is a good analysis of the sledgehammer that RBI delivered.

In any case, I am inclined to the belief that using the sledgehammer is just as inappropriate as is ignoring the problem altogether. Both are easy responses for policy makers at the helm of affairs. Making change happen in a more thoughtful and calibrated manner is very challenging.  

Such sledgehammers are most often counter-productive. In the case of China, it is now widely acknowledged that the crackdown on corruption and off-balance sheet financing entities has had the effect of squeezing spending and investments. 

Another example is the idea of transitioning the economy from informality to formality. This, as overwhelming evidence from elsewhere suggests, cannot happen directly. The share of the formal sector increases not by shrinking the informal sector, but by having the formal sector grow faster and gradually displacing the latter. 

Weekend reading links

1. Ananth points to this article on the floatation of Virgin Galactic, the loss-making $2.3 bn valued space tourism company for the immensely rich. Some of the comments are delicious,
And while 3 bn persons need fresh water and healthy food we all wish you a nice flight...
I'm sure the Vision Fund will invest in this...

New 'beyound meat'!
2. FT has an article on China's strategic investments in metals. This about the Chinese state-owned Citic Metals in Ivanhoe Mines in Democratic Republic of Congo,
Chinese companies already own some of the richest deposits of copper and cobalt in the DRC and beyond, metals that are critical to the switch away from fossil fuels to renewable energy. They have invested at least $8bn in Congolese mining assets since 2012, with miner China Molybdenum buying the Tenke copper and cobalt mine from Freeport-McMoran for $2.65bn in 2016... China has long coveted the idea of having a large mining company to rival western groups such as BHP, Anglo American and Rio Tinto, which they see as controlling the world’s best deposits.
3. Is Mark Zuckerberg the epitome of everything that is wrong with Big Tech? It is hard to not come away from watching his Congressional deposition on Libra without feeling concerned about the competence of Facebook's leadership.

4. Bloomberg points to the likely source of the next round of financial market crisis - CLOs. Sample this,
CLOs own about 54% of all leveraged loans outstanding... An alarming number of leveraged loans—29% by some estimates—are rated B- by S&P Global Ratings or B3 by Moody’s Investors Service. For both ratings companies, that’s just one rung above CCC, the very lowest tier before default.
5. How many times will this repeat? The latest episode of African debt defaults appear on the horizon. High fiscal deficits, fraud and deception, and the increased share of non-concessional commercial debt have all been contributors. Sample the signatures of troubles in frontier market debt,
Almost half of frontier market countries are either at high risk of falling into debt distress or are already distressed, the IMF has said, up from zero as recently as 2014. The warning comes as issuance of hard currency frontier market debt is set to hit a record high this year, with $38bn set to be raised, according to the IMF... Mozambique is already in default after it borrowed more than $2bn, much of it concealed from the IMF and donors, ostensibly to finance a tuna fishing fleet and maritime security projects, only for much of the money to be diverted to kickbacks for bankers and government officials, according to US prosecutors. The Republic of the Congo, Africa’s third-largest oil producer, Zimbabwe, The Gambia and Grenada are also on a list of nine states the IMF classes as being “in debt distress”. A further 24 countries, including Ethiopia, Ghana, Zambia, Haiti, Laos and Tajikistan are deemed to be at “high” risk of following suit, by far the highest level since comparable records began in 2010... The outstanding stock of such debt has already tripled to $200bn over the past five years with the median issuer now labouring under a debt pile equivalent to 7 per cent of gross domestic product and close to half its gross reserves, compared with 3 per cent and 20 per cent respectively in 2014. In terms of debt to GDP, the median frontier issuer now has a ratio of about 55 per cent, a rise of almost 20 percentage points since 2013.
Despite the growing risks frontier market yields have fallen from 8.2 per cent in November 2018 to 6.2 per cent as investors search for yields.

But with global monetary accommodation most likely in its final phase, this graphic on debt redemption (or roll-over) schedules looks ominous.

6. FT on the changing face of American capital markets. The abundance of private capital has led to an almost having of listed companies in the US.
7. In the context of the RCT focused Nobel Prize, some very good articles - Sanjay G Reddy, Ingrid Harvold Kvangraven, TCA Srinivasa Raghavan, Jean Dreze, and this one unravels the actual story behind the claims made here

Friday, November 1, 2019

Behavioural failings of public administrators

I have a co-authored paper with Dr TV Somanathan on behavioural failings of public administrators here on the Prime Minister's Economic Advisory Council website.

It has two parts. The first part covers thirteen commandments to "become better officers", and the second covers twenty insights to "become better policy makers".

Thursday, October 31, 2019

The "Phantom" FDI

The IMF's WEO talks about "phantom investments" or FDI which seeks to benefit from tax avoidance. It writes,
In practice, FDI is defined as cross-border financial investments between firms belonging to the same multinational group, and much of it is phantom in nature—investments that pass through empty corporate shells. These shells, also called special purpose entities, have no real business activities. Rather, they carry out holding activities, conduct intrafirm financing, or manage intangible assets—often to minimize multinationals’ global tax bill. Such financial and tax engineering blurs traditional FDI statistics and makes it difficult to understand genuine economic integration... Globally, phantom investments amount to an astonishing $15 trillion, or the combined annual GDP of economic powerhouses China and Germany... In less than a decade, phantom FDI has climbed from about 30 percent to almost 40 percent of global FDI...

