Weekend reading links

1. Very good article on India's dairying sector by Chandramogan, the founder of Hatsun Agro Products. This about the importance of milk production to India's agriculture,

The CSO’s national accounts statistics shows that 26.15% of the GVA from India’s agricultural sector in 2016-17 was constituted by livestock. Further, 66.93% of the value of livestock output was from milk. It implies that roughly every fifth rupee in Indian agriculture comes from dairying. This is because practically every farmer produces milk, irrespective of what his/her “main” crop is. Unlike the main/principal crop that is marketed once or twice a year, milk brings in income on a daily basis. Also, its prices are less prone to volatility and there is no other crop where the Indian farmer realises roughly two-thirds of the rate paid by consumers (that ratio is one-third in the US). Organised dairies in India have evolved a unique procurement-cum-marketing system, wherein Indian farmers get 60 to 65% of the value of retail price paid by the consumer. Milk is a source of liquidity, predictability and stability in rural incomes. Moreover, for every eighth or ninth farmer producing milk, there is a mom-and-pop store retailing the same. Again, there is no product that is as fast-moving as milk, allowing the small retailer to rotate capital 365 times a year. In short, in India, in spite of paying approximately 25% higher a price to the farmers compared to US, consumers get it at two-third of the price consumers in the US pay.

And its growth has been impressive,

Our milk output more than doubled from 79.66 mt in 2000 to 176.27 mt in 2017, when the same for the world increased by just 42%, from 579.31 mt to 824.80 mt. In 2000, India produced 79.66 mt of milk versus the rest of the world’s 499.65 mt. 17 years later in 2017, India produced 176.27 mt versus the rest of the world’s 648.53 mt. India’s milk grew by 109% against 30% in rest of the world in the last two decades. India’s contribution to the entire world growth is 35% versus 65% of all countries put together... India, in the last 10 years or more, has been a net exporter rather than importer of dairy products.

If only we had more opeds by people who actually are doing what they are writing about!

2. Livemint points to a CAG report that highlights concerns about India's revenue collection system. For the quarter ending June, gross tax revenue collection grew at the slowest pace in 10 years. The shortfall in central GST collection for 2018-19 was 22%. The report also draws attention to tax compliance not having improved significantly post-GST. The complexity of GST structure has made automated invoice matching difficult to implement, thereby creating opportunities for tax leakages and calculation errors.

A summary of the CAG report findings

3. Nice article on the perils of commercialisation of higher education. The UK's higher education market has been transformed over the past decade by market-based reforms which allowed for-profit colleges. In 2018, the Office for Students (OFS) was set up as the higher education regulator. Higher education institutions have come to rely increasingly on student fees than government grants.

Some of the providers are owned by private equity investors. The OFS requires all universities and colleges to register in order for their students to be eligible for government loans. The OFS has recently allowed private institutions to fail, which in turn raises the concerns about what will happen to the students admitted.

More signatures of distortions and problems,

Universities lower down the pecking order have fared less well... Universities are keenly aware that they are mostly competing with a handful of rivals for students, and that geography plays a big role in determining who those rivals are. Exeter, in south-west England, has commissioned research which shows it attracts students who live near the m5 motorway that runs into town, and struggles to recruit from anywhere north of Birmingham, in the Midlands... Universities not attracting enough students have to adapt. Since the new system was introduced, almost all have charged the maximum allowed—now £9,250 ($11,250) a year. Since students are entitled to government loans, which they don’t have to repay until they earn more than £25,725 a year, they are relatively unfussed by upfront costs. But price competition has begun to emerge in the form of hefty scholarships. A more common way to appeal to students is to lower the grades for entry. At its most devious, this takes the form of offers which do not require the applicant to achieve any grades at all, provided they make the university their first choice.

4. A very good description of today's start-up and technovation world,

WeWork tries to “elevate the world’s consciousness”. Or the company’s claim that it has a market opportunity of $3tn. This is precisely the sort of overconfidence that led Lyft to claim it was part of one of the biggest societal shifts since the invention of the car, and Uber to say flying taxis will soon be in the air, while suggesting it was targeting a $12tn market, including the money consumers spend in restaurants. Hype is one of the tech sector’s most magical qualities. Why under-promise when the financial success of the best bets has been so extraordinary? Tesla’s prediction of robo-taxis has the added bonus of making its forecast for driverless cars seem achievable. Uber’s gargantuan addressable market makes its own valuation look more sane. Much is made of the fact that Lyft and Uber shares trade below the price at which they listed. Less about the fact that two lossmaking companies with no clear path to breaking even are still valued at $16bn and $59bn, respectively. True believers are not limited to start-ups. At an Amazon conference earlier this year, I sat beside a man whose business card told me that he was chief evangelist of Amazon Web Services. Grandiosity makes sense in an industry that often has to generate excitement and funding before products even exist.

