Weekend reading links

1. Globalised nature of supply chains is captured in the form of the supply chain of the Chevrolet Silverado.

The high-margin General Motors model, which costs roughly $40,000-$70,000, relies on one of the most complex, international and interconnected automotive supply chains, making it particularly vulnerable to the US president’s threat to impose 25 per cent tariffs on Canada and Mexico. Of the 673,000 Silverados produced last year, 31 per cent were built at GM’s factory in the Mexican city of Silao and 20 per cent at its plant in Oshawa, Canada. But even for the roughly half manufactured at three US plants in Michigan and Indiana, it is likely that the power steering and door trim panels were built in Mexico; the rear lighting in Canada; the airbag module in Germany; and the centre stack display in Japan, according to S&P Global Mobility data... Data compiled by Export Genius shows that key components in Silverados are heavily dependent on parts imported from Mexico. The country’s exports of parts for the vehicle were worth almost $30bn last year, with braking systems alone accounting for $4.3bn.

2. Russia was the biggest beneficiary of the increased natural gas price from its invasion of Ukraine. The other beneficiary was Norway!

In 2022 and 2023 (until European gas-importing countries were able to build LNG import terminals) Norway received excess natural gas export revenues of €109bn, according to estimates by the Norwegian Ministry of Finance. Norway’s 78 per cent marginal tax on profits in the oil and gas sector, along with returns on the government’s direct investments in oil and gasfields, and dividends from its ownership share in its parastatal oil company Equinor, ensured that the lion’s share of this windfall went into the country’s coffers while a much smaller share was retained by the companies that produced the gas. Oil and gas companies operating in Norway responded to the rise in prices by increasing production. Markets did their job of allocating scarce gas supplies to their most efficient use, in many cases mitigated by energy subsidies... But Norway’s government has not recognised its windfall as profits from the war. This year it allocated a measly €3bn to support Ukraine’s desperate war effort... The value of Norway’s war windfall is almost equivalent to all US military and civilian support for Ukraine to date... Any increase in Norway’s support for Ukraine, they argue, should be subject to the national spending rule that stipulates no more than 3 per cent of the value of its sovereign wealth fund can be spent each year.

3. Steve Bannon and Donald Trump are not being whimsical when seeking closer ties with Russia, but are merely following the attitudes of their electoral base. 

Similarly, a large share of Republican voters support ending aid to Ukraine.

4.  Excellent tribute by Tim Harford to the late Donald Shoup, the father of "parking" economics. Some insights

Shoup reckoned that in a small Los Angeles neighbourhood — just 15 blocks — drivers collectively drove an extra million miles a year in their hunt for a good spot. “Shoup concluded that nearly one-third of all the cars in parking-scarce neighbourhoods were looking for a place to park,” writes Grabar... An apartment parking lot would be vacant during the day, while the office and retail would be empty at night. Regulatory parking minimums did not allow for sensible ideas such as the idea that an apartment building might share parking with a neighbouring mall... given that each new parking space cost thousands of dollars to provide, and given that there were at least three spaces per vehicle, the value of all the parking spaces in the US exceeded the value of all the cars... Shoup suggested solutions: abolish regulatory parking minimums, introduce parking meters and set the prices sufficiently high that people don’t have to waste time looking for a space — although they may instead walk, cycle, switch to public transport or drive at a less busy time. But the game-changing idea was to propose that parking revenue from kerbside meters should be invested in local improvements to the streetscape such as litter collection, tree-planting or pleasantly paved sidewalks. This, says M Nolan Gray, one of Shoup’s many acolytes, was his “greatest contribution”. Locals stopped opposing parking meters, and started demanding them.

5. Stanley Druckenmiller, founder of Duquesne Capital Management hedge fund and formerly George Soros's right hand man, may be the most influential Wall Street personality in the Trump administration through his two proteges - Scott Bessant, Treasury Secretary, and Kevin Warsh, the most likely successor to Jay Powell.

7. Amidst the extreme polarisation in US politics, the one area where the Republicans and Democrats may be converging is in anti-trust. This is borne out by the bipartisan consensus on the nomination of Oxford-educated and business concentration wary Gail Slater to succeed Jonathan Kanter and head the Justice Department's anti-trust division. 

Slater embodies the unlikely alignment of progressives who support tough antitrust enforcement and a new generation of populist conservatives helmed by vice-president JD Vance, who has called for the break-up of Google. While the motivation of the two groups differ — progressives look to curb anti-competitive behaviour and corporate power while Maga populists also aim to clamp down on platforms and companies they accuse of censoring conservative voices — the unlikely bipartisanship has spooked Wall Street.

6. As tariffs rise, here's a summary of the trade-weighted tariffs of major countries.

The trade-weighted US tariff of 2.2 per cent is lower than that of any of its trading partners, except Japan at 1.7 per cent. The European Union’s stands at 2.7 per cent, China at 3 per cent, Canada at 3.4 per cent, Mexico at 3.9 per cent, Vietnam at 5 per cent, Brazil at 6.7 per cent, South Korea at 8.4 per cent, and India—labelled by Trump as the “tariff king”—at 12 per cent.

