Weekend reading links

1. Italy follows France in imposing revenue-based tax on digital companies, which pay little by way of taxes in countries where they have their users.

The new tax, passed this week by Italy’s parliament, will take effect Jan. 1. Similar to the tax implemented this year in France, Italy’s imposes a 3% levy on revenue on some digital revenue for companies with more than €750 million in global revenue, including least €5.5 million in Italy.

The issue has gained momentum and negotiations are currently on to forge a consensus and arrive at a common tax on technology companies. A EU effort in this regard collapsed on the face of opposition from beneficiary countries like Ireland and Luxembourg.

2. Andy Mukherjee implicitly makes the case for public financing of infrastructure assets, tapping long-term finance and using institutions like NIIF, and recycling of commissioned assets towards private sector to raise capital for more greenfield investments.

3. In a nod to their importance, especially at a time when they are being squeezed by long-term trends, Canada's establishes a Ministry for Middle Class Prosperity! The share of middle-class has been shrinking across OECD countries since the turn of 1990s.

4. The asset markets scale new records,

Stocks and bonds are staging an extraordinary run, on track for their biggest simultaneous gains in more than two decades. Heading into the final two weeks of 2019, the S&P 500 has soared 28.6%, while a bond rally has pushed the yield on the benchmark 10-year Treasury note down three quarters of a percentage point. If the gains continue through the final days of December, it would mark the first time the broad stock index has jumped by at least 20%, while Treasury yields have slipped by at least that much since 1998.

5. This may well be the longest economic expansion in the US history, but it also the weakest on both output growth and job growth. Here is the output growth

... and here the jobs growth.

6. Revealing NYT investigation on mobile phone data and privacy. The short answer is this, howsoever much you anonymise, mobile phone data trace invariably leads to extremely deep invasion of individual's privacy. See this also from Ananth. 

7. As if WeWork's Adam Neumann's $1.6 bn exit package was not enough for blowing up investors money, an FT investigation reveals that there is more to come in case of a floatation.  

8. Talking about non-performing loans, Indian banks are competing with only Greece for leadership.

9. Nice Livemint feature on the Bellary iron ore mining boom of 2006-11 and its bursting following the Supreme Court judgement cancelling mining leases.

10. US productivity growth rate for the decade was just 0.3%!

11. Uniqlo has cracked the problem with handling of soft materials by robots,

There was only one job that robots could not do when Fast Retailing, the owner of Uniqlo, replaced 90 per cent of its workers with robots at its flagship warehouse in Tokyo last year. But now, with the help of a Japanese start-up called Mujin, the world’s third-largest retailer says it has cracked the final barrier to full automation, a priority for Uniqlo as Japan’s ageing population creates labour shortages. The two companies have invented a invented a robot with one arm that can pick up soft T-shirts and place them neatly in boxes to be shipped to customers. While it sounds easy, the ability to lift soft textiles has been a challenge for clumsy robotic arms. Add to this the need to sort through constantly changing seasonal clothes, in shades that are hard to distinguish and wrapped in various forms of packaging, and humans have always come out on top. Even the most aggressive believers in automation, such as Amazon, still depend on human “pickers”.

12. Finally, very interesting twist to Middle Eastern geopolitics. Chastened by the reality that American protection may not be forthcoming, Saudi Arabia has started reaching out to its enemies. Informal contacts have been established with Houthi rebels in Yemen, Qatari regime, and even the Iranians. 

In the months since a missile and drone attack widely seen as the work of Iran left two Saudi oil facilities smoldering, the Saudi crown prince has taken an uncharacteristic turn to diplomacy to cool tensions with his regional enemies... Even though American and Saudi officials agreed that Iran was behind the Sept. 14 attacks on the petroleum processing plants at Abqaiq and Khurais, temporarily halving Saudi Arabia’s oil production, President Trump responded with heated rhetoric but little else. For the Saudis, the tepid response drove home the reality that despite the tens of billions of dollars they have spent on American weapons — more than $170 billion since 1973 — they could no longer count on the United States to come to their aid, at least not with the force they expected... For the United States, the shift toward diplomacy is an awkward paradox. The Trump administration and Congress have been pressing the Saudis to end the war in Yemen, and the administration has pushed them to reconcile with Qatar, largely in vain. Now, the presumed Iranian strikes may have done more to advance those goals than American pressure ever did... Analysts saw the lack of a significant American response to the attacks as a blow to the policy known as the Carter doctrine, which dates to 1980, when President Jimmy Carter vowed to use force to ensure the free flow of oil from the Persian Gulf after the Islamic Revolution in Iran and the Soviet invasion of Afghanistan.

More observations on the Indian Economy

Continuing on posts here, here, here, here, and here.

Most of the analyses on the problems afflicting the Indian economy have sought to find out the one cause. In the process, they expectedly present partial diagnosis and therefore limited prescriptions.

Vivek Kaul and Sayantan Bera have good articles that highlight the collapse of demand and rural distress. In the circumstances, even with the 9% total fiscal deficit, the calls for fiscal restraint, here and here, are baffling. Dr Rangarajan puts the issues in perspective nicely here.

Anyways, some interesting thoughts from different sources.

1. Monika Halan posits an interesting situation. While the tightening of norms (need for Aadhaar and PAN on large volume transactions in areas like gold and land) have squeezed the spending of black money, the channels of its generation (the regular channels of corruption at all levels) remain unabated. In the circumstances, as black money is accumulating, its outlets are choked.

Some part of it appears to have found its way into the financial markets, into SIPs and stock markets. But the rest are biding their time,

But there is still plenty of money waiting on the side. What happens to the cash money? Will it come into the system or keep waiting? At the moment, it does look as if people are waiting. Waiting to see the old way come back where the circle of cash can resume and in the meantime they are just sitting on cash. While holding cash, they worry about the ₹2,000 note that could get replaced by the ₹1,000 one anytime. That they will find a way to convert that useless into a useful note one more time is sure, but the effort and cost is getting tiring. If the old way does not return, then this cash will have no option but to come back into the system through consumption and investments. Which will happen first is possibly the question on which India’s future as an economic power depends. Will this government be able to kick-start consumption to tide over the current slump and rekindle the economy, hold on to power for the cash economy to give up or will the push back against formalization find a political voice.

This presents an intriguing possibility. A relaxation of the drive against black money can potentially provide an outlet for the black money and thereby kick-start demand and revive the investment cycle. While there is not data to prove this, it is a perfectly plausible argument that a significant share of the expenditures on consumer durables and gold came from black money, which has been squeezed by the ongoing drive against it.

