Monday, June 29, 2020

Agriculture sector and wicked problems

The mainstream narrative on agriculture is simplistic. Deregulate (land sales, produce sales), de-clog (commodities market, storage investments), and digitise (electronic trading) to attract private investments into the sector, ease out exploitative brokers and connect farmers directly to the market. 

If only it were so simple. Instead, we have a classic example of a wicked problem which requires enterprise, persistence and patience with implementation, and that too one which involves multiple stakeholders and a complex political economy. 

The Government of India recently initiated three major reforms - allowing farmers to sell outside the mandis, ease the restrictions on stocking of certain food items, and a contractual framework for contract farming. These three, coupled with the eNAM, provide the basis for perhaps the most promising starting point for meaningful efforts at reform. Then there are the model regulations on tenancy and leasing, which state governments have to adopt. 

It has to be stressed that it is only the starting point. The real work lies ahead.

As I blogged here, the implementation challenges with these agriculture reforms, especially something like the eNAM, are immense. Besides Bihar's experience, having abolished APMC Act in 2006, is not encouraging. Replacing a tightly regulated system with a completely deregulated system is not the answer. Markets are not going to do any magic here. Not by any stretch.

Sales outside the mandis require its set of physical and facilitative infrastructures. The former, involving marketplace infrastructure and storage facilities, is about  public financing and attracting private participation. But private investments in market infrastructure is linked to the success with the implementation of the other two reforms.

The facilitative infrastructures require changing farming practices (adoption of new cropping practices, and sorting and grading at farm gate), engendering trust (among seller farmers and buyer traders), and creating regulatory capacity at the field to prevent exploitative practices by the contracting agency and cheating by farmers. This demands significant work for the local agriculture department officials, especially the extension services. This will be a big challenge. 

The de-listing of some items from the Essential Commodities Act and easing of restrictions on stocking is expected to attract investments into purchases, storage, and marketing of these commodities by large companies. But this depends on its practical implementation. Its real test would be how public policy reacts to the recurrent bouts of price spikes and associated political economy demands, and whether those actions adversely impacts the first-mover investors. Again an issue of trust. 

Contract farming is already successfully deployed in isolated pockets in states like Punjab, Madhya Pradesh, Tamil Nadu, Karnataka, Maharashtra etc. The objective now is to make it more mainstream. The Farmers (Empowerment and Protection) Agreement on Farm Price Assurance and Farm Services Ordinance, 2020 provides a national contracting and enforcement framework. Notwithstanding the challenges with actual contract enforcement of any kind in India, this is a good step. 

More fundamentally, contract farming requires overcoming the problems of small farm sizes, low productivity, and poor crop management practices. Given these antecedent problems (and these are not easily overcome - some of the suggestions like deregulating agricultural land sales will lead to consolidation are just fanciful) and poor quality of public agriculture extension services, the contracting company has to engage actively to cultivate social capital and deploy its services to enable technology transfer. 

In fact, even with a legal framework on contract farming, creating a trust-based relationship may be the most important requirement for a successful contract farming relationship. The political economy of agriculture and the populist narratives around exploitation of farmers makes this all the more important. In the circumstances, a contract farming arrangement intermediated through Farmers' Producer Organisations (FPOs) may be the most prudent approach. 

The government's role will have to be two-fold. One, offer some incentives to large agriculture produce procurers (farming companies and retailers) so as to kickstart the pathway to scaling the idea. Some form of crop insurance subsidy or the likes could be an option. Another option would be to integrate the government's own extension services and other publicly offered linkages to the contract farming system. They could constitute a set of confidence building measures. 

Second, the local government authorities will have to display maturity in dealing with some of the likely problems with contract farming - accusations of exploitation in pricing, non-adherence to contractual terms by both sides, off-contract sales by farmers etc. It is important to outline a clear set of principles and exclusions and ensure that both sides are made aware and are held to account. The high level of social capital inherent in FPOs make them all the more appropriate as the nodal contracting partner for the private company.   

This and this papers have good listing of all the requirements for the success of contract farming. As can be seen, enforcement mechanism is only one among the requirements. 

In many respects, the problems with contract farming is similar to those with failure of contract manufacturing in India. Both the industrial and agriculture landscape are characterised by fragmentation, low productivity, poor quality, and sorely deficient infrastructure. Besides both are mired in complex political economy - of labour in industry, and farmers in agriculture. 

The good thing is that we are now belatedly at the starting line. The challenge is now to execute on these reforms. That's very hard. It's not amenable to one-size-fits-all approaches of nationwide implementation. 

Given the nature of the problems and the vast diversity of contexts, this will require multi-pronged and experimental approaches. It is useful to start with existing structures and see how they can be leveraged to build on these reforms. The Primary Agriculture Credit Societies (PACS), FPOs, existing APMC mandis, existing contract farming companies, and so on have to become critical anchors in this journey. They all need to be co-opted, instead of trying to create new alternative platforms and infrastructures, unless exceptional circumstances demand. Besides, there will have to be sufficient tolerance for failures, and alertness to spot successes and commitment to scale successful ideas. 

