UK's broadband deregulation has spurred competition and increased coverage

This post will discuss the UK’s broadband penetration and highlight the takeaways, which are relevant not just to the telecommunications sector but more widely across utilities. 

The rapid expansion of the UK’s wireline broadband penetration, from just 12% of households with access in January 2020 to 78% by mid-2025, is a spectacular success in rapid infrastructure expansion across sectors. In Northern Ireland, 96% of homes have access to full-fibre connections. 

It has come on the back of some important measures taken by Ofcom to expand fibre rollout and coverage, which have aligned the incentives of incumbents and attracted large private investments. Specifically, it led to the emergence of smaller alternative networks (Altnets) that have led to the expansion of broadband penetration. 

Ofcom introduced the Business Connectivity Market Review in 2016. This imposed restrictions on Openreach, including a requirement to give others access to its unlit strands of fibre… a strategic directive from the UK government in 2019, which asked Ofcom to set out a framework of “stable and long-term regulation that encourages network investment”. To meet that goal, Ofcom updated its regulatory framework for the fixed broadband market in 2021… The framework — known as Wholesale Fixed Telecoms Market Review — gave other providers access to Openreach’s ducts and poles. At the same time, Ofcom agreed not to introduce price caps on the company, in an effort to encourage investment through the promise of financial return, something known as the “fair bet”. 

The result of the change was swift… “[Ofcom’s proposals] gave infrastructure investors — notably BT’s Openreach unit — the regulatory certainty to commit to large-scale fibre deployments . . . and ‘build like fury’,” adds CCS’s Mann. But Ofcom’s decision had another consequence: it opened the door to a new wave of so-called alternative networks, or altnets. These challengers — buoyed by the more favourable regulatory environment and the promise of up to £5bn in government funds to support rollout to “hard to reach” homes — began to court investors… the number of homes passed by altnet providers increased from 8.2mn in 2022 to more 16.4mn by 2025.

The Altnets have adopted a wide variety of geographic models in their expansion, though by-and-large preferring to avoid geographical overlap among each other, though not with Openreach.

The UK’s broadband expansion trajectory has useful learnings for other countries. In 2006, the UK created Openreach by separating BT’s network and ducts into a distinct entity to drive broadband penetration. 

Openreach is the company that builds, maintains, and operates the UK’s largest “last mile” broadband network, used by most broadband providers. It manages the physical network of fibre cables, copper lines, and street cabinets that connect homes and businesses to major exchanges, where internet traffic passes into the provider’s core network for routing across the UK. Openreach runs as a separate, highly regulated division of BT… Openreach is regulated by Ofcom, the UK’s communications regulator. Ofcom oversees how Openreach operates to ensure it provides fair and equal access to its broadband network for all broadband service providers. Because Openreach is part of the BT Group, Ofcom introduced strict rules to keep it functionally separate from BT’s retail business. This independence helps maintain a level playing field, allowing other broadband providers such as Sky, TalkTalk, and Vodafone to use the Openreach network on the same terms as BT. Ofcom regularly reviews Openreach’s performance, pricing, and investment plans to make sure customers benefit from competitive broadband services and continued upgrades to the UK’s fibre network… A process called ‘Local Loop Unbundling’ (LLU) allows Openreach to open up parts of its telephone exchange to ISPs who have their own networks. Throughout the UK, most exchanges are now LLU. Those that aren’t have a more limited range of broadband providers. 

In 2017, following criticism that Openreach was favouring BT over other broadband providers (e.g., their faults were not being attended to as fast as those of BT), Openreach was incorporated as a separate company, though a subsidiary of the BT Group. As of late 2025, its full fibre network has reached over 20 million homes and businesses, with a target of 30 million premises by the end of 2030.

This graphic captures the UK’s broadband configuration.

This is a good description of the broadband service provider landscape.

As a network operator, Openreach doesn’t sell broadband directly to businesses… Alongside Openreach, there are alternative network operators, or altnets… are independent broadband infrastructure operators that build and manage their own full fibre networks, separate from Openreach… in some cases, offer wholesale access to providers or sell directly through associated retail brands… Their purpose is to increase competition, speed up the UK’s fibre rollout, and connect areas that Openreach hasn’t yet reached. Altnets vary in scale and focus. Some, like CityFibre, build national networks and partner with broadband providers such as Vodafone Business, TalkTalk Business, and Zen. Others, including Hyperoptic, Community Fibre, Gigaclear, and Netomnia, focus on specific regions, business hubs, or rural communities. 