The asymmetry between generation and spending channels for black money also means that some part of those generated could now be moving into the financial markets through SIPs and stock market purchases. Are these contributing to keeping the markets immune from all the economic woes? In other words, are the markets becoming a preferred channel for money laundering - converting black money to white?

2. An article by Gautam Vashisth and Om Chaudhry points to two phases of real estate boom in India. They claim that the first from 2005-11 was financed by banks and private equity, and the second from 2011-16 was financed by NBFCs (their loan book grew 3.5 times at 30-35% annually to reach $32 bn) and private equity.

But this graphic from Arvind Subramanian's latest paper points to something interesting.

As can be seen, NBFCs apart, private sector banks led the credit flows into the real estate in the 2011-19 period. In fact, the public sector loan book has remained largely stable in this period. What are the quality of those private sector loans? What share of them are now stressed?

What are the exposures of various types of institutions - public sector banks, private sector banks, NBFCs, foreign private equity - to stressed real estate assets? If public money is used, how does the nature of these institutions impact the type of bailout? 

It is yet more evidence to refute the idea of private banks in India being paragons of virtue, one of the primary reasons for privatisation of banking sector. As Board and chief executive level decisions at Yes Bank, ICICI, Axis, and RBL have shown, there is little to choose.

Btw, the bad bank proposal is a half-baked prescription. I have blogged here and here about resolution and bad banks. Just carefully thinking through the processes necessary to resolve real estate loans will make it abundantly clear.

3. More on the demand-slowdown in the Indian economy, from Jahangir Aziz. Good summary.

But rather than characterising it as an "aggregate demand slowdown", I am inclined to describe it more appropriately as a return to the normal state of local demand based growth, without any of the external tailwinds. Unfortunately, the Can India Grow? hypothesis is starting to bind now.

It is just that stripped off all props (external demand, stimulus, transfers etc), the real demand (obviously weakened by the combined effects of demon, GST, regulatory overkill, plus the dampened animal spirits) is now surfacing. This is the "structural demand" issue being highlighted. All we can do now is to mitigate the dampeners and push the economy to its (relatively low) natural demand frontier, and simultaneously work on expanding that frontier with the longer-term reforms. Hope that some tailwinds will emerge which we can ride opportunistically to get a boost on the output side.

On the external demand/trade/globalisation, I think it is incorrect to simplistically say that the headwinds are responsible for India's stagnation or that the export path to growth has come to an end. For sure, the days of booming trade growth is past. But it is not as though trade volumes have shrunk, only that its growth rates have declined. The export engines of countries like Vietnam and Bangladesh have not encountered any similar problems. 

In fact, since 2011, India has been among the worst performing exporter of goods and services. It should actually be worse, since if we take only merchandise exports, the country would appear to have fallen off some cliff. Something is going on - we are clearly doing far worse than pretty much most of our competitors. It would be useful to get into more deeper analysis of the major export categories.

As to the immediate challenges - using government expenditure to trigger aggregate demand, while simultaneously using all tools available to de-clog the credit markets (both banks and NBFCs) appear to be the only game in town.

4. What is also really hurting the economy is the steep decline in nominal growth rates, halving from 12% to 6.1% over the September 2018 to September 2019.

When nominal GDP falls so steeply, its impacts are felt widely. An economy entrapped in a low growth and low inflation environment creates several problems. It squeezes consumers with stagnant incomes and producers with reduced pricing power. The result is low consumption and investment on the private sector side. The low nominal GDP growth (and low inflation) exerts pressure on debt-sustainability since the real value of debt and its share of GDP keeps increasing. It also lowers the tax revenue collections, thereby exacerbating the already high fiscal deficit. Finally, at a nominal growth rate of 6%, it will take 12 years to double the economy.

All this also raises questions about the 4% inflation target with a +/- band of two percentage points. This orthodoxy on very low inflation, borrowed from the requirements of developed economies, does not square up with the experiences of the East Asian economies in their rapid growth decades. One more example of how orthodoxy may have contributed to the ongoing economic stress.

5. For the fiscal puritans and their sacrosanct 3% fiscal deficit limit, here is how the US has followed counter-cyclical fiscal policy.

Note that just the federal fiscal deficit shot up to 10% of GDP in the aftermath of the Great Recession.  Also note the consistent pro-cyclicality. And here we are hesitating to raise the deficit by half a percentage point or so. In fact, is there an example of fiscal accommodation during a growth slowdown with a deep demand slump, which has led to restoration of economic growth?

Clearly IMF does not trust the fiscal disciplining abilities of developing countries. In the IMF's world, what is sauce for goose does not appear to be sauce for the gander!

NIIF and infrastructure finance - what is the additionality?

There is a growing chorus for the establishment of a Development Finance Institution (DFI) or other new strategies to fund India's massive infrastructure investment requirements. In this context, the role of the National Investment and Infrastructure Fund (NIIF) is interesting. 

There is no lack of clarity about its broad objective to leverage private capital to invest in infrastructure. But the same cannot be said about how it proposes to achieve the objective - the sectors or funds it proposes to invest, and the nature and stage of the projects. These are critical issues that need examination given public finance and the objective proposed. Unhelpfully, for a government financed entity, the website of NIIF is surprisingly opaque, without even an Annual Report. 

It would be simple if the main purpose of NIIF is to be a sovereign wealth fund (SWF), aimed at maximising returns from its portfolio, consistent with a level of risk appetite.

Since it is not an SWF, some questions assume significance. What is the additionality of NIIF's capital? Does NIIF's government shareholding help crowd-in other capital which would not have otherwise come in? Or is the mere presence of NIIF contributing to addressing some market failure? Or is NIIF ending up competing with private capital and displacing them? What other incentive distortions are happening?

In this context, the activities of NIIF are intriguing. Take for example, NIIF bidding for a stake in Ashoka Buildcon,

A roads platform operated by the National Investment and Infrastructure Fund (NIIF) and I Squared Capital-owned Cube Highways have expressed interest in buying Ashoka Concessions Ltd... Ashoka Buildcon and Macquarie Infrastructure and Real Assets (MIRA), one of the biggest foreign infrastructure investors in India, were seeking buyers for Ashoka Concessions, their roads portfolio. In 2012, along with State Bank of India, Macquarie, through its first India-focused fund, had purchased a 34% stake in Ashoka Concessions, a platform to own and operate toll-earning road assets, for ₹800 crore. The remaining stake was held by Ashoka Buildcon. Mint had reported on 29 May that Macquarie was looking to exit its roads portfolio in India... Cube Highways is currently the most active buyer of road assets in the country... The NIIF Roadis platform too has been on the lookout for road assets. Mint reported on 26 July that NIIF was in talks to acquire three roads from Subhash Chandra’s Essel group. The sale of the Ashoka Concessions road portfolio adds to the flurry of activity in India’s roads sector this year. Deal activity has been driven by large investors such as Singapore’s sovereign wealth fund GIC and Canadian pension fund manager CPPIB backed infrastructure investment trust (InvIT) - IndInfravit Trust.