In this context, a rare example of informed public commentary on agriculture market reforms comes from former NABARD Chairman Harsh Bhanwala and Nirupam Mehrotra. One of the suggestions is to develop and increase efficiency of existing agriculture marketing pathways,
During Covid-19, the ability of FPOs to deliver was demonstrated successfully in some states. So, we have a proof of concept to work on quickly. It would be a fallacy to just provide these grassroots farmer-level institutions only standalone infrastructure like storage capacity. What should be envisaged is linking up through various interventions — from logistics and digital mode to the value chain. The government had, under the Mission for Integrated Development of Horticulture (MIDH), identified 78 Bagwani clusters. In these clusters, FPOs can be linked with the value chain and export markets. Many FPOs are already conducting activity/commodity-specific trades. Essentially, while building this alternative structure, one should also envision the role it can play in building up an alternative price discovery mechanism. These institutions can be linked to commodity stock exchanges (spot markets), and alternative price discovery can happen, as opposed to the APMC route. As the size of this route increases, it would lead to an effective price discovery mechanism. This route is organically nearer to a National Markets Platform, as opposed to APMCs and even the eNAM, which is housed in (or a part of) APMCs.
Another suggestion is on moving beyond the MSP by subsidising access to commodities options,
Another viable option is to explore how one can move beyond minimum support price (MSP) as a mechanism to offer remunerative prices. Commodity options could be one such realistic measure for the government. Essentially, there are basically two types of options — call and put options. Buyers of “put” options have the right but not the obligation to sell, or make a delivery, at a predetermined price and date. Therefore, a put option could be used to advantage by farmers. If a farmer buys a put option of a commodity he produces, he locks in his profit by paying a premium. This premium could be partially or fully subsidised by the government.
The point about public subsidy on price of the options is interesting and perhaps one way to get FPOs start engaging with the commodities market. It could work well for some products and for FPOs in certain regions.
Debashis Basu has another suggestion,
The solution is for the NITI Aayog to select some of these states for a pilot project and get on board a few large business groups (Reliance, ITC, Mahindra, and others have enormous knowledge and can scale up quickly). Make them compete with each other to get the most modern technology at Indian costs, all with the ultimate vision of connecting the Indian farmer to the global market. This experiment must have positive feedback loops, embedded in the design, allowing sensible course corrections.
In short, agriculture sector requires reform by allowing million flowers to bloom and building bonds of credibility and trust across different market participants. And develop the system and capacity to learn from emergent evidence and scale successful practices.

Update 1 (21.07.2020)

Christophe Jaffrelot has a contrarian take on the agriculture market reforms of the government.

Update 2 (19.09.2020)

A primer in Indian Express on agriculture market reforms points to the importance of implementation.

Update 3 (20.09.2020)

Three good articles on the four agriculture reform measures - by Mekhala Krishnamurthy, Kavitha Kuruganti, Rajalakshmi Nirmal, and Harish Damodaran et al. All point to the importance of implementation and the perils of unregulated private markets. There is a real danger that without follow-up and regulation, this could end far worse than now. 

Himanshu writes about the present status on state-level agriculture markets,
Out of 36 states and union territories, 18 states have already enacted reforms allowing for establishment of private market yards/private markets, 19 states have enacted reforms allowing for direct purchase of agricultural produce from agriculturists by processor/bulk buyer/bulk retailer/exporter, 20 states have enacted contract farming acts. Kerala and Bihar do not have APMC mandis and Tamil Nadu has a different system.
This appears to be the central concern, 
In any case, mandi trade accounts for less than one-fourth of the total agricultural trade with the rest accounted for by private markets/traders. The absence of regulation and exemption from mandi fees creates a dual market structure which is not only inefficient but will also encourage unregulated trade detrimental to the primary purpose of providing market access to farmers for better price discovery and assured prices. Most farmers realise that the FTPC Bill is not about delivering on the promise of freedom to farmers but freedom to private capital to purchase agricultural produce at cheaper prices and without any regulation or oversight by the government. Farmers also realise that this will eventually lead to shifting of trade from regulated APMC mandis to private markets without any commitment to investment in infrastructure and regulation from government. With unequal and differentiated terms of engagement, the decline and disappearance of the APMC is only a matter of time.
The concerns that APMC will wither away and the role of MSP will decrease may be unfounded. The political economy surrounding agriculture will play itself out in the field. It may be very difficult for governments to be seen diluting their commitment to backstop procurements, especially if there is a perceptible decline in prices and rural distress is evident. After all despite many states already having regulations which effectively allow all these concerns to play out, it is instructive that none of them have actually materialised.

Update 4 (02.10.2020)

Yogendra Yadav hits the nail on its head zeroing in on the flawed assumptions with the prevailing narrative on the agriculture market deregulation legislations.

But this should not be taken to mean that the deregulation is bad, but only draws attention to the importance of its implantation in a manner that addresses these concerns. Poor implementation will certainly leave the farmers worse off.

Update 5 (18.10.2020)

This article outlines the potential/promise from shifting to horticulture. While the author does not point to, it also contains insights about the challenges with actual realisation of the objective. 

Update 6 (25.10.2020)

Ramesh Chand has a very good article making the case for the agriculture reform legislations. 

Update 7 (26.10.2020)

2019 RBI survey on agriculture has useful insights about what farmers and traders think are important for them. MSP is seen as the most useful government policy by farmers. Interestingly, provision of market information on prices, weather, agronomic practices etc is highly valued by farmers. 