Today, a multinational company can use financial engineering to shift large sums of money across the globe, easily relocate highly profitable intangible assets, or sell digital services from tax havens without having a physical presence. These phenomena can hugely impact traditional macroeconomic statistics—for example, inflating GDP and FDI figures in tax havens. Prominent cases include Irish GDP growth of 26 percent in 2015, following some multinationals’ relocation of intellectual property rights to Ireland, and Luxembourg’s status as one of the world’s largest FDI hosts.

Sample this,
According to official statistics, Luxembourg, a country of 600,000 people, hosts as much foreign direct investment (FDI) as the United States and much more than China. Luxembourg’s $4 trillion in FDI comes out to $6.6 million a person... Interestingly, a few well-known tax havens host the vast majority of the world’s phantom FDI. Luxembourg and the Netherlands host nearly half. And when you add Hong Kong SAR, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland, and Mauritius to the list, these 10 economies host more than 85 percent of all phantom investments.
This from the FT.
This should be a matter of concern to countries like India, which aggressively court foreign investments and tweak policies to encourage FDI. Already, only a tiny share of FDI is coming to job creating or export-generating manufacturing activities. What monitoring mechanisms do we have to assess the extent of FDI being driven by profit shifting and other financial arbitrage considerations?

Wednesday, October 30, 2019

More on the balance sheet of privatisation - Chilean edition

From the ProMarket Blog on utility services in Chile, the country which is often hailed as a pioneer in privatisation of infrastructure services,
The median wage is 400,000 CLP (Chilean pesos). That means that half of all workers are making $550 or less every month, and the replacement rate for pensions is only 31 percent. In 2019, the price of electric power increased by 19 percent, despite huge decreases in electric generation costs. Part of the explanation is that the private electric companies have a monopoly position and a law-mandated profit of 10 percent. The same thing happens with water monopoly companies. The biggest of them, Aguas Andinas, had a profit margin of 19 percent in 2013.

Finally, a public transport fare increase was the last straw. On October 6, the cost of a rush-hour subway ride grew from 800CLP to 830 (from $1.10 to $1.14). Those 4 cents were too much, considering that the average worker is spending as much as 30 percent of his income on transportation. Plus, the fares were already high compared with 47 cents for a metro ticket in Buenos Aires or 45 cents in Lima, the other capitals in Chile’s “neighborhood.”
This is illustration of inequality and market concentration is stunning,
The concentration of wealth is also similar to African countries, with the richest 1 percent of the population capturing 30.5 percent of the total income (and the 543 wealthiest households receiving 10.1 percent of that). In 2012, economist Ramon Lopez calculated that the five richest men in Chile, according to Forbes (including President Piñera), have the same income as the lowest-earning 5 million Chileans.. The beer, tobacco, and domestic air travel markets are each dominated by a single company (with 87 percent, 95 percent, and 74 percent market shares, respectively). And these are just three examples among many; according to the pro-free-market think tank Horizontal, Chileans spend 40 percent of their income in markets without any real competition.

Tuesday, October 29, 2019

SMEs and job creation in India

Ananth and me have an oped in Livemint which summarises our joint work published by Carnegie on  promotion of small, formal firms started by educated entrepreneurs to create productive jobs.

The summary stylised facts,
One, although micro businesses dominate most countries’ economies, India’s economy has an excessive proportion of less productive, informal micro businesses. Two, employment in India is concentrated in these micro businesses, whereas in developed countries, it is concentrated in formal small and medium-sized firms. Three, productive jobs are created by firms that start out as formal. Four, new and young firms create more jobs than older, established firms. Five, growing and efficient firms are founded and run by educated entrepreneurs. Six, with age, Indian firms typically stagnate or decline in employment. Seven, India has a deficit of productive, job-creating entrepreneurs, and an excess of informal entrepreneurs focused on survival.
The full paper is here. An extract here. A review here

Monday, October 28, 2019

Higher taxes could encourage racism and anti-semitism???

If there is an annual award for the "Tweet of the Year", then this by Lawrence Summers should make it to the list. In a series of tweets, Summers throws aside all pretensions and declares his allegiance. Sample this,
Forcing the wealthy to spend could boomerang. If the wealth tax had been in place a century ago, we would have had more anti-semitism from Henry Ford and a smaller Ford Foundation today.
And this,
Very few of the problems today involve personal contributions of the wealthy. They instead involve corporate contributions or large groups: e.g., the NRA, the insurance industry, sugar producers...
See the responses on the tweet thread itself. Even an apologetic Paul Krugman cannot take it.

And this,
Wealth inequality is a highly problematic basis for judging a society. Consider a country that put in place super effective social insurance against retirement, disability & health expenses. Middle class people would run their “standby assets” down & wealth inequality would go up
In fact do read the whole tweet thread. It is an exercise in mendacity.

The whole tweet storm is triggered by what appears to have been a very good event at PIIE where Summers had a panel discussion with Emmanuel Saez. 

The larger point that Saez-Zucman make about the need for higher taxes and redistribution to lower inequality is being detracted from by the quibbling over the implementation challenges of a specific set of proposals (never mind the numerous acceptable variations possible, even if the specific set was not feasible). Incidentally, the same Summers was at the forefront of the attack on Thomas Piketty when his book which highlighted the point about widening inequality and how the dynamic of today's capitalism contributes to it. Then the quibble was about how r > g would not always hold or that r was greater largely due to higher real estate prices.