Now CPPIB is close to acquiring Ashoka Concessions Ltd,

Canada Pension Plan Investment Board (CPPIB) has emerged as the frontrunner to acquire too roads developer Ashoka Concessions, and is likely to sign a deal at an enterprise value of Rs 55000 crore or $770 million... Several global and domestic infrastructure investors were in early stages of negotiations to acquire Ashoka Concessions for an enterprise value of Rs 5000-6000 crore as revenue generating highway assets continue to get investor traction. 

Also, another example from NIIF's recent bids for the airports privatisation, 

The GMR Group, the Adani Group, National Investment and Infrastructure Fund (NIIF) and Fairfax India Holdings have participated in the tender issued by the Airports Authority of India (AAI) to privatise six non-metro airports... Australia’s AMP Group and PNC Infratech Ltd are also understood to have submitted their qualification documents to the AAI when the deadline ended on Thursday.

These bids were hotly contested and Adani won them. 

Several questions get raised. What was the additionality of using scarce public finance? Given the level of competitive interest, did these markets (or atleast these particular assets) need any crowding-in? In fact, given the market maturity, is there a need for NIIF to be in the market to buy road assets or road developers or airports? In case of the Ashoka Buildcon, was NIIF merely providing the exit opportunity for MIRA? Most importantly, is NIIF, with its implicit government subsidy, distorting the market by displacing private capital?

Or consider the NIIF partnership with DP World to create an investment platform to invest up to $3 billion as equity in ports and logistics businesses in India.

How much does NIIF's presence increase DPWorld's interest in Indian ports and logistics assets? What is the NIIF value proposition for DP World? Is the government shareholding and important consideration for DP World to commit its capital towards Indian infrastructure? Would DP World not have considered Indian port and logistics assets without this blending? Or is this partnership merely motivated by the $1 bn transferred by Abu Dhabi Investment Authority (ADIA) to NIIF as part of the inter-governmental agreement between Abu Dhabi and India?

And consider the partnership's first purchase,

Dubai’s port operator DP World along with The National Investment and Infrastructure Fund (NIIF) is buying Continental Warehousing Corp (Nhava Seva), one of the largest companies in the logistics sector in India for $400 million from its PE investors... The platform that piped PSA International of Singapore, the world’s largest port operator and Macquarie is buying 90% of the company while the Indian promoters will retain a 10% share, said officials in the know. Private Equity firms Warburg Pincus, Abraaj and IFC Washington together own 60% of the company, with the former being the single-largest shareholder at 40.4%. Abraaj and IFC own 20% while the remaining 40% is held by N Amrutesh Reddy, executive director and promoter. Continental Warehousing, the flagship company of Chennai-based NDR Group, owns and operates cargohandling facilities such as container freight stations (CFS), multimodal cargo handling terminals (MMTs) and private freight stations. It also provides express cargo and third-party logistics services.

Again, given the strong competitive interest, what was the additionality of using NIIF's fiscal resources?

It raises the question of what is the mandate of NIIF? Is it a SWF with the mandate of maximising returns from the deployment of India's foreign exchange reserves? Or is it using fiscal resources to channel private capital into the infrastructure sector? If the former, is the NIIF's pipeline and portfolio reflecting such market catalysis? 

One could argue that NIIF leveraged $1 billion from ADIA. But this raises the question as to what was the value proposition that a partnership with NIIF, an entity without any track-record, offered the commercial returns seeking SWF ADIA? Would ADIA not have put money into India without ? Did the Indian government ownership of NIIF, something a private fund would not have offered, provide a compelling enough reason for ADIA to put its money in India? In any case, is this sufficient to attract anything more than $1 billion?

Or is there a financial co-ordination role for NIIF?

National Investment and Infrastructure Fund (NIIF) of India and Canada Pension Plan Investment Board (CPPIB) today announced an agreement for CPPIB to invest up to US$600 million through the NIIF Master Fund. The agreement includes a commitment of US$150 million in the NIIF Master Fund and co-investment rights of up to US$450 million in future opportunities to invest alongside the NIIF Master Fund. With CPPIB’s investment, NIIF Master Fund now has US$2.1 billion in commitments... CPPIB joins Abu Dhabi Investment Authority, AustralianSuper, Ontario Teachers’ Pension Plan, Temasek, Axis Bank, HDFC Group, ICICI Bank and Kotak Mahindra Life Insurance as investors in the NIIF Master Fund, alongside Government of India.

In other words, was there a need for a government financed general partner (GP) (or anchor) to establish a fund to mobilise limited partners (LPs) (or co-investors) to invest in India's infrastructure market? 

Or is NIIF's investments a means to retain majority domestic ownership of important infrastructure assets?

Apart from all these above, the governance risks for such a deep pure-play investment role for NIIF are significant.

In a system characterised by close links between large infrastructure groups and political leaders, there are several corporate governance risks. If NIIF is indeed going to become a regular investor in infrastructure sector (as the aforementioned examples appear to indicate), does it have sufficient governance safeguards and oversight to avoid problems which have been a feature of such entities earlier?

Consider the example of cash-strapped GVK's efforts to prevent their competitors, the Adani Group, from buying the 23.5% stake in Mumbai International Airport Ltd (MIAL) that was being divested by two South African firms Bidvest and ACSA. GVK got NIIF and ADIA to purchase 49% stake in GVK's airport holding company which owns 50.5% of MIAL, and used the proceeds to buy out Bidvest and ACSA shares and thereby stave off Adani. The issue invited intense competition between two large and politically connected corporate groups and spawned associated litigation, with Adani Group wooing Bidvest and ACSA with an offer to purchase their stake in MIAL. 

In the absence of strong governance safeguards, given the less than transparent nexus of politics and Indian infrastructure corporates, such investments run the risk of being captured by vested interests, including in corporate battles.