Update 8 (02.11.2020)

Harish Damodaran has a very good article about Bihar's experience with its 2006 repeal of APMC Act and allowing farmers to trade freely outside. As the article says, the independence of farmers to sell their produce to anyone will remain only in imagination and has limited practical relevance. 
The significant thing is that there are no APMC mandis involved here. Farmers sell grain to the small vyapari, who bags it and supplies to the bigger commission agent-cum-trader. The processors/millers, in turn, only deal with the bada vyapari. They aren’t buying directly from farmers yet – despite Bihar’s Agricultural Produce Market (Repealing) Act permitting it since 2006. “I am now forced to sell to one vyapari, who pays me after 20-30 days. We need a local APMC, where there are more buyers and payment is made within 2-3 days,” sums up Bhubaneswar Yadav.

Update 9 (06.12.2020)

This and this are very good articles on the three legislations, the latter on how it's likely to impact Andhra Pradesh.

Update 10 (18.12.2020)

A good summary of the APMC Act reforms across the years by different states.

Saturday, June 27, 2020

Weekend reading links

1. Vietnam's export machine gets a boost with the signing of an FTA with EU.
Once the agreement takes effect, 71 per cent of exports from Vietnam to the EU will become duty-free, as will 65 per cent of EU shipments to Vietnam. Of the remaining tariffs, up to 99 per cent will be phased out by Hanoi over 10 years and by Brussels over seven years... Once the deal takes effect, the bloc is to eliminate tariffs on 77.3 per cent of Vietnam’s textile and apparel exports after five years and the remaining 22.7 per cent after seven years.
Only makes India's attempts to attract global value chains from China that much harder.

2. The US and Europe have followed different stimulus approaches. The former adopted rolling out a generous unemployment benefit program that allowed businesses to furlough workers. The latter preferred to support firms with wage subsidy programs (like the German Kurzarbeit) to prevent firms from having to lay off workers. In a few months, we will be able to make an assessment of which approach was better at both limiting lockdown suffering as well as expediting recovery. 

The Economist has an article that examines this dilemma.

3. This article about how Dharavi, with a population of 8.5 lakh, has keep its deaths to just 79. The number of tests done till now has been 7000 and the number of positive cases 2158.

Two things stand out clearly. One, with congested spaces and community toilets, it is inconceivable that since the first case was detected on April 1, the actual number of cases in Dharavi is just 2000 odd. Including all the asymptomatic cases, it is likely to be orders of magnitude higher. Then there has been the gradual lockdown easing. Despite all this, the number of deaths is just 79. This points to the lower fatality rates with the pandemic itself. Two, this has been achieved without the kind of mass testing that people demand as essential for addressing Covid 19.

These are the two headline points that I have been writing about in earlier posts. This is another story about Dharavi.

The decision to impose mandatory institutional quarantine in Delhi is completely unfounded on practical considerations and any professional opinion. This and this are good articles about reasons why it's just counterproductive.

4. The issue of reducing dependence on China has to start with defence requirements like protective gears. It is not enough to merely announce an intent to reduce dependence or even mandate that manufacturers don't source it from China. The issue of price competitiveness goes to the heart of most dependencies on China,
Neeraj Gupta, Managing Director of MKU, said the firm imports raw materials from either US or European countries which pushes their prices up. “Chinese raw materials are 60%-70% cheaper than other international firms but this is a sector where quality of the gear and minimum loss of life on the frontlines is of utmost importance,” he said.
It is also required to be willing to pay the higher price for equipment which is sourced from other countries or made locally. This will be the case for everything from solar power to telecommunications. Customers, including the government, should be willing to pay the higher price, atleast in certain strategic sectors.

As a policy, the Government of India should discourage Chinese companies from supplying to solar, thermal power, metro rail and railway, telecoms, and defence sectors. Also Chinese contractors should be barred from all construction projects. Finally, Chinese investments in tech companies should be disallowed. All these should be done directly or indirectly (visa restriction, technical specifications etc), as diplomatically feasible. The remaining sectors can be allowed to continue engagement without restrictions. The part of the 82 km Delhi-Meerut rapid rail project proposed to be awarded to Shanghai Tunnel Engineering Company could be the start.

But the boycott China policy has hard limits as Rathin Roy says,
We are not buying Chinese goods today out of any love for China. Why are even our sewing needles manufactured in China? We are not able to manufacture even low-end products as cheaply as China is. And therefore it is a rational economic decision to buy something from somewhere when it is sold as cheaply as possible. If you choose not to do that, then your economy becomes more expensive and then your growth falls, and you lose. You have two options. Either you accept that you are going to become a more expensive country, or you put in place a plan to produce the things you take from China, more cheaply in India. India has been in a situation where we can produce high-end products for our consumers, but when it comes to mass market items, we are uncompetitive, compared to other countries, not just China. 
5. Good historical perspective on India-China border issue by Shyam Sharan here. More by him here on the need to exercise political control over the situation in the border. C Rajamohan writes about the need for a reset to India's China policy by acknowledging the rise of China and its expansionist ambitions. PJS Pannu on the undefined LAC. See also this by Nitin Gokhale. PB Mehta cautions against excessive reliance on outside help.

Good set of satellite images here about the activity at the LAC.

On the maritime side, in light of Chinese ports or refuelling facilities at Hambantota (Sri Lanka), Kyaukpyu and Sittwe (Myanmar), and  Pyaara (Bangalodesh), the importance of securing the Bay of Bengal and Indian Ocean assumes critical importance,
But what happens if China insists that shipping liners should not travel into its extended nautical zone? Moves in southeast Asia suggest that it is prone to expansive notions of nautical boundaries. It will raise costs as ships take longer diversions. It can get worse if a nation follows up its warning with a possible disruption to even one commercial ship, claiming it an inadvertent strike. Costs for the nation will skyrocket, with not only longer shipping voyages but also added insurance costs.
The case for quick development of Andaman and Nicobar Islands as a military facility has never been more important.