Altnets are also regulated by Ofcom, but are not subject to the same structural separation rules that apply to Openreach because they operate entirely independently. Despite this independence, altnets often rely on Openreach infrastructure for physical access routes. Through Openreach’s Physical Infrastructure Access (PIA) system, they can use existing ducts and poles to install fibre more quickly and cost-effectively, reducing disruption and avoiding duplicate street works… Openreach and altnets often overlapping or complementing each other as the UK’s fibre rollout expands. Openreach has been replacing its copper wires with fibre by blowing optic fibre cables along its ducts with air compressors and stringing fibre from poles to houses. 

The altnets have attracted large funding, especially from private equity funds. In July 2025, CityFibre, the biggest altnet reaching 4.5 million premises, raised £2.3bn, taking the total fundraising by altnets since 2020 to £20bn. The 130-odd altnets cumulatively serve around 16.4 million premises. However, most of them are losing money, and there is an ongoing rush for consolidation through mergers.

To lower costs and thereby make subscriptions affordable, in March 2021 the British government initiated Project Gigabit, a £5 billion program designed to deliver lightning-fast, “gigabit-capable” broadband to homes and businesses, with a focus on rural and “hard-to-reach” areas. It is expected to reach 99% of UK premises by 2032. 

The Gigabit Broadband Voucher Scheme (GBVS) is a government programme run by Building Digital UK (BDUK) to help bring full fibre broadband to homes, small businesses, and community buildings in areas with poor connectivity. It offers funding worth up to £4,500 for each eligible property that gets connected, and in some areas, local councils provide additional top-up funding, which can increase this to more than £7,500. The funding doesn’t go to the homes or businesses themselves. Instead, it goes to an approved broadband supplier to help cover the cost of building the new fibre network. To access the scheme, several nearby homes and businesses need to club together and approach a registered supplier. The supplier then pools their vouchers, applies to BDUK for funding on their behalf, and builds the connection. Once the new network is live and confirmed to deliver gigabit speeds, BDUK pays the voucher money directly to the supplier. This reduces or removes the upfront installation costs for the homes or businesses taking part.

Ofwat has initiated several measures in recent years to nudge broadband penetration across UK.

As part of the measures, Ofcom will effectively freeze the wholesale fees Openreach charges for providing "superfast" data speeds of up to 40 megabits per second, which rely on copper links via fibre to the cabinet (FTTC) or older technologies… The price Openreach charges for faster and more reliable FTTP connections will remain unregulated. There is, however, one new restriction. Openreach will not be allowed to offer geographic discounts on its full-fibre wholesale services. A similar limitation already existed on its provision of “superfast” links. And Ofcom has said it will review all long-term discount arrangements offered by Openreach to its clients, and will intervene if necessary to prevent the firm from stifling investment by rivals… The altnets’ ability to profit from building rival networks would have come under pressure if they had been required to match new full-fibre price caps imposed on Openreach… 

If it set regulation too tight by capping wholesale prices at a low level, the risk was that BT and its fibre network rivals would be reluctant to invest the billions needed to roll out ultrafast broadband. If it loosened the reins it would be accused of going soft on BT, sparking anger from the likes of Sky, which use the Openreach network and would have to pass on the higher prices to their retail customers. By opting to impose no price controls on BT’s fibre product for a decade, Ofcom has chosen the second option, insisting that it is the only way to spark the frenzy of competitive network building needed to move the UK up into the broadband fast lane.

This has unleashed fierce competition involving the altnets. 

The altnets suffered £1.5bn net losses in 2024, while Openreach lost a net 828,000 customers in that year. The rivalry was unleashed by the telecoms regulator Ofcom in 2021. It capped the wholesale price that Openreach could charge retail providers such as TalkTalk for services carried over copper for the final stretch from street cabinets, but let it charge more for full fibre connections. Altnets were encouraged to take on Openreach by using its ducts and poles. This has been good for consumers: prices have been squeezed by cut-price offers, especially in areas with several network operators. But it has taken a toll on the altnets, with G.Network being sold to a distressed debt firm this month. Openreach now wants greater freedom to cut its wholesale prices in the most competitive areas but keep them higher in others.