Corporate governance and regulatory failures in pledged shares

Livemint has a very good article that shines light on the loans against shares (LAS) market in India. Indian promoters have routinely pledged shares to NBFCs and mutual funds to avail loans. 

The total amount of pledged promoter shares as on 9 December for 838 firms is about ₹2.25 trillion. While the sums involved have come down somewhat from a peak of ₹3.04 trillion in January 2018, a series of defaults could send ripples across the whole financial system. With NBFCs already under significant stress, if a big corporate does not service its interest, it could add to the stress. Interest rates on outstanding loans from non-banks are high, ranging from 9-15%. NBFCs also do not have any ceiling on the amount of loans they can sanction against shares. Several borrowers have also preferred to raise money through mutual funds, through an instrument called zero coupon bonds. It is essentially a debt instrument that does not pay interest, but instead trades at a deep discount, rendering a profit at maturity when the bond is redeemed for its full face value. The reason behind the new-found popularity of instruments like zero coupon bonds over the last few years is simple: while banks have several restrictions imposed by the Reserve Bank of India (RBI), mutual funds do not. The hassle of a regular interest payment is also absent...

The shares were either pledged to an NBFC at a 2:1 cover, or a mutual fund as collateral on their debt issuances at a cover of 1.5-1.7, and to banks as a part of corporate loans. Simply put, a cover means the value of securities against the quantum of loan extended. For instance, if the lenders extend ₹100, then a 2:1 cover entails that the lender will take securities worth ₹200 as collateral. As the stock price of some companies fell, the cover diminished, and anxious investors began calling in on the pledge.

Some observations 

1. What were the funds being used for? Given the poor quality of corporate governance among Indian companies, there should have been strong reasons to doubt the reasons for availing such loans.

The RBI had raised concerns about this as early as December 2013. In fact, one RBI report had even raised this possibility,

“In some instances, the shares pledged by unscrupulous promoters could go down in value and the promoters may not mind losing control of the company as there is a possibility of diversion of funds before the share prices collapse."

The reputations of at least some of the corporate groups are questionable enough to have raised concerns about the potential misuse of this less regulated credit channel.  

2. The liquidation of these shares by lenders, thereby stripping promoters of control over their companies is a welcome development. It is a rare example of capitalism with exit for Indian promoters. 

3. It is clear that LAS had become an important channel for fund raising by corporates in recent years. The volumes involved attest to the same. Now that it is exposed and regulatory limits have been tightened, this channel is likely to dry up as a source of funding. Further, a default by one of the larger corporate borrowers on LAS can add to the problems facing the credit markets. In any case, this is one more squeeze on the credit tap.

4. This raises questions about whether the regulators were behind the curve. The RBI Financial Stability reports going back to 2013 means that the regulators were aware of the issues.

What was the quality of LAS market surveillance? Were the profiles of the borrowers being monitored? Were the portfolios of the NBFCs for LAS exposure being monitored? Were the portfolios of the Fixed Maturity Plan mutual funds for LAS holdings being monitored? Were there at the least some reporting requirements on them? How were the promoters being allowed to pledge shares without disclosing them? Was the LAS issuance cover not being monitored and considered for raising based on the emergent trends that pointed to its being abused? What were the reasons for the delays in taking action on regulatory limits despite the early knowledge of the problems? Was the raising of issuance cover discussed by SEBI or RBI earlier, and if so, why was it not raised? Was it the reluctance to throw sand into the wheels of a credit source that was being used by the mainstream corporates and which appeared healthy?

Weekend reading links

1. Bloomberg points to the widespread massaging of corporate account books in calculating EBITDA by some of the riskiest borrowers so as to take out bigger loans. As the graphic shows, the gap between the real EBITDA and the massaged one used to take out loans has been widening in recent years.

Sample this,

Take Del Frisco’s Restaurant Group Inc., the New York steakhouse chain. The company sought a $390 million loan last year to finance its acquisition of Spanish tapas chain Barteca Restaurant Group. It took Del Frisco 2,723 words to explain what Ebitda means, the most of any borrower included in the study. Its definition included 22 types of adjustments it could use to boost its reported earnings.

Theoretically, the measure is thought to provide a reasonably good measure of the company cash generating ability and how much money the company could have available to service its debt, since it excludes the management decisions on indebtedness and investments.

2. The most stunning exhibit from WeWork's growing pile of misdemeanours and fraud is this graphic about the divergence between its quarterly net income estimates and actual realisations.

Given the consistent and stark divergence, begs the question why were the big name investors and Board members so tolerant of what were clearly lies being peddled about the company's profitability?

3. Amidst all the hype, a real good use area of Blockchain is trade-finance. To get a sense of the challenge associated with trade finance,

On average, a cross-border transaction requires the exchange of 36 documents and 240 copies, says Kerstin Braun, president of Stenn Group, which provides trade finance... A letter of credit — a promise to pay for the goods if certain conditions are met — is sent to the exporter by the importer’s bank. This gives the exporter the green light to ship the goods. The exporter then presents proof of shipping to get financing from its own bank, which recoups the money directly from the importer’s bank. At the moment, information is limited: the companies doing business are often in different parts of the world and may have little credit history. Information is also slow to reach the relevant parties as paper documents have to be physically exchanged.

Blockchain can bridge this information asymmetry by providing access to information in real time, with ability to track the entire history of transactions. And it opens up very interesting possibilities,

The riskiness of trade finance, in theory, reduces as the goods get closer to the importer, although this is currently hard for all parties to ascertain. Aided by satellite or radio-frequency identification technology, blockchain could allow interested parties — from exporters to banks — to see immediately when, for instance, the goods are put on to a ship or the logistics firm picks them up. Professor Hau Lee of the Stanford Graduate School of Business foresees a process of “dynamic factoring”, where at each stage of the journey, as risk falls, so too does the rate of interest charged to the exporter or importer. 

4. Interesting graphic from OECD's India Economic Survey 2019 about the housing affordability issue in India - housing prices have grown faster than GDP growth rate in recent years.

5. Business concentration in the US,

Between 1987 and 2016 the share of employment accounted for by firms with over 5,000 employees rose from 28% to 34%. Between 1997 and 2012, this newspaper reported in 2016, the average share of revenues accounted for by the top four firms in each of 900 economic sectors grew from 26% to 32%.