5. Interesting inferences here and here on Reliance Industries decision to pare down all its debts. In its latest AGM, the company announced the end of its 7 year $100 bn investment cycle in refining, petrochemicals, telecoms, and retail and a commitment to become a zero-debt company in 18 months.  Andy Mukherjee asks very relevant questions,

While a breather after such frenzied activity may be understandable, why does he want Reliance to be a zero-net-debt company in 18 months? What will it mean for the more than 100 banks and financial institutions around the world that provide India’s largest company and its subsidiaries with billions of dollars – and yen, and rupees – in financing and refinancing? Above all, what will Reliance’s deleveraging mean for India?... in October 2016 Reliance was shouldering 13% to 14% of the entire investment by India’s top 1,250 listed companies as well as Indian Railways and state-owned electricity boards... The rest of India Inc. is paralyzed by debt and self-doubt; consumers are overstretched; and so is the government. A holiday for Reliance would remove from play the only domestic balance sheet with unspent firepower.

Whatever the motivations and reasons, it will clearly take out one of the biggest sources of investment demand away from the market exactly at a time when the economy needs it the most.

6. This blog has long held the view that technology firms benefit from regulatory arbitrage that allows them to socialise a significant share of their costs, which normal brick-and-mortar firms are expected to internalise. 

Sample this from a WSJ investigation,

Many of the millions of people who shop on Amazon.com see it as if it were an American big-box store, a retailer with goods deemed safe enough for customers. In practice, Amazon has increasingly evolved like a flea market. It exercises limited oversight over items listed by millions of third-party sellers, many of them anonymous, many in China, some offering scant information. A Wall Street Journal investigation found 4,152 items for sale on Amazon.com Inc.’s site that have been declared unsafe by federal agencies, are deceptively labeled or are banned by federal regulators—items that big-box retailers’ policies would bar from their shelves. Among those items, at least 2,000 listings for toys and medications lacked warnings about health risks to children. The Journal identified at least 157 items for sale that Amazon had said it banned, including sleeping mats the Food and Drug Administration warns can suffocate infants. The Journal commissioned tests of 10 children’s products it bought on Amazon, many promoted as “Amazon’s Choice.” Four failed tests based on federal safety standards, according to the testing company, including one with lead levels that exceeded federal limits. Of the 4,152 products the Journal identified, 46% were listed as shipping from Amazon warehouses...

Amazon’s struggle to police its site adds to the mounting evidence that America’s tech giants have lost control of their massive platforms—or decline to control them. This is emerging as among the companies’ biggest challenges. Amazon, Facebook Inc., Twitter Inc., Alphabet Inc. ’s YouTube and others are under scrutiny over how they wield their dominance in booming internet markets while their forums are used for fraudulent listings, offensive content and misinformation—including some spread during America’s 2016 elections... Amazon’s common legal defense in safety disputes over third-party sales is that it is not the seller and so can’t be responsible under state statutes that let consumers sue retailers. Amazon also says that, as a provider of an online forum, it is protected by the law—Section 230 of the Communications Decency Act of 1996—that shields internet platforms from liability for what others post there. This is similar to a common defense by internet companies faced with complaints about content or services offered on their platforms. Courts and regulators have largely agreed—until recently...

Third-party sellers are crucial to Amazon because their sales have exploded—to nearly 60% of physical merchandise sales in 2018 from 30% a decade ago, Amazon says. The site had 2.5 million merchants with items for sale at the end of 2018, estimates e-commerce-intelligence firm Marketplace Pulse. Amazon doesn’t make it easy for customers to see that many products aren’t sold by the company. Many third-party items the Journal examined were listed as Amazon Prime eligible and sold through the Fulfillment by Amazon program, which generally ships items from Amazon warehouses in Amazon-branded boxes. The actual seller’s name appeared only in small print on the listing page...

In contrast, Walmart Inc. requires all products on store shelves be tested at approved labs, company documents show. Target says it requires suppliers of store-branded products to undergo additional inspections and testing beyond government standards. Target and Walmart have created online marketplaces for third parties to sell directly to consumers. Target’s site, launched earlier this year with several sellers, is invitation-only. Walmart had around 22,000 sellers at the end of 2018, according to Marketplace Pulse. It requires an application that can take days for approval, and only a fraction of merchants applying make it through the vetting, says a person familiar with Walmart’s policy.