Openreach itself has been losing customers as the altnets have expanded theirs. 

It is also important that, before the entry of the altnets and competition from them, the near monopoly of Openreach (80% of the market in 2016) was stalling fibre rollout in the UK.

Rather than updating its copper network to the most advanced fibre-to-the-premises (FTTP) infrastructure, Openreach had opted for a fibre-to-the-cabinet (FTTC) network model — a form of partial upgrade. Under this approach, copper lines across the country were replaced by fibre to small cabinets in neighbourhoods, where it then connected back to original copper lines that stretched to the home… The limitations of FTTC were evident. Not only was it a slower service, it was ultimately more expensive to maintain due to the copper element… Openreach continued to invest “in incremental upgrades to its existing copper network”, says Ben Harries, director of competition policy at Ofcom. “The rationale for that was that incumbents often prefer to sweat existing assets over investing in new ones”…

By the late 2010s, the UK’s lack of FTTP coverage was concerning the government and its regulator, which watched countries including Spain and Portugal rapidly adopt newer, faster, more reliable technology. The issue led to a series of fiery clashes between then BT chief Gavin Patterson and his counterpart at Ofcom, Sharon White, over Openreach’s slow rollout of FTTP. By 2016, things had escalated and the regulator ordered the telecoms company to legally separate Openreach from BT.

It is important to also note that while nearly 80% UK households have access to FTTH, just 38% of them have chosen to take connections as on July 2025. In general fibre subscriptions remain in the 15-40% households range across most developed countries.

The UK’s experience with broadband penetration has some general lessons for the infrastructure sector. Foremost, it highlights the importance of policy steering in guiding the course of sectoral growth. The UK government and Ofcom’s multiple interventions - the transfer of BT’s wire assets to Openreach, its incorporation as an arms-length subsidiary of BT, its non-discriminatory access to its unlit fibres to other service providers, removal of tariff ceilings on OFC network for a decade while retaining them on legacy wires, etc. - have been central to the UK’s success. All of these have been complemented by the UK government’s Project Gigabit scheme to facilitate broadband access in remote areas. 

An important principle underlying these measures was highlighted in the UK government’s strategic directive of 2019 that demanded Ofcom create the framework for “stable and long-term regulation that encourages network investment”. These measures gave businesses the confidence to invest for the long term. 

Each of these measures realigned distorted incentives, spurred entrepreneurship, and crowded in private capital. They have encouraged the entry of over a hundred altnets, who have shaken Openreach out of complacency (in the late 2010s, Ofcom clashed with BT over the slow pace of fibre rollout by Openreach), and the resultant competition has turbocharged broadband penetration in the country. 

The altnets have been critical for enabling last-mile delivery, a critical bottleneck in ensuring access to households. Interestingly, this last-mile access is being delivered neither through micro-entrepreneurs nor the legacy national internet service providers, but mainly through localised mid-sized enterprises.

For sure, many of the altnets are unlikely to survive the consolidation wave that is sweeping the market, and many investors will lose their shirts. This is the dynamics of the market playing out, as it has historically from railways and power generation, to telecommunications now.

Weekend reading links

1. Dame Sarah Mullally, 63, becomes the 106th Archbishop of Canterbury, the first woman to serve as the senior-most bishop of the 85 million-strong Anglican Communion since the role's creation for Augustine of Canterbury in 597 AD!

2. Kevin Warsh as Fed Chairman may pursue significant changes to the way the Fed sets monetary policy.

The Fed’s vast bond-buying programmes, which Warsh initially supported as a Fed governor during the financial crisis, are at the centre of the Trump administration’s allegations that the central bank is acting far beyond its remit to keep prices in check and maximise employment. The... quantitative easing, expanded the Fed’s balance sheet from less than $900bn in 2008 to a peak of almost $9tn. The balance sheet now stands at $6.6tn, following a three-year reversal of QE — dubbed “quantitative tightening” — that the rate-setting Federal Open Market Committee has recently paused amid signs banks were falling short of reserves. Warsh has said he would like to shrink it much further... Warsh in April said successive QE programmes meant politicians found it “considerably easier appropriating money knowing that the government’s financing costs would be subsidised by the central bank”... 