6. An editorial in ET rightly urges caution on the portfolio inflows, 

India figures among countries with the 10 largest forex reserves. Of these, only Brazil, apart from India, runs a current account deficit. All the rest are export powerhouses that run current account surplus and accumulate claims on other economies. India’s foreign exchange reserves are capital inflows unabsorbed into the real economy, and represent liabilities. Of these capital inflows, foreign direct investment is the most desirable kind and should continue to be welcomed. External commercial borrowings take advantage of low interest rates abroad and are welcome, within prudent limits. It is portfolio flows that can be discouraged in a calibrated fashion. Foreign portfolio inflows are welcome additions to domestic financial savings, true. But these, in excess, also push up stock prices at a time when the underlying financials are a mess, setting up the market for a fall — all the harder when the excess liquidity produced by quantitative easing in the US, Europe and Japan is sucked back in. This is the right time to clamp down on some inflows of doubtful provenance.

In fact, given the prominent role of private equity in FDI - with their services and real estate destinations, short-term horizons and greenfield nature of investments - even its desirable value needs to be qualified.

7. Ofwat, UK's water regulator, has issued its five-year determination of terms of service of the country's water utilities. The determination mandates investments to improve quality, limits return on capital allowed, restricts investor payouts, and demands reduction in debt levels,

The regulator is also demanding that the 10 large regional water and sewage companies and seven smaller water suppliers lower debt levels. Ofwat has also set the companies a target to reduce water leaks by 16 per cent between 2020 and 2025... The ruling is part of Ofwat’s long-awaited final determination on how much water companies can charge customers and how much they must spend on infrastructure, such as mains pipes, and sewage treatment over the next five years... The regional monopolies in England and Wales were privatised almost free of debt 30 years ago in a model that has not been repeated elsewhere in the world. Since then the sector has racked up a combined £51bn in debt and paid out £56bn in dividends, while at the same time failing to hit its targets for cutting leaks and incurring a series of fines for polluting rivers. Under the ruling, Ofwat will allow the utilities to invest £51bn over the next five years to meet the leakage and pollution targets by modernising the country’s increasingly stressed infrastructure. The allowed return on capital for the water companies has been set at 2.96 per cent, the lowest return since the privatisation of the water sector, down from 3.19 per cent, while the cost of equity has been reduced from 4.5 per cent to 4.2 per cent.

8. Very good reporting by Sayantan Bera in Livemint about the plight of landless poor in rural India.

9.  The World Bank highlights a "towering" $55 trillion debt accumulated by developing countries by end of 2018. Since 2010, the total debt has risen by 54 percentage points to touch 170 per cent of emerging market GDP.

10. Fascinating article about the rapid emergence of the smart phone as the ultimate personal device. Over this decade, the smart phone has come to render obsolete the camera, satellite navigation system, camcorder, music devices like iPods, and messaging devices like Blackberry. 

Simple and incremental knowledge gains, and their diffusion

I had blogged here about our propensity to underplay or even gloss over simple and incremental solutions to problems, and instead search for innovative and big-bang solutions.

In the context of explaining the advances made in rock-climbing over the decades, especially the Alex Honnold's free solo (no aids, no protection at all) climb of El Capitan in Yosemite, John Cochrane writes,

In studying economic growth, we (and especially those of us in Silicon Valley) focus way too much on gadgets and too little on simple human knowledge. Southwest Airlines’ ability to get an airliner back in the air in half the time it took in the 1970s (and still does at many larger airlines) is as much about an increase in productivity as it is about installing the latest gadget. Growth is about the knowledge of how to do things, knowledge that is only sometimes embodied in machines. Free Solo is a great example of the expansion of ability, driven purely by advances in knowledge, untethered from machines.

This is important in the growth of such knowledge,

The key insight of modern growth theory is that, in the process described above, the larger the group studying any problem, the faster the knowledge advances. If 1,000 people are figuring out how to climb, and all of their good ideas disseminate through the group, each member of the group gets to use new ideas more quickly than if there are 100 people doing it.

So relevant at multiple levels!

Global shipping graphic of the day

The humble steel box, the standardised steel 20 ft X 8 ft (TEU) shipping container, has been central to the spectacular rise in global trade and the emergence of the global value chains (GVCs). 

The graphic below shows how the global container traffic has risen more than ten-fold over the past three decades and doubled since 2015. 

The article points to a reversal in the global shipping industry. For long the trend was towards off-shoring and expansion of GVCs, leading to even-growing Panamax ships to facilitate intercontinental trade. Ships capable of carrying over 20000 containers are now available.

But the trend of decline in trade and the re-shoring of economic activities is thought to shift attention towards shorter-distance regional traffic. The FT article writes,

That will put the emphasis on vessels that are quick to load and unload, rather than ones that can carry boxes at minimal cost over thousands of miles.

Agriculture terms of trade - coffee and chocolate

It is well-known that farmers get only a small fraction of the full value extracted from a coffee and cocoa bean.

This is the breakdown of the value capture from the cocoa bean supply chain.

The farmer gets just 6.6% of the total value of a chocolate sold. Ivory Coast and Ghana produce two-thirds of the global cocoa beans, but makes just $6 bn in revenues, from a global chocolate industry of $100bn. 

This is the cocoa supply chain.

This is the breakdown of the value capture from the coffee bean supply chain.

The farmer gets a mere 1 pence from a £2.50 cup of coffee! In contrast the coffee maker's profits are twenty-five fold higher!

Update 1 (03.06.2021)

Chocolate terms of trade fact of the day,

Of the $130bn global chocolate industry, less than $2bn goes to Ghana. Many farmers live in penury. Some employ children or extend their farms by cutting down forest to make ends meet. Farmers get at most 7 per cent of the chocolate value chain. Those who make, sell and market chocolate grab more than 80 per cent.

Measuring impacts of cash transfers vs infrastructure investments, and 'sins of omission'

In an insightful paper that is a must-read for all methodological purists among academics, George Akerlof draws the distinction between 'hard' (read quantitative or rigorous) and 'soft' (read qualitative) methodologies to explain economic and other phenomena. He claims that economists’ preference for the latter creates ‘sins of omission’. These omissions include arguments and explanations which are not amenable to the ‘hard’ approaches. For example, ‘stories’ and ‘anecdotal accounts’, even with their often-misleading portraits, carry important insights which are missed by the ‘hard’ approaches.

I had blogged earlier about the paper here.

A very good example of this is the debate surrounding cash transfers, and something like say, the Millennium Villages Project, which focused on capital and inputs intensive integrated village development approaches. The 'hard' methodologists find no evidence from investments in physical infrastructure like roads and electricity, and instead argue in favour of the likes of cash transfers ("transformed the economy"!!) as a better use of aid money.