The point about implementation difficulties is one of the main arguments against progressive measures like wealth tax, higher income taxes, breaking up tech companies, and taxing multinationals. This is unsurprising since implementation of most radical changes will ex-ante always appear challenging. But in this case, it is a bit rich coming as it does from ideologues who have played a major role in entrenching the narrative around far more difficult implementation endeavours like valuation of start-ups or executive compensation, both of which have engendered egregious excesses and perverse incentives. 

With nomenklatura like Larry Summers representing them, the Liberals should not be surprised by the rise of the likes of Donald Trump!

Sunday, October 27, 2019

Weekend reading links

1. To give a sense of the demographic challenge facing Japan, sample this from Yubari town in Hokkaido, which recently became the first Japanese municipality to file for bankruptcy,
The town’s population has declined to about 8,000 from roughly 120,000 in the 1960s, according to the local chamber of commerce. The closure of Yubari's coal mines was a blow the community never recovered from; population decline only made matters worse.
2. From Ananth, fascinating analysis of India's income tax revenue trends in Livemint. The major share of income tax comes from salaried income compared to business income,
The total income declared by individuals during AY19 stood at ₹34.1 trillion. Of this ₹20 trillion, or the bulk of the income, was declared by the salaried class. The business income came in next at ₹9.3 trillion. The declared interest income was ₹1.19 trillion, whereas the income from house property stood at ₹37,448 crore... In AY13, individuals paying an income tax of greater than ₹1.5 lakh accounted for nearly 79% of the total tax. This figure fell to 74% in AY15. It has since risen to 79.1% in AY19. A possible explanation for this lies in the higher surcharges that the government has introduced for those in the higher tax brackets over the last few years... The number of people paying an individual income tax of greater than ₹1.5 lakh has increased from 1.38 million in AY13 to 3.49 million in AY19. Nevertheless, as a percentage of the population, this remains a very small proportion. In AY19, 0.26% of the population paid close to four-fifths of the individual income tax, against 0.11% in AY13.

The government appears to be spending more effort and political capital squeezing more tax revenues out from the system, than in trying to expand the envelope itself by enabling growth. The former is easier to do, and the latter difficult. And the former comes with all its perverse incentives. In fact, it worsens the situation without commensurate performance on the latter.

This about housing rental market is very interesting,
According to the data, only around ₹37,400 crore is generated as income from house property in a year (through rents after adjusting for home loan interest, etc.) in the entire country, which shows that much of these transactions are still cash-based and completely outside the tax net... In AY19, around 8.3 million individual returns were filed for house property income. Of these, around 4.67 million declared a negative income from house property. This basically means that they are repaying their home loans. An interest of a maximum of ₹2 lakh paid on a home loan(s) is currently allowed as a deduction from taxable income during a year. Hence, around 3.63 million filers actually made a positive income from house property. If I were to put it a tad simplistically, India has just 3.63 million landlords.
It underscores the challenge about rolling back the cash economy.

3. Also from Ananth, a good set of links to research papers that highlight different signatures of financialisation in the economy. Most of them are covered in great detail in The Rise of Finance.

4. Mint's Macro Tracker shows continuing economic weakness. All the high frequency indicators are in the red.

5. Good summary of India's water problems,
As for water, a near-total reliance on moody monsoons has not made Indians careful users. Around 70% of surface water is thought to be polluted, and pumping from 20m tube wells has dangerously lowered groundwater levels. Indian farmers use more groundwater than America and China combined. They draw as much as 6,000 litres of water to produce a kilo of rice, compared with as little as 600 in China. This is because for 50 years Indian governments have subsidised farming. Water for irrigation is free, and seeds, diesel fuel, electricity and fertiliser are all sold below cost. As a result, India now has a 70m tonne grain mountain and a 15m tonne sugar mountain. It ranks as the world’s biggest exporter of virtual water, shipping out the equivalent of nearly 100bn cubic metres a year in its exports of rice, textiles and other goods. Lack of access to clean water kills an estimated 200,000 Indians a year, and sickens millions more. Once-pleasant rivers such as the Yamuna in Delhi and the Mithi in Mumbai are devoid of oxygen and black with sewage. Bengaluru’s suburban lakes now regularly burst into flames or erupt in towers of toxic foam. Between pollution, overuse and global warming—which appears to be making the monsoons more capricious and slightly less generous—India is fast approaching a water crisis.
6. Even with all its flaws and limitations, the Ease of Doing Business surveys must count as one of the rare policy reform successes of the World Bank.

7. Elizabeth Warren's "fair markets, markets with rules" based manifesto is overall very impressive. Is this the most comprehensive proposal yet on redefining a national economic paradigm? 

8. After becoming America's biggest landlord, private equity giant Blackstone has a new target - warehouses used by e-commerce companies, close to urban areas.
Blackstone owns about 800 million square feet of industrial warehouses, with nearly half of its 443 million square feet in the Americas having been acquired this year.
It raised a record $20 bn real estate fund early this year, and manages $157 bn in investor capital aimed at real estate. 

This about what favours the large funds like Blackstone,
New York firm’s history of double-digit returns and a herd effect, where pension-fund managers and other big investors tend to favor the same brand names with established track records... Even before its latest fund, Blackstone had the record for raising the four largest funds, according to Preqin. Its previous real-estate fund, at $15.8 billion, currently holds the record. Giant firms like Blackstone and Brookfield Property Group typically have an easier time raising money than smaller firms. Investment officers working for pension funds, endowments and other institutional investors prefer firms with marquee names and long track records because they have less explaining to do if things go wrong.
Then there is also the fact that large funds manage to raise debt cheaper than their smaller competitors. 