7. Maurice Obstfeld makes some important points.

The trade balance equals what an economy produces minus total spending on consumption and investment. It is therefore linked to manufacturing output and employment. This is not because importing more lowers GDP. Rather, when demand rises beyond output in an economy close to full employment, as in the US today, part of that higher demand is for non-tradeable goods. As supply expands to meet demand, production inputs including labour are drawn away from tradeable sectors like manufacturing. Demand for tradeable goods is thus satisfied by imports — the trade deficit grows and manufacturing shrinks. Tariffs do not necessarily push the balance between income and spending in one direction or the other, which is why they don’t improve the trade balance or manufacturing employment. Tariffs will cause the currency to strengthen... This both raises imports and harms exports. Tariffs also hurt exports by raising the prices of critical intermediate goods... Tariff talk distracts us from the appropriate economic policies to help America. Better targeted policies could include a more redistributive tax system, limits to corporate market power, further healthcare reform, and workforce development. The Trump administration is offering none of these.

8. American corruption fact of the day  

Mr. Trump’s post-election fund-raising... inaugural committee, which is a separate entity, brought in more than $170 million in private donations as of early January, a record... Among them are the technology companies Amazon, Meta, Google and Microsoft, each of which donated $1 million. Kraken, a cryptocurrency exchange that was sued by the Securities and Exchange Commission in 2023, put in $1 million as well. On Monday, the S.E.C. said it was dropping the case voluntarily. Last week, it dismissed a suit against another cryptocurrency exchange, Coinbase, which also donated $1 million to Mr. Trump’s inauguration.

9. DOGE takes the chainsaw to consulting firms working with US federal government agencies. 

10. Indonesia's middle class is shrinking, even as the new President, Probowo Subianto, seeks to turn Indonesia to a developed country by 2045 with an annual growth rate of 8%.

The number of Indonesians in the middle class had fallen to 47.9mn by March 2024, down from a peak of about 60mn in 2018, according to the most recent government data. Indonesia defines its middle class as those who spend Rp2mn-Rp9.9mn ($122-$605) a month. In the four years to 2018, the middle class grew by 21mn. The middle class accounted for 17 per cent of the population last year, down from as much as 23 per cent in 2018. Indonesia has also seen an increase in the number of people in the “aspiring middle class” and “vulnerable” categories, indicating a reversal in economic progress, said analysts. At the same time, employment in the informal sector — typically poorly paid and insecure — has risen to 59 per cent in 2023 from 57 per cent in 2018, according to government data...

“The culprit for this is the inability to produce jobs in the formal sector,” said Chatib Basri, a former finance minister who is now advising the government on the economy. “From 2019, most of the jobs created were basically in the informal sector.” Such growth results in weaker consumer spending and lowers tax collection, said Eko Listiyanto, vice-director of the Institute for Development of Economics and Finance. Manufacturing, a mainstay of middle-class jobs, as a contributor to GDP has dropped steadily over the past two decades. Instead, resource-rich Indonesia has focused on developing its commodities sector.

11. FT reports that Chinese competition and high electricity prices annihilated the US aluminium industry. President Trump has raised tariffs on aluminium imports from 10% to 25%.

The downturn in the US industry is being driven above all by high energy costs. And they show no sign of abating... “For aluminium, everything comes down to electricity,” said Annie Sartor of Industrious Labs, a non-profit focused on the decarbonisation of heavy industry. “There’s a phrase that aluminium is electricity in solid form.” New Madrid is no exception. “This smelter uses more electricity in 24 hours than the whole city of Springfield, Missouri,” said Lester. That is why the recent rise in power prices has been so painful for producers. The average cost of electricity for US smelters is expected to rise to $36 per megawatt hour in 2025, up from $33/MWh in 2024, according to CRU Group, a commodity data company. An industry veteran, Lester has had a ringside seat at the decline of American aluminium. When he started out, the US had 34 smelters — now it has four. It produced 30 per cent of the world’s aluminium in 1980 — now it accounts for just 1 per cent.

12. Aid facts of the day.

Rich countries spent $256bn (or 0.4% of GDP) on foreign aid last year—enough to provide sub-Saharan African governments with a sum as large as their total tax revenues. Only a sliver of the spending will have gone to cultural causes, funding the sort of pro-democracy charities and independent newspapers that maga types despise. Around a quarter will have been humanitarian aid (covering disaster relief and refugees) and health funding (such as hiv treatment, vaccines and so on)... Development spending accounts for almost three-quarters of all aid. It most often subsidises favoured industries, frequently funds infrastructure construction and sometimes pays the salaries of teachers. The average Malawian has had more money spent on them by international agencies than by their own government every year since the country gained independence from Britain in 1964... 