6. A NAR article talks about Indian startups wooing Japanese investors. This can be a cautionary note,
Japanese companies have a rocky history of investing in India. Two major deals more than a decade ago -- Daiichi Sankyo's 500 billion yen (around $5.1 billion at the time) acquisition of pharmaceutical company Ranbaxy Laboratories in 2008 and NTT Docomo's 250 billion yen investment in a telecoms business of Tata in 2009 -- led to bitter legal disputes and are widely regarded as cautionary tales.
5. A status report on the only 24X7 water supply project under implementation in an Indian city, from Nagpur.

6. Tamal Bandopadhyay has a good article about the recent proposals by RBI to housing finance market. This summary of the market is useful,
The compounded annual growth rate of NBFCs in the five years between 2013 and 2018 was 17 per cent versus 9.4 per cent growth of the banking system; the HFCs grew even faster — 20 per cent. Since then, the HFCs’ growth has come down to around 13 per cent annually. There were 72 HFCs in 2015; since then the number has grown to nearly 100. As of December 2019, the size of the Indian housing finance market was Rs 20.7 trillion, including finance to commercial real estates and builders. The share of a few large banks, which have been aggressively chasing home buyers, is roughly two-thirds of this. One-third of this market belongs to the HFCs and NBFCs and about 10 of them have 90 per cent share of the pie.
7. Jahangir Aziz calls for cutting rates, increasing liquidity, and widening fiscal deficit in India.

8. Peter Navarro made a very valid point,
“One of the things that this crisis has taught us, sir, is that we are dangerously overdependent on a global supply chain for our medicines, like penicillin; our medical supplies, like masks; and our medical equipment, like ventilators.”
Martin Wolf disagrees branding it as protectionism. Both are talking past each other. Navarro is make the point in the context of the over-dependence on China. It is a case none of the liberals or opinion makers have made over the years as the world got sucked ever deeper into dependence on China. It took the Trump administration and renegades like Navarro to surface this concern. It cannot be anybody's cause that this state of affairs be continued.

Besides, and especially for larger economies and global powers like the US, resilience demands not just diversification away from China to other countries, but also some share of local production in atleast certain categories of products. If that requires reshoring, then so be it.

9. Austria issues a 2 billion euro 100 year bond with a yield of 0.88%. The bond was oversubscribed ten times!

10. A NYT article about the low wage problem in the US economy. This graphic about how automation hits the low-wage jobs the most is instructive.
11. Roland Fryer has this summary of findings from his studies on racism in policing in the US. Yes, there is racism in non-lethal encounters, but not in shootings. And see also this by Coleman Hughes.

12. From a very nice NYT feature on ship-building in the US,
In the United States, large shipyards have been on the decline for decades, losing out on orders for massive commercial ships to cheaper foreign competition. Today, more than 90 percent of global shipbuilding takes place in just three countries: China, South Korea and Japan. What industry does remain in the United States is supported by the federal government, which orders American-made ships of all kinds, from Coast Guard cutters to naval aircraft carriers. The industry is also protected by a century-old law, the Jones Act, which requires that people and goods moving between American ports be carried on ships owned and operated by U.S. citizens and built domestically. The federal involvement has helped to preserve the vitality of the 124 remaining active American shipyards, which, according to government estimates, contribute more than $37 billion in annual economic output and support about 400,000 jobs.
13. Profile of the 3 million plus migrants who have returned to Uttar Pradesh post-lockdown. More than half are unskilled, with over half-a-million in construction. 

14. Finally about the problems facing the start-up fund administered by SIDBI. The Fund of Funds initiated in 2016 with Rs 2500 Cr and a four-year commitment of Rs 10000 Cr. Till date, Rs 3798 Cr has been committed and Rs 1025 Cr drawn down. A Business Standard article writes, 
Five years on, while the start-up fund has spurred some activity in the domestic VC ecosystem, the allocation from the fund has been slow and mired in bureaucratic hurdles, three investors concur. The process for sanction of funds takes months, or more. But an even bigger problem is that sanctions are typically contingent on the VC raising funds from other investors. For instance, if a VC with a Rs 100-crore targeted fund approaches Sidbi for a contribution of Rs 20 crore (20 per cent) and gets an approval, Sidbi could, in some cases, wait for the VC to raise the remaining Rs 80 crore before releasing the committed Rs 20 crore, says a Bengaluru-based investor closely involved with the bank. “Sidbi has made the fund-of-funds structure very convoluted,” says this investor. “It wants to be ‘last in, first-out’, does not allow tranche drawdown, and takes a long time to disburse the money. So, the investor’s hands are tied. If I get a good deal, I don’t have the money to invest,” the investor explains.
And this about the like problems with the Rs 10000 Cr government equity to a Rs 50000 Cr fund of funds to invest equity in SMEs,
Firstly, the structure of the fund envisages contribution by other investors as well — venture capitalists (VC), for example — but MSMEs are not a viable asset class for VCs to invest in. These companies do not offer the upsides that technology or technology-enabled businesses do, and that is one reason why there are no MSME-focused VCs, according to market participants. And secondly, even if the fund gets off the ground, the actual investment will not take place for six-eight months. By that time, most distressed small firms would have closed down.