Consider two development strategies followed in backward rural settings. Plan A - investments are made in physical infrastructure - school and hospital facilities, transportation connectivity, and electricity. Plan B - conditional or unconditional cash transfers of equivalent amounts. Which is likely to be more impactful?

Using Akerlof's framework, clearly the 'hard' methodologies will invariably favour the latter over the former. The former will have long-term and path dependency effects - sustainable economic growth is not possible without capital accumulation, of which infrastructure is a sine-qua-non - but limited medium-term effect on quantitative measures like income and on human development. 

What if we qualify impact by making the distinction between poverty alleviation and economic growth? 

Then the former comes with the certainty of positive partial equilibrium effects but limited or no economic trajectory shifting general equilibrium effects. The latter is a sine-qua-non for economic growth, though its likely general equilibrium effects are also dependent on other factors. It takes the village to the starting line in being able to engage meaningfully with the world of economic opportunities outside. But it is unlikely to generate significant immediate poverty alleviation effects. 

In this framework, cash transfers are, especially when compared to investments in basic infrastructure, something like the Cheshire cats - the impacts disappear with time, without even having expanded the production possibility frontiers (PPFs). 

The path dependency part is important. An all-weather road and transport connectivity expands the PPF by opening up the local society and economy with outside and all associated net benefits (I hope we don't dispute that integration of any type of hinterland with the mainland is, on the net, beneficial). Similar is the likely general equilibrium impact of reliable three-phase electricity supply. The combined effects of both in terms of opening up new economic opportunities and markets, and facilitating better access to public services is undeniable. 

There is another important consideration, that of the quality of implementation at scale. A new study on the much derided Millennium Villages Project from Northern Ghana writes,

The project improved some MDG indicators but, with few exceptions, impacts were small and core welfare indicators, such as monetary poverty, undernutrition and child mortality, remained unaffected. We found no spillover effects of the project to neighbouring areas and no displacements of development expenditure by local government and NGOs. We assessed the cost-effectiveness of the intervention and concluded that MVP did not produce the expected cost-saving synergies. We attribute the lack of impact to poor project design, redundancy of the interventions, and excessively high expectations.

In other words, the details of the design and implementation, both intimately tied to state capacity, were the primary reasons for the lack of impact. But we also know that in such countries, state capacity is acutely weak.

So, if state capacity is weak, and it detracts from the state ability to deliver on pretty much anything, then it is only appropriate that we focus on improving state's capacity.

The poverty alleviation-economic growth framework and the weak state capacity (and the inability to incorporate such considerations) are examples of the 'sins of omission' associated with 'hard' approaches. 

That we are even seriously debating these non-issues should be a damning indictment of the global discourse on development. This is also despite reasonably 'hard' evidence that the beneficiaries themselves favour investments over cash transfers. 

In fact, a UKAid report on the latest MVP study unwittingly points to the deficiencies of these evaluations,

Of course, in the long run, the MVP may produce welfare gains. For example, health care service improvements during the MVP period may improve health later on; or other considerable investments in infrastructure (roads, health and school facilities) may have an impact on future outcomes.

There is another contributor to the 'sins of omission', that arising from the marginalisation of experience and latent knowledge and the de novo search for evidence. I have blogged about it here.

As to cash transfers, this blog's views are summarised here. The case for cash transfers as a substitute for in-kind public goods of any kind (infrastructure to vouchers for education and health care) is questionable on multiple grounds, especially in countries where state is present (even if capacity is weak, the objective then being to strengthen state's capacity). Despite experimental evidence on cash transfers not being diverted to wasteful expenditures, scale-effects can be unpredictable. However, a cautious case for some form of cash transfers can be made in certain settings - refugee camps, civil war torn regions, and where state is completely absent.

The case study of India's solar industry

I have blogged earlier on multiple occasions urging caution on India's solar generation fad. It does appear that the chickens may soon be coming home to roost. Quoting extensively from a recent article in Livemint, which touches on several dimensions. 

Solar energy tariffs in India are among the lowest in the world, but state governments are keen to push them down further. These dangerously low tariffs are turning unsustainable for some developers, who in turn cut corners on quality. Some state power distribution companies (discoms) are also over a year late on paying their power bills... In the last four months, there have been 11 wind and solar project auctions. Only two of these auctions have been fully subscribed.

This is a story of failings at multiple levels. The much hyped entrepreneurial energies of India's private sector was, like elsewhere, missing in action, though doubtless again the government will be blamed,

"Countries on the solar leader board almost all have had a parallel development in solar-based IP, manufacturing and deployment. But in India, we went straight to deployment and that makes us vulnerable to global players like China and Vietnam who lead in manufacturing," said Ashwini K. Swain, executive director at the Centre for Energy, Environment and Resources, Delhi.

The sanctity of contracts took a beating as state governments blatantly reneged on their contractual obligations, as well as started revising policy as per their whims and fancies,

In July, Y.S. Jaganmohan Reddy, the newly elected chief minister of Andhra Pradesh, said solar and wind IPPs that provide power to the state would have to lower their tariffs or else see their long-term power purchase agreements (PPAs) cancelled... the state, at 7.7GW, buys 9.6% of the renewable power generated in India... Credit rating agency Crisil has estimated that Andhra Pradesh’s decision affects 5.2GW of its installed power, placing ₹21,000 crore of outstanding debt at risk of default... The bone of contention for the state government is PPAs signed from 2014-2019 that were over and above the mandated 5% renewable power purchase obligations of the state. Before competitive bidding for awarding projects was introduced for the renewable energy sector in 2017, states invited developers by setting a fixed tariff (called the feed-in tariff). Greenko’s first plants in the state sell power at ₹5.74 per kWh, which appears to incense the current dispensation when prevailing solar tariffs have fallen to a low of ₹2.44 per kWh... Taking a cue from Andhra Pradesh, Uttar Pradesh made an attempt to renegotiate old renewable energy tariffs. Gujarat decided last year that only projects which supply power to the state discom could use land within the state, flouting a central procurement agency’s rule for setting up projects under the interstate transmission system. Rajasthan, one of the most sought-after states for solar power plants, recently announced its decision to impose a charge of ₹2.5-5 lakh per megawatt on all projects that sell power outside the state.