In 2004 William Easterly of New York University and co-authors found that, from 1970 to 1997, aid was just as likely to shrink the world’s poorest economies as to help them grow. A year later the World Bank produced a post mortem on two decades of development aid, poring over the history of its recipients. The researchers concluded that its grants and loans did not move the needle on growth. In 2019 the IMF reached a similar conclusion. As Charles Kenny of the Centre for Global Development, a think-tank, notes: “There is no country that has really grown from aid.”... In 2005 David Dollar and Jakob Svensson, both then of the World Bank, and Dani Rodrik of Harvard University, looked at disbursals tied to political reforms—and could not find a country where they had produced better policy... In 2015 Axel Dreher of Heidelberg University and Steffen Lohmann, then at the University of Göttingen, looked at local economic activity after the building of schools, social housing and other projects in a range of locations, and found no increase in the amount of electric light, their proxy for economic growth... And instead of strengthening recipient countries’ ability to provide public services, aid often weakens it. The IMF has found that more development spending tends to result in lower taxes. Last year Avi Ahuja of New York University concluded that it produces less competitive political systems, as incumbents wield the cash to win votes.

And more here

In 2023, the latest year for which there are comparable data, rich Western countries spent $60bn on aid in Africa, which is 27% of global aid spending by these countries. For the median African country aid accounts for about 4% of gross national income (gni), though it ranges from less than 0.5% in fairly rich countries like South Africa to 27% in very poor ones such as Central African Republic (see map).

A study published in 2023 by academics at Lund University in Sweden found that aid led to weaker fiscal capacity in African democracies, suggesting it got in the way of social contracts between the taxed and the taxer. “In effect, aid-dependent democracies become more autocratic,” say the authors.

Also Martin Wolf on aid.  

13. Livemint points to the differences between tariffs imposed by India and US. At the aggregate level, weighted average tariff gap has declined sharply from 22.9 percentage points in 2000 to just 2.5 percentage points in 2022.

At the broad sectoral level.

And at the product level.

14. Fascinating long read about the complex financial structure of the Canadian PE firm Brookfield Corporation, especially on its related party transactions where it's both the buyer and seller. The article describes the sale of One Liberty Plaza in Manhattan. 

A rare transaction in a moribund market for office towers, it received little publicity because the building’s ultimate owner, Canada’s Brookfield Corporation, was both the buyer and the seller. One of the world’s largest and most complex financial conglomerates, Brookfield sold property to itself like this dozens of times in 2024, using $1.4bn from its insurance arm to finance transactions that supported its “distributable earnings” — a non-standard measure of profit that underpins the corporation’s $90bn stock market valuation. These earnings were then recycled back into the portfolio in a circular flow of cash that is attracting scrutiny of both the relative opacity of Brookfield’s accounting practices and how it juggles its vast global portfolio of real estate...

Such trades support an expansive but lossmaking portfolio of more than 200 malls and offices dotting skylines around the world, including London’s Canary Wharf, One Manhattan West and the Las Vegas Fashion Show mall. The transactions pose questions about the quality of Brookfield Corporation’s earnings, and the valuation of assets held to pay annuity policies at the Brookfield-owned insurance businesses that trade with other parts of the conglomerate. They also raise the question of whether Brookfield and chief executive Bruce Flatt are presenting a sufficiently transparent picture of the organisation — a labyrinth containing thousands of entities, the interconnected funds, partnerships, trusts and companies that control $1tn of assets. Flatt, an accountant by training, owns a third of the Bermuda trust that appoints half the board of Brookfield Corporation in Toronto, the topmost of six listed companies operating in real estate, private equity, infrastructure, green energy, insurance and asset management. Brookfield also exercises control over a wide range of businesses and investment funds even though it often owns only a small part of them... Brookfield is a fiduciary that manages assets and money for public sector and union pension funds, annuity holders and investment funds. It runs critical infrastructure, is responsible for huge sums in long-term liabilities, and operates regulated businesses in many jurisdictions.

15. The size of the US Treasury market has doubled in the last decade!

16. High multiplier of government R&D spending.

In a comprehensive study, Andrew Fieldhouse and Karel Mertens classify major changes in non-defence R&D funding by the DoE, Nasa, NIH and NSF over the postwar period. They estimate implied returns of as much as 200 per cent — raising US economic output by $2 per dollar of funding. This is substantially higher than recent estimates of returns to private R&D. According to the Congressional Budget Office, the high returns to public funding are more than 10 times that on public investment in infrastructure. With the higher tax revenue generated from additional GDP, an increase in R&D funding more than pays for itself. In aggregate, productivity gains from federal R&D funding are substantial. Indeed, Fieldhouse and Mertens estimate that government-funded R&D amounts to about one-fifth of productivity growth (measured as output growth less all input growth) in the US since the second world war.

17. Business Standard points to a new study by ICAR-National Institute of Agricultural Economics and Policy Research which finds limited outreach of MSP operations. 

The findings indicate that only 15 per cent of paddy and 9.6 per cent of wheat farmers engage with the procurement system. Moreover, it remains confined to mostly large farmers. Small and marginal farmers, despite producing 53.6 per cent of paddy and 45 per cent of wheat, have low participation in public procurement. The direct relationship between participation in the MSP-backed procurement system and farm size arises because small and marginal farmers are likely to have low awareness about the procurement system, and are often constrained by their limited scale of production.