Friday, June 26, 2020

Constraints to scale manufacturing in India - the entrepreneurship deficit?

I blogged here about the state of India's footwear industry.

As western and Japanese businesses seek to exit China and active efforts are underway to recalibrate the global manufacturing value chains, discussion invariably involves India. 

Given the size of the market, it is surprising that India struggles with scale manufacturing. Even neighbouring Bangladesh, for example, has much bigger textiles manufacturing facilities than India. The country's marginal role in the global contract manufacturing market is surprising.

The conventional wisdom on the deficient scale of Indian manufacturing blames poor quality of infrastructure, restrictive labour laws, difficulty in assembling large land parcels, high cost of capital, and pervasive red tape. These are all, in general, legitimate areas of concern. But even where these are taken into account (like with SEZs and already existing large manufacturers), scaling has proven elusive.

Labour management including labour relations are critical factors even if other issues are addressed. All discussions about labour issues tend to focus on problems with retrenching workers and compliances. For sure, when lay-offs are difficult, labour hiring becomes almost like a fixed investment. This is important since manufacturing for the export market exposes the company to the business cycle risks, which demands retaining the ability to scale down production and lay-off workers. 

But an equally important factor when dealing with facilities employing thousands of people is the sheer human resource challenge of managing them, distinct from the labour laws themselves. Managing a facility with 15000 workers is qualitatively different than managing one with 3000 workers. While there are many large employers in India, they are generally spread over several production facilities. The recurrent issues and problems with labour issues can take up significant senior management bandwidth, besides the attendant risks and tensions.

This brings us to an important overlooked dimension, the innate characteristics of these entrepreneurs. In particular, the deficiency of entrepreneurial ambition and risk appetite to scale, among the small universe of those who are well-positioned to scale. This is applicable to entrepreneurs across sectors. While I have not come across studies in this regard, anecdotal evidence from multiple sources point in this direction.

This is important also since scale manufacturing also comes with embracing a much higher level of risk, an appetite which Indian companies outside of a tiny handful for very large groups involved in infrastructure sector have not exhibited. For example, large contract manufacturers are exposed to the vagaries of the business cycle and associated risks of cash-flow management, demanding customers which in turn necessitates constant technological upgradation, and so on. All these require an entrepreneurial spirit and risk appetite that is qualitatively different from that of being a successful mid-sized manufacturer. The example of Reliance may be an outlier in terms of ambition and risk appetite, but conveys the mindset required. 

The entrepreneurs of firms in the INR 100-200 million revenue category, located in Tier II and III cities, earn more than enough to have very comfortable lives. They earn enough to afford a BMW car, an annual European holiday, and send their children abroad for studies. This satisfaction and lack of risk appetite is an under-appreciated constraint on scaling.

Then there is the dynamics of family-owned businesses. The smaller size of the enterprise also helps them control their business without relying on outsiders and professional managers. It also limits the commercial risk exposure from a business downturn. They can rely on some local and loyal staff to manage the business. Scaling also requires capital investment in greater automation and adherence to higher standards. All this adds layers of costs and there is the danger of losing control and assumption of greater business risks.

At a conceptual level, this is not to completely discount the value of family businesses. In fact, today, with listed businesses more focused on short-term results and stock market performance based on leverage-financed stock buybacks, there is a strong argument that virtuous and conservative businesses are a strength to the economy. It is just that an excess of everything, including conservative business practices, can be sub-optimal. 

In fact, these forces are likely to be even more relevant in case of the larger firms. They would have to take the leap of faith of entrusting critical operations to professional managers, with all the attendant risks of delegating power and losing control, not to mention costs. More importantly, expansion also necessitates going beyond bank finance and attracting either external capital from the public or private markets. This entails sharing control over the business decisions. Besides, it also involves greater adherence to certain standards and practices, which increases external oversight and reduces operational flexibility. 

Typically, from among the universe of growth-focused small manufacturers a few grow into medium-sized ones,  fewer still to large ones, and a minuscule proportion into very large ones. But what if the universe of ambitious enterprises from which the very large manufacturers emerge is itself so narrow as to seriously limit the prospects of progression?

In fact, apart from the occasional start-ups, the expansion that happens in the industry comes more often when a family business is divided and siblings spin-off their own independent businesses. This is often described as the “divide and grow” feature of Indian family owned businesses. This stands in contrast to the “conquer and grow” approach that is the essence of scaling. 

Another requirement for scale manufacturing is the availability of component manufacturers and product development facilities. Large manufacturing is about creating eco-systems that can help lower transaction costs and leverage efficiencies and economies associated with scale. Establishing a large manufacturing facility is about transplanting an eco-system. It is for this reason that large  footwear contract manufacturers that have relocated to India like Lotus and Apache have brought along with them their component suppliers and they too are located within their large integrated facilities.