Then there is the perennial power sector problem - the inability of discoms to pay out their dues,

As of July 2019, which is the latest data available from the Central Electricity Authority, state discoms owe a whopping ₹9,735.62 crore to renewable energy companies. Of this, ₹6,500 crore is due from just three states—Andhra Pradesh, Tamil Nadu and Telangana. Andhra Pradesh discoms, the worst offenders, haven’t paid their dues in over 13 months.

One of the most important players in inflating the solar bubble were from the financial markets, yet again demonstrating that finance loses all its disciplining powers when in a bubble,

While the renewable energy sector has been fuelled mostly by private equity (PE) investments so far, the number of firms now able to attract investment has dwindled. PE investment into renewables have stayed flat in 2018 ($1.93 million) and 2019 ($1.8 billion, till date). And large banks like State Bank of India are no longer lending to renewable energy projects that sell power at below ₹3 a unit.

Worsening the situation is the poor quality of the panels, another illustration of how unregulated market dynamics leads to skimping and cutting the corners by corporates.

But beyond the rising risks and regulatory uncertainty, an increasing area of concern is also the quality of solar energy installations in India, most of which are chasing cheaper panels from China to break-even. Animesh Damani, managing partner at Artha Energy Resources, a Mumbai-based renewable energy consultant and investment bank, said: “We have access to data on the performance of solar energy installations in a variety of states, and there is enough data available to show higher-than-expected degradation levels in the solar modules that Indian developers are using... Usually, we assume an average annual degradation rate of 0.8%. That is, generation from an installed solar plant falls by 0.8% roughly for every year of operation. But we’re now noticing that after a plant’s fourth or fifth year in operation, the average annual degradation is as high as 2-3%." A 2016 all-India survey by a team of experts from IIT Bombay on photovoltaic (PV) module reliability found significant variability in the quality and degradation rates of solar modules in India. The study warned that quality issues in solar PV cells could be the result of “very aggressive pricing and commissioning deadlines for PV plants in India in recent years". It cautioned that due diligence should be exercised while selecting and procuring modules, including verifying the antecedents of the manufacturer, and independent checks on the quality of the modules imported into India. “Indian developers rarely use tier-I panel manufacturers when setting up plants in India," said Damani of Artha. 

Weekend reading links

1. It's hard not to argue that SoftBank, with its $100 bn Vision Fund, which is ten times bigger than the next biggest venture fund, has single-handedly distorted incentives big-time in the venture capital world,

“These start-ups try to get workers attracted to them and bring them within the fold,” said Uma Rani, a researcher at the International Labor Organization who is surveying start-up contractors in emerging economies. “When the workers attach to the whole thing and are highly dependent on it, then you slash it. This is something we are systematically seeing.” SoftBank’s Vision Fund is an emblem of a broader phenomenon known as “overcapitalization” — essentially, too much cash. Venture funds inundated start-ups with more than $207 billion last year, or almost twice the amount invested globally during the dot-com peak in 2000, according to CB Insights, a firm that tracks private companies. Flush with the cash, entrepreneurs operated with scant oversight and little regard for profit. All the while, SoftBank and other investors have valued these start-ups at inflated levels, leading to an overheated system filled with unsound businesses. When the companies try to cash out by going public, some have run into hurdles. At two of SoftBank’s biggest investments, WeWork and Uber, some of these issues have become public... “Since the money started pouring out of SoftBank, they have completely distorted the priorities and focus of young ventures around the world,” said Len Sherman, a Columbia Business School professor.

The consequences,

At Ola, where SoftBank was the largest shareholder, 62 percent of what drivers earned in 2016 came from investor money rather than fares, according to the data firm RedSeer. When some of the start-ups cut costs, often prodded by SoftBank, they reduced payments to workers. Many contractors said they wanted to stop working with the start-ups, but couldn’t because of upfront investments they had to pay off. 

2. On Oyo, it is very hard to believe that its aggressive growth will have a happy ending.

3. From Eduardo Porter in the Times on how the rich cities are becoming richer still, increasing the gap with their poorer cousins,

There are about a dozen industries at the frontier of innovation. They include software and pharmaceuticals, semiconductors and data processing. Most of their workers have science or tech degrees. They invest heavily in research and development... And if you don’t live in one of a handful of urban areas along the coasts, you are unlikely to get a job in one of them. Boston, Seattle, San Diego, San Francisco and Silicon Valley captured nine out of 10 jobs created in these industries from 2005 to 2017, according to a report released on Monday. By 2017, these five metropolitan regions had accumulated almost a quarter of these jobs, up from under 18 percent a dozen years earlier. On the other end, about half of America’s 382 metro areas — including big cities like Los Angeles, Chicago and Philadelphia — lost such jobs. And the concentration of prosperity does not appear to be slowing down.

But efforts like this from a Brookings study that seeks to help others emulate the successful cities by supporting them with resources and enabling policies to attract new businesses may not be effective,

Battling the forces driving concentration will be tough. Unlike the manufacturing industries of the 20th century, which competed largely on cost, the tech businesses compete on having the next best thing. Cheap labor, which can help attract manufacturers to depressed areas, doesn’t work as an incentive. Instead, innovation industries cluster in cities where there are lots of highly educated workers, sophisticated suppliers and research institutions. Unlike businesses in, say, retail or health care, innovation businesses experience a sharp rise in the productivity of their workers if they are in places with lots of other such workers, according to research by Enrico Moretti, who is an economist at the University of California, Berkeley, and others.

Other industries and workers are also better off if they have the good fortune of being near leading-edge companies... The cycle is hard to break: Young educated workers will flock to cities with large knowledge industries because that’s where they will find the best opportunities to earn and learn and have fun. And start-ups will go there to seek them out. Even skyrocketing housing costs have not stopped the concentration of talent in a few superstar cities.

4.  Abhijit Banerjee and Esther Duflo write about the futility of searching for big ideas that drive economic growth, and instead argues in favour of focusing on smaller ideas which have evidence of impact.

5. On the phased manufacturing policy (PMP) for mobile phones, here is the latest,

India has imported mobile phone components worth more than $1 billion from Vietnam — with which India has a free trade agreement (FTA) —in the first half of this fiscal alone, compared to $800 million in the whole of 2018-19 and just over $600 million in FY18.

Following demand from handset makers, three years back India had imposed basic customs duty of up to 15% on imports of more than half-dozen mobile phone components, including a 20% duty on fully made mobile phones. The objective of the PMP was to gradually move up the value-chain by targeting volumes which, it was hoped, would help pull in sub-assembly and component industry in due course.