Some thoughts on the gig economy

The Ken has a very good article which argues persuasively that the “VCs and techies are turning India to a nation of hired hands”. It focuses on e-commerce and hyperlocal firms (Amazon, Flipkart, Swiggy, Zomato, Blinkit, Zepto, Bigbasket etc.) that employ 20-30% of the country’s 11.2 million gig workers. 

Zomato, Swiggy, logistics firm Delhivery, and beauty-and-lifestyle e-tailer Nykaa have a combined market value of $40 billion. Sure, all these companies have great tech chops, brand equity, and sizeable operations. But their appeal boils down to one thing: a steady supply of low-paid packers and riders. Take that away, and the magic disappears… You pay for the privilege of not having to rub shoulders with those of lesser means. Either you believe your time is better utilised elsewhere, or parting with a few hundred rupees isn’t going to break the bank even if you have nothing better to do.

Gig economy work has emerged as one of the main job creators at a time when formal sector job creation has been weak. As the article estimates, India produces 1.5 million new engineers from 8 million graduates, of whom only four in ten are employable, and only 10% will actually get jobs. 

Whether we like it or not, the gig economy is here to stay. At a time when jobs at the lowest end of the formal labour market are scarce, they are a major source to absorb the millions joining the workforce each year. However, the emergence of the gig economy as a major source of incremental job creation raises several concerns. This post examines some of them. 

The fundamental idea behind the gig economy is paying a price for convenience and time. Those who prefer greater leisure and are time-poor exchange time with time-rich people for a price. It involves the outsourcing of the regular activities that people do in their daily lives - cooking, shopping for groceries and vegetables, buying milk, owning a car and driving, running errands, doing small home repairs, dog walking or pet minding, standing in a queue, etc. Some people prefer to avoid the hassle associated with these activities and save on the time required. 

This raises the question of how big this market is. How many Indians can afford the price for such outsourced work?

For a start, since for the vast majority of Indian households, the marginal value of the rupee is very high and time is very low, they are unlikely to pay a premium, even a small premium, to save it. Further, since Indian customers are notoriously (for businesses) price-sensitive, the margins available to businesses on all these activities will be very small. Finally, the Indian consumption class for such kind of services is too small to be able to build several large and profitable businesses. Therefore, the gig economy firms serve the top end of the market, far less than 10% of households.

Then, there’s the question of the economic productivity associated with such sectors. How much productivity impact do these jobs have on the economy?

I cannot think of many direct productivity improvements associated with these jobs on gig workers themselves. The scope of these jobs is too narrow and limited to provide opportunities for the workers to improve productivity in any meaningful manner, nor for the employers to invest in their human capital. Besides, there’s very little space for likely occupational mobility for an Uber of Swiggy driver or Amazon warehouse worker. 

For sure, there are some productivity improvement opportunities. The companies themselves may invest in IT systems and management techniques to improve their logistics; and the users would use their time saved in other productive pursuits. Both are likely to be limited, given the nature of these activities and the smaller size of the Indian market. 

Some of the market segmentation is straight out fad. Consider the current craze about quick-commerce and hyper-localisation. Or the segmentation of e-commerce among different categories of products or that of clothing e-commerce firms among different categories of consumers. Or the emerging segmentation in cooked food business. I struggle with their addresseable markets and their likely productivity improvements. 

Further, such market segmentation is perhaps at its highest in India. We must introspect whether this is the kind of innovation India needs. 

In this context, I want to make the distinction between the gig economy and those like outsourcing and off-shoring. Unlike the former, the latter involves genuine productivity improvements. In fact, the basis for outsourcing is that these works are done more productively and efficiently by someone else with a comparative advantage. It’s a genuine productivity exchange. Gig work, as discussed above, is largely about intermediation based on time and convenience arbitrage. 

Then, there’s the issue of resource misallocation. Large amounts of scarce risk capital are being burnt on the gig economy firms. By some estimates, since 2010, over $20 billion or 13% of all tech funding has gone into gig work startups (multiply this if you add the investments made by Amazon, Walmart etc.). Some of the best human resource talent (IT engineers, product architects and managers etc.) are being lured by firms and startups who are essentially engaged in some form of low-skilled time and convenience arbitraging. 

There are also ethical and legal aspects. The gig workers are the real body-shoppers, where time-rich people lend their time and bodies (and some basic universal skills) to time-poor people. And when you have large companies as platforms that use a technology that lends to network effects and high entry barriers and are engaged in continuous iteration to improve efficiencies and lower costs, it’s only a matter of time before gig jobs become an exercise of labour exploitation. 

On the legal side, we know about the independent contractor-employee debate. The lop-sided employee-employer relationship, coupled with the business entry barriers and the abundance of cheap labour supply, means that wage repression and worker exploitation are inevitable, thereby necessitating regulation, especially on the labour side. 

It was only natural that a market emerged under unregulated or loosely regulated conditions. But now that the market is massive and mature, it’s only appropriate that it get appropriately regulated.