Saturday, October 26, 2019

The case of Dewan Housing is an opportunity to shine light on corporate India

If you thought that mortgaging the same asset to different lenders was what you only saw with small-time fraudsters and in movies, wait till you read about the latest twist in the case of Dewan Housing Financing Limited (DHFL). 

The company is reeling from a $12 bn pile of debt and is undergoing restructuring efforts, failing which it will have go into bankruptcy, with its ripple-effects across the financial markets.

In this context, Livemint reports about the latest developments in the already unsavoury troubles facing DHFL.
The Bombay High Court is scratching its head and wondering if Dewan securitized — that is, sold to a separate entity — assets that it had pledged to another set of investors to obtain loans. Now, the court wants the beleaguered firm to produce, under oath, a list of assets it repackaged and sold within the last year. This imbroglio has the potential to bring India’s securitization market to a standstill.
As if this was not enough,
A special review of Dewan by KPMG is still in a draft form. But the parts leaked to the media Wednesday raise damaging questions. The auditor says that $2 billion was lent to 25 borrowers with little real business or assets, and that “such entities may be working closely" with Dewan without qualifying as related parties. 
The question that will get asked in the days ahead in a vociferous manner is this. What were the regulators, on both the capital markets and banking sides, doing? 

What will not, unfortunately, get highlighted is the rot within India's corporate sector, where at the slightest opportunity subverting the rules of the game has become passe! 

The blame will get evenly distributed between the unscrupulous promoters and the government. Never mind this is only the latest in the series, the opinion makers will not think it still not appropriate enough to introspect how pervasive such practices are in corporate India.

Friday, October 25, 2019

More on private equity

Nice article in Bloomberg about private equity. In terms of a confluence of circumstances which has contributed to PE's rise, this is important
But it’s possible that a cosmic alignment of lax corporate management, cheap debt, and desperate-for-yield pensions created a moment that won’t be repeated soon.
Debt is central to the underlying idea,
The basic idea is a little like house flipping: Take over a company that’s relatively cheap and spruce it up to make it more attractive to other buyers so you can sell it at a profit in a few years... Private equity couldn’t exist without debt. It’s the jet fuel that makes a corporate acquisition so lucrative for a turnaround investor. The more debt you can raise against a target company, the less cash you need to pay for it, and the higher your return on that cash once you sell... PE firms can use some of the companies they own as virtual ATMs—having the company borrow money to pay its owner special dividends. That allows the funds to recover their investment sooner than they typically would through a sale or an initial public offering.
Or about the impact of PE,
Research has shown that companies acquired through leveraged buyouts (LBOs) are more likely to depress worker wages and cut investments, not to mention have a higher risk of bankruptcy. Private equity owners benefit through fees and dividends, critics say, while the company is left to grapple with often debilitating debt... Private equity and hedge funds gained control of more than 80 retailers in the past decade, according to a July report by a group of progressive organizations including Americans for Financial Reform and United for Respect. And PE-owned merchants account for most of the biggest recent retail bankruptcies, including those of Gymboree, Payless, and Shopko in the past year alone. Those bankruptcies wiped out 1.3 million jobs—including positions at retailers and related jobs, such as at vendors—according to the report, which estimates that “Wall Street firms have destroyed eight times as many retail jobs as they have created in the past decade.”
And this
A July paper by Brian Ayash and Mahdi Rastad of California Polytechnic State University examined almost 500 companiestaken private from 1980 to 2006. It followed both the LBOs and a similar number of companies that stayed public for a period of 10 years. They found about 20% of the PE-owned companies filed for bankruptcy—10 times the rate of those that stayed public. Pile on debt, and employees lose, Ayash says... Research by Eileen Appelbaum, co-director of the Center for Economic and Policy Research, says the problem isn’t leverage per se but too much of it. She points to guidance issued by the Federal Deposit Insurance Corp. in 2013 saying debt levels of more than six times earnings before interest, taxes, depreciation, and amortization, or Ebitda.
And this is important,
A study co-authored by UC Merced’s Eaton, for example, found that buyouts of private colleges lead to higher tuition, student debt, and law enforcement action for fraud, as well as lower graduation rates, loan-repayment rates, and graduate earnings. But the deals did increase profits.
Jonathan Ford has another article on PE in the FT which has this summary of PE balance sheet,
First, it shows why pension funds are tempted by private equity’s blandishments. If you are struggling to meet your promises to members, you want every pound or dollar to work as hard as it can. Nonetheless, before getting carried away, it is worth also noting the source of this superior performance, which all comes from financial engineering, not running companies better. It is far from clear this justifies the three-times higher fees that the pension fund incurs with Acme B. It is also worth remembering that the extra return is not the free lunch it appears, coming at the cost of additional volatility. Private equity argues that the extra oversight involved in its governance arrangements allow it to deal with the higher financial risks. But its preference for debt can carry heavy societal costs, such as bankruptcy and lost productivity through shirked investment in the business. And lastly there is a big puzzle surrounding the credit that supports these private equity investments. Most of the gain comes from capital leverage rather than the “tax shield” of deductible debt interest. The scale of the leverage-related bump raises the question of whether banks are really earning a proper return through the cycle on the risks they are bearing on their private equity loans. If they aren’t, that’s a cost for all citizens (including pension fund scheme members) given the taxpayer support that banks enjoy. The clearest and biggest beneficiaries of lenders’ largesse are the recipients of swollen transaction and private equity fees.