But apparently even as on the one hand India was imposing duties on components imports, on the other hand it was signing FTAs with Vietnam/ASEAN which ended up defeating the very purpose of the duties (which were aimed at China). A case of the two hands not co-ordinating?

Maybe I am missing something here. But if this is indeed a case of poor co-ordination and lack of active surveillance on a policy implementation, then we do have a big problem at hand.

6. This is interesting coming as it does from the Chairman of India's largest telecom operator, Mr Sunil Mittal,

We have gone through several crises before, but this probably is the most difficult time for the industry. We have seen brutal competition, an unprecedented competition, for the last two or three years. The result has broken balance sheets, eight companies have collapsed or folded up, gone bankrupt or were sold for nothing. What we have now must be protected. And for that, the government must do whatever they to support in whichever form they can, including the reduction in levies charged on us. They must have a sympathetic view towards the industry.  

He then goes ahead to suggest a new three-plus-one market structure for telecoms - three private operators and BSNL!

Left unsaid in this is an acknowledgement that the much hyped telecom story was largely about an industry being at an opportune moment in history with the market's evolution and the technological trends, and less about any inherent merits of unfettered market capitalism where governments get out of the way. The request for bailout by government would have appeared less hypocritical if this too was explicitly stated.

7. Good set of data on health expenditures from the NSS 2017-18 analysed in Livemint. Outpatient treatment expenses outstrip hospitalisation expenditures. While hospitalisation rate was 2.9% (2.9 out of 100 need hospitalisation, outside childbirth, in a year), non-hospitalisation treatment was 7.5% in the previous 15 days (to the survey). This makes average per capita expenditures on OP treatment to be double that of in-patient care. IP care in private hospitals is 6-8 times more costlier than in public hospitals. The share of OP care in total medical expenses is higher for the poor.

Medicines account for the major share of the out-of-pocket expenditures.

8. A measure of the extent of credit binge by Chinese companies,

The banking system more than quadrupled in size, from $9 trillion at the end of 2008 to $40 trillion today... While most of the lending comes from banks, Chinese borrowers have increasingly turned to the bond market to get money they need to run their businesses. Now the bill is coming due. According to S&P Global, Chinese companies must pay back $90 billion in debt denominated in American dollars, meaning the lenders are global companies and investors outside China. In 2021, an additional $110 billion will come due. At home, Chinese companies will have to pay $694.6 billion to bondholders next year and $706 billion in 2021.

9. An interesting study from China about the value of collecting and disseminating information on air pollution which leads to behavioural adaptations that lower health costs,

During 2013-2014, China launched a nation-wide real-time air quality monitoring and disclosure program, a watershed moment in the history of its environmental regulations. We present the first empirical analysis of this natural experiment by exploiting its staggered introduction across cities. The program has transformed the landscape of China's environmental protection, substantially expanded public access to pollution information, and dramatically increased households' awareness about pollution issues. These transformations, in turn, triggered a cascade of behavioral changes in household activities such as online searches, day-to-day shopping, and housing demand when pollution was elevated. As a result, air pollution's mortality cost was reduced by nearly 7% post the program. A conservative estimate of the annual benefit is RMB 130 billion, which is at least one order of magnitude larger than the cost of the program and the associated avoidance behavior. Our findings highlight considerable benefits from improving access to pollution information in developing countries, many of which are experiencing the world's worst air pollution but do not systematically collect or disseminate pollution information.

10. Finally, Ed Luce shines light on the opacity surrounding financial market transactions in the US,

The US has 10 times more shell companies than the next 41 jurisdictions combined, according to the World Bank... America is the largest dirty money haven in the world. Its illicit money flows dwarf that of any other territory, unless you treat Britain and its offshore tax havens as one. The US Treasury estimates that $300bn is laundered annually in America. This is probably a fraction of the true number. Worse, the US government has no idea who controls the companies that channel the money because America lacks a corporate central registry. There is no law in America requiring disclosure of “beneficial ownership”. US banks must report suspicious activity. But law firms, real estate companies, art sellers, incorporated enterprises and non-bank financial institutions are exempt. Those hoping to clamp down on money laundering are thus heavily outgunned by lobbyists for the status quo... the US system offers a red carpet for dirty money. Furthermore, autocrats in Russia, China, Saudi Arabia and elsewhere could not thrive without the connivance of America’s suite of service providers.

This is a great primer on how the corrupt use legal structures to hide stolen wealth and what to do about it.

Start-ups and "millennial lifestyle sponsorship"!

Derek Thompson (HT: Sandipan Deb) cuts to the chase with the start-up hype, describing it as a massive lifestyle subsidy to consumers,

Starting about a decade ago, a fleet of well-known start-ups promised to change the way we work, work out, eat, shop, cook, commute, and sleep. These lifestyle-adjustment companies were so influential that wannabe entrepreneurs saw them as a template, flooding Silicon Valley with “Uber for X” pitches. But as their promises soared, their profits didn’t. It’s easy to spend all day riding unicorns whose most magical property is their ability to combine high valuations with persistently negative earnings—something I’ve pointed out before. If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home, and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year. If you use Lime scooters to bop around the city, download Wag to walk your dog, and sign up for Blue Apron to make a meal, that’s three more brands that have never recorded a dime in earnings, or have seen their valuations fall by more than 50 percent...

To maximize customer growth they have strategically—or at least “strategically”—throttled their prices, in effect providing a massive consumer subsidy. You might call it the Millennial Lifestyle Sponsorship, in which consumer tech companies, along with their venture-capital backers, help fund the daily habits of their disproportionately young and urban user base. With each Uber ride, WeWork membership, and hand-delivered dinner, the typical consumer has been getting a sweetheart deal. For consumers—if not for many beleaguered contract workers—the MLS is a magnificent deal, a capital-to-labor transfer of wealth in pursuit of long-term profit; the sort of thing that might simultaneously please Bernie Sanders and the ghost of Milton Friedman.

When this round of start-up bubble bursts, as it will in the foreseeable future, several narratives (the world abounds with spectacular innovations waiting to be harnessed, boot-strapped start-ups are best placed to harness them, VCs are good at spotting these innovators, there is a VC funnel with this investment approach, and so on) and reputations (among the big name investors, and the world of impact investing itself) will take big hits.

This is hardly a game about building sustainable businesses, but about growing at whatever cost and thereby keeping the valuations going up - about cheshire cats than unicorns! Unfortunately, it is also giving a bad name to those investors who are genuinely good at spotting good businesses. 

Sample this, this, this and this to know more about the realities of the start-up world.