Finally, there’s the economic impact of such sectors. In a very short time (less than a decade), the gig economy has come to employ more than twice the number of workers employed by the software industry, which is nearly half a century old. It’s perhaps the single largest job creating market segment. 

As I have blogged on numerous occasions (this, this, this, and this), sustained high growth requires broad-based economic growth brought about by the creation of productive jobs that pay well. The overwhelming majority of gig economy jobs have a take-home pay in the range of Rs 15000-20000. Their wages have a high level of stickiness in a labour market overflowing with new entrants who face an acute deficiency of alternatives. 

Financially, the gig workers belong to the category of labour that includes construction labour, security guards, and household help. All of them pay in similar ranges, have limited occupational mobility, and are characterised by low skills and productivity. Given that the vast majority of these jobs are in the urban areas, they are hardly the kind of incomes required to support meaningful non-subsistence consumption.

Tax assessments and arrear recoveries

I blogged here arguing, among other things, that collecting tax and non-tax arrears is a very challenging endeavour. Central and state tax agencies have large amounts locked up in such arrears, including litigation. Only a tiny proportion of these amounts is ever realised. 

Arrears refer to any amount due from the taxpayer due to confirmation of demands due to original orders, appeals, and tribunal/court orders. They are in turn classified as recoverable and irrecoverable (those where there are court stay orders). Let’s take a look at the magnitude of these arrears of the central government’s direct and indirect tax departments. 

The FT has a good graphic that informs that disputed tax arrears amount to $186 bn, rising a staggering 1140% from $15 bn in 2010 to $186 bn in 2024. 

This is the story of the $1.4 bn tax demand raised on Volkswagen in September 2024 on what appears to be a case of legitimate tax minimisation to skirt around a clear loophole in the tax structure. 

The CAG’s compliance audit report on GST for 2022 reveals some interesting insights on service and excise tax under the Central Excise Act 1944. The Table shows limited progress in recovery of arrears.

Realisation from closed units is negligible.

The age-wise break-up of pending arrears is in the table.

The two graphics below show the percentage of detections and recoveries in GST…

… and Excise and Service Tax.

On the direct taxes side, the CAG’s compliance audit on the outstanding demand on income tax assessees for FY22 reveals the following table (HT: The Wire).

An analysis of ‘total outstanding demand’ and demand classified by the ITD as ‘difficult to recover’ vis-à-vis the ‘total direct tax collection’ for the financial years 2016-17, 2017-18, 2018-19 and 2019-20 showed that total outstanding demand had exceeded direct tax collections consistently. The demand classified by the ITD as 'difficult to recover' was more than 97 per cent of the total outstanding demand in all these years. 

The Table captures the different reasons for the demand difficult to recover. 

The amounts locked up in litigation range from 59% to 77%. 

The figure of outstanding demand against the ‘assessees not traceable’ more than doubled in 2019-20 and tripled from 2017-18, despite linking PAN with Aadhaar being mandatory since July 2017. 

All compliance audit reports of CAG can be found here. 

A few observations.

1. Arrear collections are a dissipative endeavour. For a new officer or government, notwithstanding its persistence over the years, the large arrear pending provides an alluring attraction. A disproportionate amount of effort is expended on arrears with limited results. On a pure cost-benefit analysis, the realisations are often offset by the manpower costs involved, much less the opportunity costs from displaced efforts. 

2. There’s an iron law of arrears - the difficulty of collection increases exponentially with its age. The best time to collect an arrear is in the first year. Once it exceeds the first year, it becomes extremely difficult to recover. Tax authorities should, therefore, focus efforts on collecting dues pending for less than a year. 

3. Once a case goes into litigation, it’s inevitable that the assessee will litigate till the final court of appeal. This also means several years for which the amounts are locked in litigation. Finally, only a tiny share of those cases result in actual realisations. The amounts realised after the completion of litigation are likely to be rounding errors. 

4. It’s not out of place here to say that the courts also play their role in the accumulation of cases in litigation. While inordinate delays are the common culprit, a less-discussed contributor is the propensity in many courts to admit cases at various stages of investigation, adjudication, and appeal. The taxpayers tend to prefer this route since it allows them to pay a small amount and delay the due process before the tax authorities. Collusion among all stakeholders ensures that the case gets delayed interminably. 

In this context, I had blogged here with several actionable suggestions to address such excessive demands. 

Apart from procedural reforms, there’s also the need for some form of performance management of officers in tax departments. Specifically, there should be a mechanism to rigorously monitor the quality of their assessment and enforcement work. 

As a framework, allocation of cases for investigations should be based on signatures of high likelihood of evasion (also ideally high-value evasion for audits and inspections). Investigations should avoid false positives that harass innocent taxpayers with notices and procedural pain. Similarly, the quality of investigation and adjudication should strive to target deviations in the least invasive manner and should result in realisations that are close to the initial demand.