Thursday, October 24, 2019

How quickly the tide turns!

In February 2014, I wrote an oped in Indian Express urging caution on capital account liberalisation

In response, this is what Ila Patnaik wrote mockingly,
When some Indian bureaucrats have argued in favour of a closed capital account at international forums, they have faced amusement from the audience. No country has taken this idea seriously. This so-called “lesson from the global financial crisis” is something no one is interested in learning. There has been no reduction in capital account openness — either among advanced countries or among emerging markets — after the crisis. The free movement of goods, services, ideas, capital and enterprise across national borders is an integral part of modernity.

Tuesday, October 22, 2019

The default responses when faced with a problem

When faced with any problem, we have a set of default responses. 

1. We need to do something new. A big bang. We need to innovate.

2. Somebody has to be responsible for the problem. Blame the government. Blame the politicians. Blame the corporates. Blame America or (now) China!

3. We need a reassuring solution, one which we can implement in finite time and solve the problem.

Instead, why not these?

1. What if the problem arose because we were not doing well what we were supposed to have been doing? So why not refocus efforts to doing it more effectively?

2. What if all of us are to blame? Or what if no one is to blame? What if the problem arose due to the complex dynamic of human interactions?

3. What if the problem never disappears fully? What if there are no solutions at all, never mind neat and reassuring ones? What if the solution is a never-ending journey, and not a destination?

Consider the example of increasing economic growth or development in general.

What if all governments need to do are develop human capital, invest in physical infrastructure, facilitate ease of doing business, provide a basic social safety net, maintain macroeconomic stability, and in general maintain good governance?

What if there is no one specific point of blame and the problem is the emergent consequence of the inter-play of several unforeseen forces and actions within the economy?

What if the entire set of processes is a journey, with no clear destinations, and one which requires constant vigil and recalibrations?

What rubbish! Let's go back to our good-old reflex responses!

Monday, October 21, 2019

How the humble grain was responsible for the State

Rajeev Mantri points to this review of the very original James C Scott's latest book, Against the Grain, by Scott Alexander. The essence of the book appears to be how the need to raise taxes was the underlying motivation to promote wheat over other crops. You can tax grain farmers!

Reproducing this extract from Alexander's blog, which captures the essence of the book,
Why should cereal grains play such a massive role in the earliest states? After all, other crops, in particular legumes such as lentils, chickpeas, and peas, had been domesticated in the Middle East and, in China, taro and soybean. Why were they not the basis of state formation? More broadly, why have no “lentil states,” chickpea states, taro states, sago states, breadfruit states, yam states, cassava states, potato states, peanut states, or banana states appeared in the historical record? Many of these cultivars provide more calories per unit of land than wheat and barley, some require less labor, and singly or in combination they would provide comparable basic nutrition. Many of them meet, in other words, the agro-demographic conditions of population density and food value as well as cereal grains. Only irrigated rice outclasses them in terms of sheer concentration of caloric value per unit of land.
The key to the nexus between grains and states lies, I believe, in the fact that only the cereal grains can serve as a basis for taxation: visible, divisible, assessable, storable, transportable, and “rationable.” Other crops—legumes, tubers, and starch plants—have some of these desirable state-adapted qualities, but none has all of these advantages. To appreciate the unique advantages of the cereal grains, it helps to place yourself in the sandals of an ancient tax-collection official interested, above all, in the ease and efficiency of appropriation.

The fact that cereal grains grow above ground and ripen at roughly the same time makes the job of any would-be taxman that much easier. If the army or the tax officials arrive at the right time, they can cut, thresh, and confiscate the entire harvest in one operation. For a hostile army, cereal grains make a scorched-earth policy that much simpler; they can burn the harvest-ready grain fields and reduce the cultivators to flight or starvation. Better yet, a tax collector or enemy can simply wait until the crop has been threshed and stored and confiscate the entire contents of the granary.
Compare this situation with, say, that of farmers whose staple crops are tubers such as potatoes or cassava/manioc. Such crops ripen in a year but may be safely left in the ground for an additional year or two. They can be dug up as needed and the reaminder stored where they grew, underground. If an army or tax collectors want your tubers, they will have to dig them up tuber by tuber, as the farmer does, and then they will have a cartload of potatoes which is far less valuable (either calorically or at the market) than a cartload of wheat, and is also more likely to spoil quickly. Frederick the Great of Prussia, when he ordered his subjects to plant potatoes, understood that, as planters of tubers, they could not be so easily dispersed by invading armies.
The “above ground” simultaneous ripening of cereal grains has the inestimable advantage of being legible and assessable by the state tax collectors. These characteristics are what make wheat, barley, rice, millet, and maize the premier political crops. A tax assessor typically classifies fields in terms of soil quality and, knowing the average yield of a particular grain from such soil, is able to estimate a tax. If a year-to-year adjustment is required, fields can be surveyed and crop cuttings taken from a representative patch just before harvest to arrive at an estimated yield for that particular crop year. As we shall see, state officials tried to raise crop yields and taxes in kind by mandating techniques of cultivation; in Mesopotamia this included insisting on repeated ploughing to break up the large clods of earth and repeated harrowing for better rooting and nutrient delivery. The point is that with cereal grains and soil preparation, the planting, the condition of the crop, and the ultimate yield were more visible and assessable.
And this from Alexander about what motivated acquisition of prisoners of war,
Scott discusses how this shaped the character of early Near Eastern warfare. Read a typical Near Eastern victory stele, and it looks something like “Hail the glorious king Eksamplu, who campaigned against Examplestan and took 10,000 prisoners of war back to the capital.” Territorial conquest, if it happened at all, was an afterthought; what these kings really wanted was prisoners. Why? Because they didn’t even have enough subjects to farm the land they had; they were short of labor. Prisoners of war would be resettled on some arable land, given one or another legal status that basically equated to slave laborers, and so end up little different from the native-born population. The most extreme example was the massive deportation campaigns of Assyria (eg the Ten Lost Tribes of Israel), but everybody did it because everybody knew their current subjects were a time-limited resources, available only until they gradually drained out into the wilderness.