Warsh’s claims that the response to the pandemic “was the biggest monetary policy error in 45 years”... Along with shrinking the balance sheet, Warsh would like to change the Treasury-Fed Accord, a 1951 agreement seen as the foundation for the US central bank’s freedom to set interest rates free from political pressure. Warsh has said he wants a “recommitment” to the accord that would entail a smaller, less powerful central bank, with some control of its balance sheet handed to the Treasury... Trump’s nominee will push the Fed’s staff to gather more “real-time information” to rely less heavily on official government data that comes on a longer lag... He could also deploy economists to find out whether his view is right that an AI-led productivity boom can boost US workers’ pay without stoking inflation — a move that could potentially pave the way for more interest rate cuts.

This is Warsh's WSJ op-ed of March 2023, where he called for an "economic regime change", including stopping the practice of providing forward guidance and stopping the provision of forecasts of the path of interest rates. The expectation now is that Fed may dispense with its widely followed dot plot showing the interest-rate projections of each participant of the FOMC, and end the tradition of press conferences by Fed chair following every FOMC meeting. 

3. Soumaya Keynes points to new research that links commerce and markets to the shaping of cultural norms.

One 2010 study ran money-sharing experiments across a diverse mix of communities, including smaller ones where people foraged or hunted for food. In those less marketised societies, norms around fairness towards strangers seemed weaker... A new study by Max Posch of the University of Exeter and Itzchak Tzachi Raz of Hebrew University takes a different approach, exploring the US economic transformation between 1850 and 1920. Thanks in part to a vast expansion of railroads, internal commerce became much easier. Mail-order catalogues served remote communities with items including shoelaces, suitcases and booze. The researchers compared places and people gaining more and less market access. Unsurprisingly, they found that in the places that enjoyed juicier connections, work shifted to involve co-operation with more distant partners...

Compiling many metrics, they found that on at least three dimensions, new markets did seem to affect culture. First, commercial opportunities made people more outward-looking. In places that became more connected, Americans became more likely to marry someone outside their local community and parents more likely to pick out nationally common names for their children. Second, access to markets raised tolerance levels, as measured by higher religious diversity and greater variation in family size, as well as mothers’ ages at their first birth. (The logic being that more dispersion should reflect more of a “you do you” attitude.) Third, greater market access came with higher trust towards others, as extracted from language in local newspapers. This measure wasn’t perfect, but reassuringly matched trends in more recent survey data, and fell during wars... Instead, they emphasised a story of rapid cultural adaptation among people who were most engaged with impersonal, anonymous exchanges. The changes in naming practices, for example, were concentrated among migrants working in industries that were more exposed to trade with other parts of the country. For those working in construction and entertainment, the market access had no effect.

4. Paul Blustein questions claims about the dollar's dethronement. 

Participants in this market are international banks, securities firms, multinational corporations, insurance companies and pension funds — the biggest private actors in the financial system. Their globe-girdling operations require the movement of immense amounts of money across borders on a constant basis. They use the market to hedge themselves against currency fluctuations by trading a pair of currencies (say, the dollar and Japanese yen) twice, first at the current exchange rate and then swapping back later at an agreed rate. Japanese life insurance companies, for example, invest their portfolios heavily in US Treasuries and other dollar securities. Because they have obligations in yen to their policyholders, they need to protect themselves against movements in the yen-dollar rate and they use swaps to do so. These sorts of transactions occur at such a huge scale that, according to data from the Bank for International Settlements, the amount of outstanding swaps currently stands above $100tn. Some 90 per cent involve the dollar, reflecting the myriad ways it is used. Unwinding all of this activity and subbing in another currency would be staggeringly costly and difficult.

The $12.6 trillion European holdings of US Treasuries confer less leverage to the Europeans than they appear.  

Europe’s US government debt holdings don’t translate into usable leverage, because most of them can’t be politically co-ordinated and selling would be self-defeating. The reason is simple. “Europe” may hold a lot of US assets, but that doesn’t mean Europe can control them or deploy them as a co-ordinated political tool. Much of Europe’s exposure actually sits in private portfolios — pension funds, insurers, banks, and asset managers — not in a single public balance sheet that can be mobilised strategically.