Accordingly, any investigation can be reduced to four stages - assignment of the case and issue of notice, detection of deviation and raising of preliminary demand, adjudication and issue of final demand, and collection. The detection rate (detected cases/total cases identified for issue of notice) is a measure of the quality of assignment or allocation. The ratio of final demand to initial demand is a measure of the quality of the investigation. The ratio of collection to the final demand raised is a measure of the quality of adjudication (and collection). Finally, there’s the average realisation per case, which is a measure of the combined quality of the tax enforcement work (this last metric will also ensure that officials don’t game the system by raising several small tax demands). 

These metrics can be customised based on the specific sequence of processes associated with each tax agency. 

Taken together, at a steady state and over the tenure of an officer, these four ratios should give a reliable assessment of the quality of the assignment, investigation, adjudication, and collection. It might, therefore, be useful for the tax authorities to devise benchmarks for each stage and have all tax officials performing these roles assessed for the duration of their tenures on these metrics. These performance metrics should inform the postings of officers and the assignment of cases. 

In fact, if historical data on these metrics can be assessed for each senior officer (along the lines discussed here), then it might be a good basis for identifying officers who have the propensity for aggressive demand-raising. The CBDT and CBIC could invite academic researchers and offer them access to their databases and have them analyse and generate the reports as required (while also allowing them to publish on the headline findings).  

Weekend reading links

1.  Ruchir Sharma points to the attractions of investing in China.

China now has more than 250 companies with a market cap of over $1bn and a free cash-flow yield of more than 10 per cent; the US has fewer than 150. Of those 250-odd China stocks, all but about 20 are in sectors other than tech, led by industrial and consumer discretionary businesses, so the opportunities are not just in the internet and AI... But by some measures, capitalism with Chinese characteristics is more competitive than its US rival. Large caps account for a smaller share of listed companies in China, leaving more room for newcomers. Among the 11 leading sectors, seven are less concentrated in China than in the US, meaning the top five businesses constitute a smaller share of each sector’s market cap. China’s tech sector is much less concentrated, which means a private upstart such as DeepSeek could rise in an environment less dominated by giants.

2. Interesting that amidst all talks of green transition in the US under Biden, the country continued to increase oil and gas extraction at an increased pace since 2016.

3. Good description of the bear and bull case for US equity markets with associated numbers.

4. Microsoft announces a breakthrough in quantum computing by unveiling Majorana 1, the world's first quantum chip powered by a topological core architecture. 

Microsoft’s ability to exploit a new kind of matter to create a new type of qubit (or quantum bit) promises to accelerate the development of reliable large-scale quantum computing... It’s kind of a generational technology like moving from vacuum tubes to a semiconductor. The advantages of Microsoft’s topological qubits are that they are fast and digitally controlled. That should enable them to scale more reliably to the 1mn qubit threshold that researchers consider necessary for sophisticated quantum computation. But it will still take years of experimental engineering before the company can deploy its quantum processing units (QPUs) in data centres alongside the classical graphics processing units (GPUs) that are currently powering the AI revolution. Nevertheless, the company still hopes to build a utility-scale quantum computer by the end of the decade configured to tackle a set of problems that no classical computer can address. By exploiting the special properties of a quantum computer, Zander reckons researchers will be able to develop new catalysts to break down microplastics, enhance the fertility of soils or develop new forms of self-healing concrete, for example.

A summary of the latest on quantum computing chip development - Google's Willow, IBM's Heron, Microsoft's Majorana 1, Amazon's Ocelot, and others. It's estimated that we are 15-30 years from any commercial chip deployment. 

5. In a paradigm breaking shift from its more than two decades of fiscal conservatism, Germany looks set to amend its 'debt brake'

Chancellor-in-waiting Friedrich Merz late on Tuesday agreed with the rival Social Democrats (SPD) to exempt defence spending above 1 per cent of GDP from Germany’s strict constitutional borrowing limit, set up a €500bn off-balance sheet vehicle for debt-funded infrastructure investment and loosen debt rules for states. Deutsche Bank economists described the deal as “one of the most historic paradigm shifts in German postwar history”, adding that both the “speed at which this is happening and the magnitude of the prospective fiscal expansion is reminiscent of German reunification”.

The plan is expected to open €1tn of additional borrowing over the next decade, more than a fifth of the country's GDP, for defence and infrastructure spending. Given its far lower debt to GDP ratio of 63%, Germany fortunately has enough fiscal space to accommodate such spending which is expected to rise to 84% over the decade. It has precedents in so far as similar spending spike happened in the aftermath of the reunification and boosted economic growth in the nineties. 

At the core of the problem has been a “debt brake”, written into Germany’s constitution in 2009 at the peak of the global financial crisis, that limited the government’s capacity to take on new debt to 0.35 per cent of GDP — one of the most stringent anti-borrowing laws in history. Much of the fiscal space that did exist was spent on the welfare state and social benefits. Merz’s plans bypass the debt brake by enabling the exclusion of everything over 1 per cent of GDP spent on defence. Goldman Sachs anticipates that the plan will drive German defence spending to as much as 3.5 per cent of GDP by 2027 — up from 2.1 per cent in 2024 and a mere 1.5 per cent in earlier years... Even with a debt-to-GDP ratio of around 84 per cent, German public leverage would be “still pretty favourable” compared with most peers, said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, pointing to ratios of 115 per cent in France and 124 per cent in the US.