Saturday, October 19, 2019

Weekend reading links

1. The US withdrawal from oil-rich north-east Syria, paving the way for Turkish troops to attack the Kurdish forces which had been at the forefront of the successful war against the Isis, is certain to reinforce the geo-political recalibration happening in the region away from the US. Russia and Iran would be definite beneficiaries.

The Kurdish militia which ran the region named Rojava which was taken over after the defeat of the Isis, People's Protection Units (YPG), responded by striking a deal with President Bashar Al Assad in an agreement mediated by Russia. They invited the Syrian army to fight the Turkish army alongside them. This is a good primer on the issue and the roles of different countries.

2. FT points to the changing portfolio compositions of leading financial institutions, mostly driven by the world of low interest rates and the search for yields,
In addition to its traditional roles advising on mergers and trading debt and equities, Goldman is now: a venture capitalist investing in the likes of Uber and WeWork; a retail bank offering accounts and short-term loans to ordinary consumers; a credit card issuer in partnership with Apple; and a software developer with a suite of applications... Finance is full of companies uncomfortable in their own skins and trying to adopt more fluid identities. Blackstone, notionally a private equity firm, today makes more money from property. BlackRock, famous as one of the world’s biggest owners of public equities, is now getting into private equity buyouts. Elliott Management, an activist hedge fund, has ended up owning a football club, AC Milan, and two bookstore chains, Barnes & Noble and Waterstones.
Apart from straying into areas where they may have limited expertise, the other worrying thing is the illiquid nature of many of these assets, which in turn pose challenges of runs, as faced by the collapse of leading UK fund manager Neil Woodford following suspension of withdrawals after customers started demanding their money back.
This week’s Global Financial Stability Report from the IMF pointed to renewed risks from pension funds’ headlong rush into alternative assets. The allocation to alternatives such as property and private equity has risen from just over 5 per cent in 2007 to more than 20 per cent today.
3. In recent days we've had two similar financial market failures in India and UK.

In UK, Neil Woodford, the country's best known fund manager was ousted from all his investment vehicles following the collapse of his flagship £3 bn equity fund. It followed suspension of withdrawals by fund administrators after a flood of investors demanding their money back. An article in the FT writes,
The problems... began after he loaded up his flagship £3bn “equity income” fund with investments that provided no income. About a fifth of the portfolio was composed not of the dividend-paying public stocks that one would expect, but a rash of exotic private businesses such as Industrial Heat, a company whose nuclear fusion dreams have attracted Brad Pitt — and the scepticism of physicists. These instruments cannot be sold in a hurry and, in June, when Mr Woodford’s customers wanted their money back, the fund’s administrators suspended withdrawals and then, this week, decided to liquidate the assets, resulting in the end of the firm.
And this,
Mr Woodford became a household name during 26 years at Invesco where he turned £1,000 invested into more than £25,000. But he was later known for a reckless investment style, piling into illiquid and unquoted stocks, which led to the destruction of his clients’ savings. The Equity Income Fund was suspended in June after being crippled by relentless redemption requests and investment losses, sparking the biggest crisis in the European fund management industry in a decade and an investigation by the UK’s Financial Conduct Authority. Problems at the fund stemmed from its exposure to stocks that cannot easily be bought or sold.
In India, something similar happened with a regional co-operative bank, Punjab and Maharashtra Cooperative Bank (PMC). As news of RBI putting the bank under its direct control for six months emerged, the depositors rushed to pull out their money, forcing imposition of limits on withdrawals by the regulator. It also emerged that 73% of PMC's Rs 8,800 Crore loan book was exposed to just one account, Housing Development and Infrastructure Limited (HDIL), a real estate developer whose credit worthiness was already under the cloud. This was four times the regulatory cap on exposure to single entity.

The country's 1500 plus co-operative banks have dual regulation - by RBI on financial supervision and State government's Registrar of Co-operative Societies for bank management. But the influence of political leaders in the running of these banks erodes the professionalism in their management.

All this highlights atleast three things. One, financial market regulation invariably runs the risk of being behind the curve. Two, the widespread perception among opinion makers about Indian financial market regulators are especially inept does not quite square up with the pervasive similar failures in the most advanced markets. Finally, it underlines the need for financial market regulation. Asset management industry is among the most competitive segments of the financial market. Such competition could not keep the most high-profile asset manager in UK honest. This again questions the underlying ideological premise about the self-regulating nature of financial markets.