Update 1 (24.07.2020)

Is Adar Poonawala, the CEO of Serum Institute, an exception to the norm?
Poonawalla, who was already working with the University of Oxford on a malaria vaccine candidate, was quick to spot the promise of its Covid-19 vaccine (code named AZD1222). Serum Institute now has a tie up with AstraZeneca-backed Oxford vaccine candidate for one billion doses which it will make for India and the GAVI vaccine alliance of 58 countries. Poonawalla is perhaps the only Indian vaccine maker who has decided to start making a vaccine (which is still under clinical trials) on “personal risk”. He has said in his recent interviews that Serum Institute is putting in $200 million to create capacities for the AstraZeneca-Oxford vaccine... in around 2005-06... Serum Institute was supplying vaccines to around 35 countries... He got the Serum Institute vaccines validated globally and began supplying to aid agencies including the World Health Organisation (WHO). Today, Serum Institute exports to around 150 countries across the world, sells over 1.5 billion doses of vaccines and is the world’s largest vaccine maker in terms of volumes.

Thursday, June 25, 2020

Observations on credit guarantee schemes

Ananth has an oped that shines light on the important reform area of SME credit. I agree with the broader point about reforms to the credit guarantee schemes and unlocking more value from them. 

A few additional points 

1. This is an example of an area requiring a clear policy-focused research agenda. Perhaps for SIDBI to commission?

Guarantees assume fiscal support. It would be useful to consolidate the annual fiscal outgo from all the different guarantee schemes for the past few years.

I also assume guarantees have a twin objective - unlock more capital AND for certain categories of borrowers. The challenge then is this - given this fiscal outgo, what forms or structures of guarantees can best serve this objective? What can empirical analysis of lending practices among different lenders inform us in this regard? What are the global best practices on this? 

This can be invaluable in the design of a good guarantee scheme. This would also be a good example of policy-relevant research.

2. For sure guarantees are an important instrument. But we should be realistic in our expectations. I am not optimistic that there is any type(s) of guarantee program(s) can unlock extra resources of anything even remotely close to ₹10 trillion from a ₹1 trillion guarantee. The weak interest in the recently announced 100% credit guarantee scheme is a case in point. 

The conventional wisdom is that the binding constraint faced by MSMEs to accessing credit is one of supply availability. Instead, for MSMEs (at least the small enterprises) what if the greater binding constraints are cost of capital, excessive risk-aversion and gate-keeping by lenders, timeliness and convenience of access, and so on? In other words, the availability of capital at the right price and right level of accessibility. 

Incidentally, credit-guarantees have been the holy grail for multi-lateral infrastructure and development finance lending - offer some guarantees to unlock private capital from elsewhere, especially domestic credit sources. But the limited success with the World Bank's Multilateral Investment Guarantee Agency (MIGA) underscores the challenge. 

3. The oped writes,
While SIDBI’s Credit Guarantee Fund Trust for Micro and Small Enterprises is a credit guarantee programme, it guarantees MSME customers individually and offers fairly generous credit coverage in theory. However, all banks report significant delays in payment of these guaranteed amounts. The low off-take of a 100% guarantee structure announced in the context of the MSME covid relief measures, particularly among private banks, is a reflection of the low credibility of the guarantee administration.
This underlines the importance of the small details of such programs - ease of borrowers access to credit, ease of reimbursement claims etc - which are almost always the difference between a good program and an unsuccessful one. I blogged earlier about the same challenge with initiatives like eNAM and TReDS.

4. Finally, in this working paper, I have discussed the issue of Development Finance Institution (DFIs) meeting their development mandate and the problems of DFI governance, from both the global and Indian experiences. I also proposed eight design features of a new generation of DFI. 

Wednesday, June 24, 2020

Nepotistic corruption graphic of the day

Stefano Gagliarducci and Marco Manacorda have a new paper which tries to quantify the relationship between holding political office and private benefit in Italy. They find strong evidence of nepotistic corruption. 

They examined data from 1985-2011 of all political offices in the central, regional, provincial, and municipal government levels, and matched the politicians with their relatives living in the same municipality (since Italians have unique surnames, there is a rough match among people with same surname and living in the same area). They compared the earnings and employment of relatives when a family member entered office compared to those that did not have one. 
Their findings,
They found that Italian politicians secured significant advantages in obtaining private sector jobs for their family members. And these favors appear to be reciprocated... Overall, winning an office generated an extra €10,000 worth of private sector earnings for family members... In fact, officials with larger budgets and more regulatory control over industries did indeed gain more benefits for their family. But there wasn’t any evidence that officials in the upper reaches of government did. This pattern is consistent with arguments that larger bureaucracies and less oversight are at the root cause of corruption. While higher-profile politicians are more powerful, they can face more scrutiny. Public backlashes may keep them in check, while local officials fly under the radar... The potential scope of Italy's nepotism could be quite large. The authors estimate that at a minimum, 0.4 percent of all private sector employment arises from familial ties to elected officials. That number would surely rise if it were to include friends and associates of politicians.
Another finding was about the emergence of a new nepotistic equilibrium as an outcome from the Italian anti-corruption drive of the nineties,
Bribery investigations launched in 1992—known as Operation Clean Hands—led to the conviction of a former prime minister, the dissolution of Italy’s main parties, and numerous trials of high-powered politicians... But the success of its crackdown may have incentivized a switch to the more subtle nepotistic corruption that the authors uncovered.
This shape-shifting nature of corruption is interesting, and especially the emergence of the nepotistic norm. It is the corruption of the developed world. This form of corruption is not confined to politicians, but is pervasive across corporate sector globally. Instead of cash transfers or other direct financial benefits, preferential access to high-paid or career launching jobs (especially in consulting and finance) have become a more sophisticated way to buy favours. 

This and this, involving two of the biggest names from finance and consulting, are just two infamous examples from recent times. And these trends towards nepotistic corruption and influence peddling are universal and not confined to developing countries. 