The markets reacted in all the positive ways to the announcement.

Markets are applauding. As a Kiel Institute policy brief notes, the increase in German borrowing costs after the announcement was accompanied by rising stock prices, an appreciating euro, a steeper yield curve and stable default insurance — all pointing to improved growth expectations.

6. It's a measure of the unprecedented global power wielded by Donald Trump that his tirade against Chinese ownership of Panama Canal has led to the Hong Kong based CK Hutchison has decided to sell its ownership of two ports at either end of the Panama Canal to BlackRock. The deal involves the takeover of 43 ports, including the two, by a consortium headed by BlackRock and includes Global Infrastructure Partners (the private infrastructure investment company purchased by BlackRock last year), port operator Terminal Investment Ltd (TIL), and the world's biggest container shipping line, Mediterranean Shipping Company (MSC).

7. Good primer on the effects of tariff increases. Interesting that it confines to short-term costs and does not talk about the gains and the long-term impacts.

8. Efficiency maximisation, Amazon edition.

Amazon’s fulfilment centre in Shreveport, Louisiana — its most technologically advanced warehouse — has demonstrated the type of savings it can achieve with automation. The 3mn sq ft facility, which opened in September, uses robots at every stage of fulfilment and has achieved a 25 per cent cut in costs, according to Amazon, following a tenfold increase in robotics compared with its previous generation of warehouses... Shreveport features a range of mobile drive units, which are used to carry items across the warehouse, and advanced robotic arms that pick and sort items, cutting down on the number of human workers in the warehouse. The tech giant is also investing in robotics talent as part of a wider push to deploy AI large language models in its warehouse robots... 

While its retail business continues to be profitable, Amazon has forecast more modest growth across the group in the first quarter of this year, with a strong dollar knocking revenues. The US ecommerce group is pushing to lower delivery times, particularly for users of its Prime subscription service. This includes separating its logistics network into specific regions to ensure inventory is in place for same day deliveries... The group has deployed more than 750,000 mobile drive units since it acquired robotic start-up Kiva Systems in 2012. In recent years it has introduced Proteus, a fully autonomous lift vehicle that navigates sites independently using a set of sensors having been trained using AI. The company has also partnered with chipmaker Nvidia to develop “digital twins” of its warehouses to enable it to run thousands of simulated situations before deploying an autonomous robot.

9. Bjorn Lomborg interview in FT. He appears to have 12 hanging fruits, drawn from deep research evidence, that would cost $35 bn to add $1.1 trillion to developing world output and save 4.2 million lives a year. 

His favoured educational reform, for example, is to improve outcomes in countries such as Malawi by teaching children according to their level, not their age. Many children, crammed into massive classes, fall hopelessly behind. Lomborg’s solution is to teach for one hour a day using tablets with adaptive software, giving children the benefit of a good curriculum delivered at their own pace. Implementing it, according to his think-tank, would cost $9.8bn and deliver a $604bn boost to income through better-educated children. “This is spinach for the world. I want people to know about it.”

Ahem!

10. Donald Trump, Elon Musk, neo-colonialism, and corruption.

Foreign companies operating in South Africa have to navigate Broad-Based Black Economic Empowerment (B-BBEE) regulations set by the Department of Trade, Industry and Competition, and in the case of certain multinationals, such as auto manufacturers, where ownership quotas can’t be applied, “equity-equivalent” programs require investments that drive Black participation in supply chains to meet empowerment targets. This doesn’t apply in the case of communications companies, though, which need to be 30% owned by “previously disadvantaged” people to qualify for a license.

Musk wants to launch his Starlink satellite-communications service in South Africa, but that requires him finding an equity partner for a South African operation to qualify for a license. “Change the laws,” Musk is said to have repeatedly told Ramaphosa during a Feb. 3 meeting. On Feb. 5, Musk’s SpaceX (representing Starlink) withdrew from the Independent Communications Authority of South Africa’s hearings into a proposed licensing framework for satellite services. Trump’s executive order blasting South Africa came two days later... Donald Trump’s Feb. 7 executive order decried the “egregious actions of the Republic of South Africa,” claiming its 2024 Expropriation Act, which allows the state to seize land without compensation in certain scenarios, has been used to dispossess White people of their property.

11. The best illustration that America is now a country of rule by law, where law is that decided by the President and his cronies, comes from the decision to cull USAID programs. 