4. The Economist has an article which refers to Jevons Pradox, which argues that the more efficient use of a substance inevitably leads to higher total consumption. Sample this,
Vaclav Smil, a Czech-Canadian scientist, argued that as goods become lighter and cheaper the market for them explodes and, as Jevons predicted, increases demand for resources. The weight of the average mobile phone in 2011 was one-sixth what it had been in 1990. But the number of phones ballooned from 11m to 6bn. So the total mass of phones globally went from 7,000 tonnes to about 700,000 tonnes. Less, Mr Smil writes memorably, is “an enabling agent of more”.
5. The Economist on whether share options may have had the effect of lowering business investment and productivity,
The proportion of cash paid out to shareholders by non-financial American companies was 40.7% from 2000 to 2017, when share options became popular. Between 1947 and 1999, when they were not, it was 19.6%. As a corollary, the proportion used for investment fell.
6. Good survey in The Economist on the changing rules of the game in the world economy. Sample this about low inflation and why inflation targeting as a regime may be past its relevance,
The IMF counts among its members 41 countries in which monetary-policy targets inflation. Add in the euro zone and America (where the Fed has multiple goals), and you get 43. Of those 28 will either undershoot their inflation targets in 2019 or have inflation in the bottom half of their target range, according to the fund’s most recent round of forecasts. (When those forecasts are updated on October 15th, after this special report goes to press, that number will probably rise.) By GDP 91% of the inflation-targeting world is an inflation laggard on this measure.
It talks about the breakdown of the Phillips curve relationship between inflation and unemployment, persistence of low inflation despite massive increases in credit supply, and technology making inflation statistics unreliable.

Evidence about how global value chain integration contributes to synchronisation of inflation,
The recent growth in cross-border supply chains has created conduits along which cost changes in one part of the world flow into the prices of goods that emerge from factories elsewhere. Research by Raphael Auer of the Bank for International Settlements (BIS), Andrei Levchenko of the University of Michigan and Philip Sauré of Johannes Gutenberg University in Mainz has found that half of global synchronisation in producer-price inflation is attributable to prices that can be traced through supply chains. Via this mechanism the average country imports one-fifth of any change in inflation in the rest of the world. Prices are more intertwined in integrated trading regions such as America, Canada and Mexico... In other work with his colleagues at the bis, Claudio Borio and Andrew Filardo, Mr Auer finds that the greater a country’s integration into cross-border supply chains, the more inflation tracks slack in the global economy. If imports of inputs to production double as a share of GDP, the sensitivity of inflation to global economic conditions also appears to double. Messrs Ha and Kose and Ms Ohnsorge also find that global factors explain a greater share of inflation in countries which participate more in global supply chains.
Another long-held view being questioned is the belief in depreciating currency to boost exports.
And although in theory a falling exchange rate should at least boost exports, this effect is limited by the fact that so much trade is invoiced in dominant currencies like the dollar or the euro. Research by Gita Gopinath and Emine Boz of the imf and Mikkel Plagborg-Møller of Princeton University has found that a strong dollar tends to gum up world trade, as well as making dollar debts harder to repay. As a result, even emerging markets with independent central banks and floating exchange rates can appear to be at the mercy of international financial conditions, in particular the policy of the Federal Reserve.
7. From $47 bn in late 2018 to $8 bn apparently now, the fall and fall of WeWork valuation!

8. The post-IPO balance sheet of 2019!
9. Finally a very good article about the excellent satirical Malayalam cartoon characters, Bobban and Molly, which was part of the state's folklore for a long time. Thinking about it, one of the things that made Malayalam cinema stand-out, especially till perhaps the early noughties, was its very sensitive characterisation of real-world life issues. 

Wednesday, October 16, 2019

Inequality graphics of the year and more!

From the authors of the big book of the year, Emmanuel Saez and Gabriel Zucman,
For the first time in the past hundred years, the working class — the 50 percent of Americans with the lowest incomes — today pays higher tax rates than billionaires... The richest 400 adults pay a lower tax rate than all other groups... Taking into account all taxes paid, each group contributes between 25 percent and 30 percent of its income to the community’s needs. The only exception is the billionaires, who pay a tax rate of 23 percent, less than every other group.
They disaggregate among different income categories the 28% of national paid out in federal, state and local government taxes in 2018 and get the graphic below.
The state and local taxes, which form a third of all tax revenues, are, as can be seen, extremely regressive. And how have we reached this state of affairs?
Saez and Zucman have a proposal to redress this egregiously unfair system.
There is nothing inherent in modern technology or globalization that destroys our ability to institute a highly progressive tax system. The choice is ours. We can countenance a sprawling industry that helps the affluent dodge taxation, or we can choose to regulate it. We can let multinationals pick the country where they declare their profits, or we can pick for them. We can tolerate financial opacity and the countless possibilities for tax evasion that come with it, or we can choose to measure, record and tax wealth. If we believe most commentators, tax avoidance is a law of nature... But they are mistaken. Tax avoidance, international tax competition and the race to the bottom that rage today are not laws of nature. They are policy choices, decisions we’ve collectively made — perhaps not consciously or explicitly, certainly not choices that were debated transparently and democratically — but choices nonetheless. And other, better choices are possible.
Take big corporations. Some countries may have an interest in applying low tax rates, but that’s not an obstacle to making multinationals (and their shareholders) pay a lot. How? By collecting the taxes that tax havens choose not to levy. For example, imagine that the corporate tax rate in the United States was increased to 35 percent and that Apple found a way to book billions in profits in Ireland, taxed at 1 percent. The United States could simply decide to collect the missing 34 percent. Apple, like most Fortune 500 companies, does in fact have a big tax deficit: It pays much less in taxes globally than what it would pay if its profits were taxed at 35 percent in each country where it operates. For companies headquartered in the United States, the Internal Revenue Service should collect 100 percent of this tax deficit immediately, taking up the role of tax collector of last resort. The permission of tax havens is not required. All it would take is adding a paragraph in the United States tax code. The same logic can be applied to companies headquartered abroad that sell products in America. The only difference is that the United States would collect not all but only a fraction of their tax deficit. For example, if the Swiss food giant Nestlé has a tax deficit of $1 billion and makes 20 percent of its global sales in the United States, the I.R.S. could collect 20 percent of its tax deficit, in addition to any tax owed in the United States. The information necessary to collect this remedial tax already exists: Thanks to recent advances in international cooperation, the I.R.S. knows where Nestlé books its profits, how much tax it pays in each country and where it makes its sales. 
As Saez and Zucman point out, it is for America to bite the bullet and initiate this proposal and let others follow suit. Are the liberals listening?