But while a deliberate and coordinated weaponisation is difficult, "a slow, decentralised buyers' strike, as investors gradually stop adding to US assets" is a distinct possibility.

5. Singapore's acclaimed public housing model.

More than three-quarters of its citizen and permanent resident population live in 1.1mn government-built flats, bought at subsidised rates... Rising property costs, notably in the resale market, have sparked concern over affordability, while the lottery system for allocating flats, which favours traditional nuclear families, is being tested by changing social norms. Over the longer term, property values are also being eaten away by the 99-year leases on which they are sold. “The main thing that worries me is that . . . as the lease clock ticks down and as the stock ages, housing equity drops to zero,” Gee added...

When Singapore introduced national service after gaining independence in 1965, home ownership was also encouraged as an incentive for conscripts to fight for their country. Today, more than 90 per cent of Singaporeans live in an owner-occupied home — among the highest rates in the world. Properties are allocated to would-be buyers via a lottery system to applicants who are typically required to be married, engaged or older than 35. Prices are eased through a raft of government subsidies based on personal circumstances. Singaporeans can also dip into their mandated savings and pension plans and obtain mortgages and loans from the HDB directly. But critics have said that the lottery system is unfair to singles and non-traditional families, for whom it is harder to get a flat. Singapore’s marriage rate has been steadily falling in recent decades, dropping from 57 per 1,000 unmarried males in 1994 to 42 in 2024. The HDB system has also been used by Singapore’s government to promote multicultural integration by setting limits on the proportion of different ethnic groups in the same estate. However, this policy has caused problems for some in the resale market by restricting potential buyers... Construction ground to a halt during the Covid-19 pandemic... Wait times to move into a property rose from three years to as many as six. As a result, more buyers turned to the resale market, where HDB owners can sell properties after five years of occupancy. This led to a sharp rise in resale prices, especially in more desirable estates.

6. FT has a long read on Latin America's rightward turn.

“Crime and violence is clearly the top concern of Latin Americans today,” says Jean-Christophe Salles, Latin America chief executive at pollster Ipsos. “It is the biggest concern in almost every country.” Some 55 per cent of Latin Americans name crime and violence as their prime worry, according to Ipsos data, against just 34 per cent worldwide. In Chile, the figure rises to 62 per cent. Fear of crime propelled arch-conservative José Antonio Kast to a landslide presidential election victory last month in Chile over a Communist opponent, Jeannette Jara. His broader rightwing message had failed in two previous elections, but this time he won by focusing on pledges to erect border fortifications, deport illegal migrants and reduce crime...

El Salvador’s President Nayib Bukele is the inspiration for many rightwing challengers across the region. His extraordinary success in transforming El Salvador from one of Latin America’s most murderous countries to one of its safest — albeit through mass incarceration and authoritarian rule — is firing up anti-establishment conservatives across the region just as it enters a major election cycle... Bukele’s newly built giant prison, the Centre for Confinement of Terrorists (Cecot), which has capacity to hold about 40,000 inmates, many detained indefinitely... Even Costa Rica, a country so peaceful that it decreed the abolition of its army in 1948, has been shaken by record levels of drug-related murders. Ahead of elections on February 1, its outgoing president, Rodrigo Chaves, appeared with Bukele to lay a foundation stone for Costa Rica’s own version of Cecot, a $35mn maximum security jail project with capacity for 5,100 prisoners... In Peru, which is set to go to the polls in April, leading presidential contender and former mayor of Lima Rafael López Aliaga is promising to fight what he calls “urban terrorism” with life sentences for serious crimes... In Mexico and Uruguay, leftwing incumbents are cracking down on violent crime to curry favour with voters.

7. The rising share of debt raising by hyperscalers (companies like Alphabet, Amazon, Meta, Microsoft, and Oracle) to finance their AI infrastructure rollouts.

8. What does the India-EU FTA mean for Europe?

9. Ed Luce has this description of the breadth of the Jeffrey Epstein network.

This includes the sitting US president and a previous one, big Wall Street figures, a network of Ivy League luminaries, Silicon Valley entrepreneurs, foreign government officials, Democrats, Republicans, a Maga influencer, a far left scholar, British and Norwegian royals, wives and girlfriends of powerful men, government lawyers, heads of law firms, movie directors and endless celebrities. Epstein’s network is an MRI of the establishment. The idea that anyone did not know about Epstein’s conviction as a sex abuser is absurd. Some people spurned his social approaches. Having been invited in 2010 to an Epstein dinner with Woody Allen and then Prince Andrew in New York, the magazine editor, Tina Brown, replied: “What the fuck is this . . .? The paedophile’s ball?” Brown’s reaction should have been everyone’s. So should that of Melinda Gates, the now ex-wife of Bill Gates, who stepped into Epstein’s home once and immediately regretted it. Alas, their reaction was all too rare.