In Afghanistan, women’s education programmes shut down. Health services were suspended for refugees from Myanmar taking shelter in camps in Thailand. In Colombia, anti-narcotrafficking helicopters were suddenly idle. But African countries were hit particularly hard. In Uganda, medical trials were halted. Life-saving medicines are gathering dust in warehouses in Malawi, where more than half of healthcare spending is dependent on US and foreign aid. Perhaps greatest of all has been the impact on the decades-long battle to end the Aids pandemic... The President’s Emergency Plan for Aids Relief, known as Pepfar, screeched to a halt. Launched by George W Bush in 2003, a year in which Aids killed more than three million people, the multibillion-dollar health initiative is based on a simple premise that everybody deserves access to antiretrovirals that suppress the spread of HIV... The initiative changed the trajectory of the Aids pandemic. To date, Pepfar has saved more than 26 million lives and prevented roughly 1,000 babies a day from being born with the HIV virus. Pregnant women can avoid passing on the virus to their babies by taking medications that either suppress their own viral load to undetectable levels, or pass through the placenta to the baby’s body... 

Mitchell Warren, the executive director of the Aids Vaccine Advocacy Coalition (Avac), a New York-based campaigning group, called Pepfar “inarguably the best investment ever in global health and development”. “We took 20 years to build up what has taken less than four weeks to dismantle,” he said, reflecting on the chaos caused by Trump’s move... Within days, the 340,000 global healthcare workers whose salaries depend on the Pepfar programme — doctors, nurses, lab assistants and community outreach workers — received “stop-work orders”. More than 20 million HIV-positive people like Samkelo no longer knew when their next dose of antiretrovirals would come. Already, since January 24, at least 15,000 premature deaths have occurred because of the funding gap, according to a Pepfar tracker set up to monitor the impact.

The surest sign of the phasing out of Rule of Law and phasing in of Rule by Law comes when one hears news like this.

Congressional Republicans, egged on by Elon Musk and other top allies of President Trump, are escalating calls to remove federal judges who stand in the way of administration efforts to overhaul the government. The outcry is threatening yet another assault on the constitutional guardrails that constrain the executive branch... “The only way to restore rule of the people in America is to impeach judges,” Mr. Musk wrote this week on X, his social media platform, in one of multiple posts demanding that uncooperative federal judges be ousted from their lifetime seats on the bench.

12. Two maps that convey the striking reversal of global trade leadership between the US and China.

13. Xiaomi does what Apple could not.

After nearly a decade of trying, Apple finally gave up its effort to produce an electric car last year, canceling a project that soaked up $10 billion. But last year in China, the electronics maker Xiaomi launched its first electric car after just three years of development and delivered 135,000 vehicles. It has vowed to double that number in 2025. Xiaomi’s ability to succeed where Apple could not shows how thoroughly China has come to dominate the supply chain for electric vehicles. Chinese companies have mastered electric vehicle manufacturing. By tapping that infrastructure, Xiaomi was able to get components quickly and cheaply. More Chinese electric vehicle companies — including Leapmotor, Li Auto and Seres Group — are starting to turn a profit after burning cash for years in their intense competition for the world’s largest auto market... The telecommunications giant Huawei, which the U.S. government has targeted with sanctions and legal action for years, is making autonomous driving software. Huawei has teamed up with multiple Chinese automakers, including Seres Group and the state-owned firms SAIC Motor, BAIC and Chery.

14. Two striking graphics about the masculinisation of the US society. First on gender roles.

The second on society becoming too feminine.

15. Javier Blas introduces a dose of realism to the debate on the critical minerals squeeze due to Chinese restrictions.

Beijing has targeted five metals: tungsten, tellurium, bismuth, molybdenum and indium. China is the biggest producer of all of them...My calculations suggest the US spends about $300 million importing tungsten; roughly $30 million on bismuth; about $90 million on indium; and less than $1 million on tellurium. The total annual cost for all four comes to less than $500 million... it’s the same trend as the one observed in the much-hyped rare earth elements sector. Fears abound, but the cost of importing the 17 metals that form that category is tiny. The US Geological Survey calculated rare earth imports at less than $200 million in 2023... 

The import bill of minor metals could increase by five, 10, 20, even 50 times, and not amount to more than a rounding error for the US economy. Prices, however, are lower today than they were a decade ago. Did you notice when they were high? Nope; for a reason. Indium, for example, traded as high as $800 per kilogram in 2011; it’s now at $345. The cost of the most common compound of tungsten, one of the much-hyped critical minerals, is trading 25% below its 2011 peak. Even if prices rise because of Chinese restrictions, recycling will increase, American engineers will work to reduce their use and alternatives will be found. High prices cure high prices.

This is a good primer on rare earth minerals and their refining (where, in particular, China has a 30 year headstart advantage). 

16. Some facts on employment increase in the Government of India, which rose 4% from 3.17 mn to 3.3 mn from March 2022 to March 2024. 

But what contributed to the rise in the civilian staff strength in the last three years? Note that over 86 per cent of the total civilian staff is accounted for by just four heads — Indian Railways, posts, central police forces, and tax departments... And even as the overall civilian staff strength has risen by over 489,000 in the last three years, the Indian Railways has seen a small increase during the same periods—about 3,000 employees. Of the four heads, the postal department and the police saw the largest increase by over 179,000 and 143,000, respectively, in the last three years. The two tax departments (overseeing direct and indirect taxes) have seen an increase in their staff strength by over 71,000, bringing their total strength to over 172,000.

17. As defence spending rises globally, it may be end of the peace dividend.