Tuesday, June 23, 2020

India's footwear industry - a reality check

The leather and footwear industry are often discussed as sectors to focus for indigenisation and capturing the global export market. But what are the practical challenges to be surmounted? How realistic is this goal?

The importance of the footwear industry arises from the fact that it can easily absorb millions of workers with basic education and some skill development trainings. The investment requirements in the industry is far lower than in others. It is possible to generate 50-60 jobs with just INR 10 million of investment. But, as outlined in this post, there are daunting challenges to be overcome if this goal is to be realised.

Let's get some basics about the industry out of the way.

The footwear industry makes 2 billion pairs, of which 286 million pairs were exported last year. It employs 2-4 million people, the vast majority as informal and contract labour and/or hired through manpower agencies and at very low salaries in the range of Rs 6000-10000.

In terms of value addition, the major share of the 2 billion pairs are low-end hawai chappals. Further, a large majority are non-branded footwear. For a large market, there are very few Indian brands. Furthermore, the Indian manufactures are disproportionately focused on the lower-value men's footwear and less on those of women and children which fetch higher prices.

In terms of business size, there are hardly 10 manufacturers with revenues of more than INR 1 billion (100 Crores). Most of the formal manufacturers are in the INR 100-200 million, employing 50-70 people. 

The vast majority of footwear market is non-leather based. Poly urethane based materials offer leather-like appearance at a tenth of the price. Accordingly, over 90% of the global trade is in non-leather footwear.

The industry is largely concentrated in UP (Agra and Kanpur), Tamil Nadu (mainly Chennai), Kerala (Calicut), Haryana, and West Bengal.

As a summary, the current state of the Indian footwear industry is characterised by small scale, very low productivity, low automation, stagnant growth, and pervasive informality. 

The highest value market segment is the mainstream global branded manufacturing in non-leather footwear. But this is a segment that has proved elusive even to the Chinese manufacturers, especially in the global market. It may well be outside the reach of Indian manufacturers, unless some particular brand breaks out due to a combination of exceptional entrepreneurship and even more exceptional good fortune.

Another high value market segment is that of branded leather manufacturing and its contract manufacturing. However, the environmental standards demanded in the global export market is a big barrier. On top of these, the recent closure of tanneries may have irretrievably snuffed out any hopes with this market expansion.

The next best alternatives may be to increase their share of the Indian branded manufacturing segment and become large scale contract manufacturers for global brands. This is the playbook of the Chinese footwear industry.

Therefore, in terms of opportunities to scale and expand the local manufacturing capacity, there are perhaps only three pathways:

1. Scale-up contract manufacturing, mainly, but not only, aimed at exports. This is the Make in India for the world template. It involves attracting the global value chains from China and South East Asia. But this, in turn, also requires attracting a few very large (larger than any existing Indian manufacturer) contract manufacturers, who could bring in their own component manufacturing and design ecosystem.

It also requires that some of the current medium and large manufacturers aspire to become very large contract manufacturers. How many of them have the required entrepreneurial appetite to do so and what can be done to support them?

2. Development of local brands for the Indian market. Despite low per-capita consumption, India is the world's second largest footwear market. This also means that the potential for growth and the associated opportunity for local manufacturing is huge. Instead, cheap Chinese imports occupy a major share of the market.

Any strategy to increase local branded manufacturing to capture this market has to focus on Make for India (and not Make in India for the world). This does not mean skimping on quality, but competing with the imported manufacturers by gradually improving productivity. This can be done only by efficiency gains to cut costs - improving labour productivity, local component manufacturing, greater automation (not full automation, but enough to enhance labour productivity), and economies of scale.

3. Support component manufacturers. The starting point for any scale manufacturing is the presence of a large component manufacturing industry. Unfortunately, like with other sectors, most footwear components are imported from China. This is not just the case with soles and uppers. Even islets, insoles, and laces are imported from China. It is stunning that even buckles in belts are largely imported from China.

Even the large non-leather contract manufacturers like Apache and Lotus import uppers and soles from China, Indonesia and Vietnam and only stitch them together in India.

What can the government do to support these three objectives?

1. Address the low productivity problem by supporting demand-based trainings.

Given the abundance of cheap labour, limited automation, and the poor general quality of manufacturing, most manufacturers rely on semi-skilled labour. They start on the shop-floor with menial work and acquire some basic skills to become the assembly line worker (mainly stitching). These workers demand low pay, and while have high turnover can also be easily replaced. The productivity of these workers is very low, lower by orders of magnitude compared to the typical Chinese workers. Needless to say, most of them are migrant workers.

In order to train the workers, the manufacturers have to incur the cost of trainings as well as bear their salaries. They have no incentive to bear this cost, even if a couple of months trainings can suffice.

There are productivity spillovers from at least partially subsidising the cost incurred by businesses in trainings. An appropriately designed incentive-compatible and easily monitored training subsidy which is demand-based can therefore be useful. The trainings can be for a period of 2-3 months, arranged by the individual manufacturers themselves, and the subsidy reimbursed.

2. Support increase in productivity by encouraging greater use of machines. India is a labour surplus country and automation is clearly undesirable for the Indian footwear industry. But the alternative to automation is not complete manual manufacturing. A certain level of automation is not only useful but also necessary to sustain a minimum level of productivity required for growth.