10. Fascinating account of the egregiously one-sided US-Japan trade deal.

Proposed projects are screened for “strategic and legal considerations” by a committee of US and Japanese members, according to a joint MOU and a document prepared by Japanese officials. Projects are then sent to an investment committee headed by US commerce secretary Howard Lutnick, who chooses which proposals to send to the US president for approval. Donald Trump has the final say on which projects are “deemed to advance economic and national security interests”. Japan and its state-backed bank can delay or refuse to proceed but face potential penalties, including higher tariffs. Funds for approved projects — from JBIC or with guarantees from Japan’s insurance corporation — then flow into an SPV alongside “the provision of land, water, power, energy, offtake agreements, regulatory support, etc” from the US. Free cash generated by projects will be split equally until the Japanese loans are paid back, according to officials. After that, the US will receive 90 per cent. Officials believe Japanese companies outside the project can also make agreements with it separately, with terms negotiated that are different from the US-Japan split of cash flow... The way the agreement with the US is structured also means that if Japan delays or refuses to fund a project recommended by Trump, it could be liable for “catch-up” payments or an increase in tariff rates.

11. Elon Musk may have pulled off the biggest bluff of the century by merging SpaceX with xAI to create the most valuable private company at a combined valuation of $1.25 trillion. xAI, which had revenues in the low hundreds last year and is burning through $1 billion a month, was bought by SpaceX at an eye-popping valuation of $250 billion. Musk says that the move was needed to launch data centres into space, build factories on the moon and colonise Mars. Musk controls both the private companies, whose combined valuation has increased by over $1 trillion in 18 months. To pay for the deal, SpaceX will issue $250 bn in new shares, thereby diluting the existing shareholders.

This from the comments section sums up the deal

You set your own price for a company you own, sell it to another you own and, miraculously you can then leverage the hell out of it.

12. Thailand has become the sick man of Asia

South-east Asia’s second-largest economy has been stuck at about 2 per cent growth for the past five years, with its pivotal drivers of consumption, manufacturing and tourism all in decline... Making matters worse are prolonged political instability and frequent changes in leadership. The royalist-military establishment has been locked in a stand-off with reformist parties that have won the past two elections but have been blocked from power. Thailand has had three prime ministers in as many years... Signs of economic malaise are increasing. Banks worried about defaults are lending less, the property market is in its worst slump in three decades and headline inflation turned negative last year, signalling weak demand. Thailand’s stock market has been the worst performer in Asia over the past 12 months, declining 10 per cent in 2025 in local currency terms. The government has projected 2 per cent growth this year, but the IMF has forecast just 1.6 per cent, the slowest among major south-east Asian economies...

Manufacturing has been on the decline for years, weighed down by weak domestic demand, an influx of cheaper Chinese goods and intense competition from newer manufacturing hubs such as Vietnam. That has also taken a toll on Thailand’s once mighty auto sector. The country was a regional hub for car manufacturing but Nissan, Honda, Suzuki and others have shut down factories or scaled back production in recent years... Household debt-to-GDP is close to 90 per cent, among the highest levels in Asia, as wages have remained stagnant. And Thailand’s population has been shrinking for four years, with the birth rate hitting a 75-year low in 2025... Tourism, another economic engine, is sputtering and this has had a knock-on effect on retail, agriculture and hotel construction... Thailand recorded 32.9mn foreign visitors in 2025, a 7 per cent fall from the previous year and still below the pre-pandemic peak of 40mn tourists in 2019.

13. US federal debt is at pre-war highs.

14. With the purge of General Zhang Youxia and Gen Liu Zhenli, Xi Jinping has removed all the six members of the Central Military Commission (apart from himself), 35 out the 43 generals in leadership positions of the PLA.