See also this by David Leonhardt,
The overall tax rate on the richest 1 percent would roughly double, to about 60 percent. The tax increases would bring in about $750 billion a year, or 4 percent of G.D.P., enough to pay for universal pre-K, an infrastructure program, medical research, clean energy and more. Those are the kinds of policies that do lift economic growth. One crucial part of the agenda is a minimum global corporate taxof at least 25 percent. A company would have to pay the tax on its profits in the United States even if it set up headquarters in Ireland or Bermuda. Saez and Zucman also favor a wealth tax; Elizabeth Warren’s version is based on their work.
Also, I am sure in the days ahead, the venerable economists will indulge in hair-splitting over arcane and marginal concerns, and seek to detract from the central message about sharply reduced tax progressivity and its contribution to widening inequality, which, as Paul Krugman says here, screams out loud!

Btw, in terms of economists who are engaged with important real-world issues in a meaningful manner, are there any others more important than Thomas Piketty, Emmanuel Saez and Gabriel Zucman? I am inclined to believe that in 20 years hence, these three will be hailed as being among the most influential economists of our times in terms of having deeply influenced the trajectory of economic policy making. Interestingly, none are American and all three are Frenchmen.

Tuesday, October 15, 2019

Is Japan peak-urbanisation?

Japan has been the trend-setter for many themes in the economy and the society. The latest could be in mapping the trajectory of urbanisation. In fact, Japan could represent peak-urbanisation. 

Bloomberg has an excellent article,
When it comes to Japan’s economy, there’s actually two of them. In Japan A, an urban-industrial corridor stretching about 300 miles from Tokyo through Osaka, you’ll find cutting-edge businesses and world-class wealth. In Japan B, which is just about everywhere else, small cities and towns are dying as people move to Japan A in search of opportunity. While other major developed economies are headed down a similar path, Japan has a head start on them when it comes to aging and depopulation, making it a cautionary tale for policy makers across the globe... Japan A, in which about half of the country’s 126 million people live on just 14% of the landmass... More than 80% of towns that replied to an agriculture ministry survey last year said they need to take steps to help residents who find it difficult to obtain groceries, with almost all citing aging as a reason. From 2002-2017, more than 7,000 public schools across Japan shut their doors, the majority in rural areas, as the country’s birthrate remained mired well below replacement level. As more schools close and other services disappear or become harder to access, young families will have even more reason to flock to the cities.
And this is the clincher, or peak-urbanisation, at least for Japan,
Japan will fare better in the 21st century if it reinvents itself as more of a city-state than a continental nation, said Kotaro Kuwazu, executive fellow at the Nomura Research Institute, one of Japan’s most prominent think tanks. Cities will drive the future, so to compete globally Japan should give more resources and power to Tokyo – or what will become the Tokyo megalopolis, he said.
Is this unique to Japan or is Japan a portend of things to come for the others?

Drawing the analogy of physics, a city generates positive centripetal and centrifugal forces. The former attracts migrants towards it, and the latter generates positive externalities on the conurbation and beyond. The desirable state of affairs is a balance between the two forces. If the former is disproportionately high, then development gets concentrated within the core and the periphery withers. The metropole becomes the banyan tree which crowds-out other growth.

I am inclined to believe that there are two progressive equilibriums with the trajectory of urbanisation. The first involves an evolution of numerous smaller towns co-existing with a few large cities. The growth in the larger towns and their emergence as metropolises feed their peripheral towns. This was the one which developed countries followed in their urbanisation pathway. It allows for spatial spreading out of the gains from urbanisation and promotes a very orderly structural transformation.

Then, spurred by certain factors (and this may be unique to regions and countries) and the dynamics of the modern economy, the centripetal forces come to dominate, and instead of feeding the periphery, the larger cities end up squeezing growth outside. A second equilibrium starts to emerge where a handful of very large cities become the big banyan trees and the hinterland struggles. This results in the concentration of economic activity around a few clusters/regions, with decaying hinterlands.

It is perhaps the case that developing countries are still in the first phase. This is especially likely with larger developing countries like India. However, for whatever reasons, there is also a danger of going down the second pathway prematurely. Would rapid urbanisation result in this transition? What would be the socio-economic and political consequences of such transitions? Which Indian states manifest such a transition? Andhra Pradesh?