15. Indian cities need much more buses.

While the Ministry of Housing and Urban Affairs recommends 40-60 buses per 100,000 people, India’s cities together have only about 47,650 buses, nearly 61 per cent of which are concentrated in just nine mega cities.

16. Primer on Project Vault, the $12 bn US program to procure and develop a reserve of critical minerals for civilian and other purposes through a public-private partnership involving the US federal government and US companies. 

Project Vault is a public-private partnership that will buy and store critical minerals and rare earth elements. These include gallium and cobalt, which are essential for modern technology and defence equipment. It will combine $1.67 billion in private seed funding with another $10 billion from the US government’s Export-Import Bank... Companies will make an initial commitment to buy materials later at a fixed inventory price. They will also pay some upfront fees. Based on these commitments, companies can give Project Vault a list of the materials they need. The project will then purchase and store those materials. Manufacturers will pay a carrying cost that covers loan interest and storage expenses.

16. Mihir Sharma has an excellent op-ed that raises the questions about the emerging international order arising from the US National Security Strategy released in December and the more recent National Defence Strategy. Both are anchored around an America First approach that narrowly defines its interests in terms of drug trade, energy security, immigration, etc. 

The rest of the world matters only as a market or as a source of certain raw materials that are not specifically available in the US. This is not a status-quoist view of the world, nor is it radical or aggressive. It is essentially defensive. US interests are defined far more narrowly than earlier, and are more localised. But they will be as aggressively and unilaterally defended as ever, perhaps more.

I'll blog on this in due course.

17. Some staggering numbers in the Big Tech capex plans announced this week, along with their quarterly earnings which have spooked the markets. 

Big Tech stocks sold off heavily after unveiling plans to spend $660bn this year on AI, as investors fret that the “breathtaking” capital expenditures are outpacing the earnings potential of the new technology. Amazon, Google and Microsoft are set to lose a combined $900bn in market value since filing their quarterly earnings over the past week... Along with social media giant Meta, their proposed outlay on data centres and specialised chips needed to train and run advanced AI models would mark a 60 per cent rise from the $410bn they spent in 2025 and a 165 per cent increase from $245bn in 2024... Even a 14 per cent boost to their combined annual revenue to $1.6tn was not enough to overcome the pessimism.

18. Big infrastructure deal in the UK, as Canadian pension fund majors CPPIB and Omers announced sale of their 34% and 33% stakes in Associated British Ports (ABP) in a deal estimated to value the UK's biggest port operator, owning 21 ports in the UK, at more than £10bn. ABP was taken private in 2006 by a group of investors including Goldman Sachs' infrastructure arm and Omers, for £2.8bn. Ownership has chaged over the years, with CPPIB taking stake in 2015, along with others like Singapore's GIC and Kuwait Investment Authority's Wren House Infrastructure. CPPIB manages C$777.5bn ($568bn) of assets and Omers manages C$141bn of assets.

Lessons from India's fiscal policy management

It has become a feature of economic policymaking to define thresholds for fiscal prudence and macroeconomic stability. Accordingly, it is held that fiscal deficits should not exceed 3% of GDP, public debt should not exceed 60% of GDP, inflation should not exceed 2% (or 4%), etc. 

I have blogged earlier here and here about the problems with the uniform adoption of such targets. 

This post will examine India’s macroeconomic record over the last fifty years against these benchmarks. It will use data for 1975-2024 from the World Bank’s WDI to assess the impacts of CPI inflation, central government debt (% of GDP), fiscal deficit, and gross fixed capital formation (GFCF) on GDP growth rates. 

The table below captures the five-year averages on each of the above parameters. 

This is the same table with ten-year averages.

This is a ChatGPT summary which broadly conforms to the economic orthodoxy on macroeconomic stability. 

A five- and ten-year view of India’s macrofiscal indicators highlights a clear structural shift after the mid-1990s, marked by lower inflation, higher investment, and improved growth outcomes. The FRBM period stands out as the most balanced macro regime. However, major shocks since 2008—particularly the COVID-19 pandemic—have resulted in persistently higher fiscal deficits and public debt, underscoring the importance of restoring fiscal space while protecting capital expenditure.

We get broadly similar conclusions from models with different specifications (lagged multivariate growth regression, structural break regression, and reduced-form VAR).

India’s growth experience shows that fiscal deficits support growth only in the short run and only when macro-credibility is intact. Sustained growth is driven far more by investment and macro-stability than by deficit expansion, while rising public debt increasingly constrains long-term growth.

However, if we disaggregate the fifty years into identifiable macroeconomic regimes and perform lagged GDP growth regressions against each parameter separately, the shorter-term trends become less clear and regime-dependent. It provides some useful takeaways. 

There are some distinct takeaways. The strongest relationship is that between GFCF and growth. It holds in both short and long-run time frames. 

The short-run relationship with fiscal deficits is generally positive. However, the magnitude of this relationship depends on the regime. As can be expected, the three periods with the greatest perceived thrust on macroeconomic stability - post-liberalisation decade, FRBM era (2003-08), and post-Covid 19 years - are also associated with the highest positive impulse from fiscal deficits. 

The trends on fiscal deficit show a distinct shift towards a higher deficit. Interestingly, though the post-pandemic period has had the highest deficits, it has also been associated with the highest economic growth rates. 

In fact, since 2010, the economy has shifted to a regime with fiscal deficits that are much above the 3% of GDP threshold. But it does not appear to have adversely impacted growth rates, nor market perceptions. An obvious reason is the quality of fiscal deficits, which have shifted sharply towards capital expenditures. 

Overall, as the graphic below shows, there’s a very weak correlation between growth and fiscal deficit. At least, there’s nothing to suggest a fiscal deficit threshold around 3% of GDP. 

Since around 1995, successive governments in India have generally exercised fiscal prudence in terms of the public debt to GDP ratio being range-bound in the 45-50% range. However, unlike fiscal deficit, there’s a strong inverse correlation between the stock of public debt and GDP growth rates. Therefore, the rise in the public debt ratio in the post-pandemic period should be a matter of concern. When the state government debt is added, the gross public debt is inching towards 100%, easily the highest among all major developing countries. 

Similar to fiscal deficit, inflation higher than the target rates has been found to co-exist with high growth rates. There’s little relationship between an inflation rate of 2%, or even 4%, and GDP growth rates. In general, inflation effects tend to weaken once macro stability is achieved. 

Over the last decade, India has significantly improved its economic attractiveness. This has come about through a combination of political stability, large infrastructure investments, expansion in the IT services market (GCCs), the emergence of e-commerce and startups with the resultant job creation, gradual but consistent pursuit of economic reforms, interspersed with some critical reforms, and generally good macroeconomic governance through fiscal discipline, quality of public expenditures, and transparency. It has also helped that the country has been growing at steady high rates, and has emerged as the fourth biggest economy in the world and is one of the few big growth markets. 

All this has provided the fiscal credibility to run a higher level of deficits. In fact, the Indian economy has benefited from the free lunch of an additional 2-3 percentage points of GDP of fiscal space for the last decade or so, which was unavailable in the FRBM-constrained regime. This fiscal boost has been central to the high growth rates of recent years. 

This is a good case study for at least two reasons. One, while such quantitative targets do play a fiscal disciplining role, there’s nothing sacrosanct or objective about arbitrarily defined thresholds. In fact, a rigid adherence to such targets is counter-productive and growth-squeezing. Second, in a world where these targets have become accepted norms, market perceptions about reform commitment and fiscal prudence can significantly expand the fiscal space available for governments. Market credibility provides the flexibility for fiscal expansion. 

So what does this all say? Here is the summary from ChatGPT

Over the last five decades, India’s growth experience shows no stable linear relationship between fiscal deficits and growth. Periods of high growth have occurred under both fiscal expansion and consolidation. Inflation control appears growth-enhancing primarily in high-inflation regimes, while capital formation is largely pro-cyclical. The results underscore that fiscal quality, institutional credibility, and macro stability matter more than headline fiscal aggregates.

A major macroeconomic challenge for India going forward will be the management of its fiscal balance. It must pursue fiscal consolidation to significantly reduce its current high flows and stock of debt, while also significantly raising GFCF. And it must do all these at a time when private investment remains caught in a low equilibrium trap with no signs of a breakout, and when global headwinds are likely to squeeze capital inflows and export growth. This is especially daunting since, as the figures show, economic growth since the GFC, and more so since the pandemic, has been largely propped up by public investment, which is now hitting hard fiscal constraints.