Unfortunately, like with other equipment, India has limited manufacturing of the cutting and sewing machines and other equipment that are used in the industry. Most of these are imported from China.

While capital investment subsidies are in general not a very desirable thing, some form of fiscal incentives may be necessary to encourage the smaller and medium sized manufacturers to increase their level of automation. Though targeting and tailoring these subsidies will be challenging, the government could consider a subsidy that is linked to some performance, either exports or on higher productivity growth.

3. Support on designs. A critical ingredient of the manufacturing ecosystem are designers. The design eco-system is chronically deficient. While the typical median foreign designers command $1000-1500 per day, the local designers come at INR 20000-40000 per month. The quality is naturally inadequate.

The Government of India already has specialised institutions on footwear design and leather research. There is a need to have them play a much more proactive role in supporting with supply of trained and quality designers. There may also be a need for an arrangement to access good quality designers at a reasonable cost. An incentive compatible subsidy mechanism may be required here too. This should be complemented with colour and fashion forecasting support.

4. Encourage formalisation. The government of India's recent decision to expand the coverage of the 12% EPF reimbursement of the employee's contribution for three years to the footwear industry is a step in the right direction. While there are no reliable figures, anecdotal evidence points to a formalisation of some labour. However, anecdotal evidence also points to the employers largely absorbing this subsidy and not passing on any benefit to the workers (in terms of higher wages).

5. Support the emergence of component manufacturing. Some of the larger branded manufacturers will have to be encouraged to take the lead in this regard. While they could provide the market assurance, the government could offer some fiscal incentives and/or interest subvention subsidy.

These are some areas where meaningful action can help move the sector out of its current situation. It is acknowledged that their effective implementation can be very challenging. However, in the absence of some action in these directions, there is little hope for any improvement in the footwear industry. For sure, the industry will not collapse, but will meander along business as usual. There may even be the occasional mutant success. But there cannot be a sectoral exit out of the current low productivity and stagnation trap. 

Note that I have not suggested any of the typical fiscal incentives like tax cuts or higher import duties.  Over the years, there have been several such rounds of such tax cuts which have failed to yield any of the promised results. In fact, they have not even led to much success in scaling even among the larger manufacturers. Further, these are championed largely from the perspective of the biggest manufacturers, which in India's case is a tiny part of the universe. And in case of these firms, there are several reasons to believe that these tax structures are the binding constraint to their growth into very large manufacturers.

On the industry side, some of the large contract manufacturers could also strive to develop their own brands in the local market. Similarly, existing brands should strive to expand their market share. More importantly, as mentioned earlier, the very large manufacturers have an important role to play in catalysing the development of component manufacturing.

What constrains scale manufacturing in India?

The conventional wisdom in this regard blames poor quality of infrastructure, restrictive labour laws, difficulty in assembling large land parcels, high cost of capital, and pervasive red-tape. These are all, in general, factors of concern. But even where these are taken into account (like with SEZs and already existing large manufacturers), scaling has proven elusive. Given the size of the market, it is surprising that India does not today have even one manufacturer with sales turnover of even half-a-billion dollars.

While these are all important, an important overlooked dimension concerns the innate characteristics of these entrepreneurs. One of the most important is the deficiency of entrepreneurial ambition to scale, among the small universe of those on the starting line to look at scaling. This is an observation confined not just to leather or footwear industry. The entrepreneurs of these firms in the INR 100-200 million category, located in Tier III and IV cities, earn more than enough to have very comfortable lives.

Then there is the dynamics of family-owned businesses. The smaller size of the enterprise also helps them control their business without relying on outsiders and professional managers. It also limits the commercial risk exposure from a business downturn. They can rely on some local and loyal staff to manage the business. Scaling also requires investments in greater automation and adherence to greater standards. All this adds layers of costs and there is the danger of losing control and assumption of greater business risks.

Further, the smaller size of the enterprise also helps them control their business without relying on outsiders and professional managers. It also limits the commercial risk exposure from a business downturn. They can rely on some local and loyal staff to manage the business. Scaling also requires investments in greater automation and adherence to greater standards. All this adds layers of costs and there is the danger of losing control and assumption of greater business risks.

Typically, from among the universe of small manufacturers a few grow into medium-sized ones, even fewer to large ones, and a minuscule proportion into very large ones. But what if the universe of enterprises from which the very large manufacturers emerge is itself so infertile as to seriously limit the prospects of progression?

In fact, apart from the occasional start-ups, the expansion that happens in the industry comes more often when a family business splits and brothers spin-off their own independent businesses.

The impact of reforms like GST, while certainly beneficial in the long-run, may have ended up squeezing the vast majority of the small manufacturers. For a start, for these small manufacturers, the compliance costs in terms of hiring accountants and IT requirements are a non-trivial share of their profits. Then there is the structure of the GST tariffs - 18% for the components and 5% for the final product. This means that the manufacturers capital gets locked up as receivables for a long time. For small manufacturers, these costs are prohibitive.

This is a sobering tale. It is far from the mainstream narratives that point to one where governments need to get out of the way to let India's innate entrepreneurial energies to be unlocked. Never mind, as Joe Studwell has brilliantly described in the examples of North East Asia, this is a narrative which has never based on any evidence. It is important for the Government to play an important role if the footwear industry can move significantly forward. The market by itself is unlikely to have the incentives or the capacity to manage that.

The intention here was not to write a post advocating massive government intervention in putting the Indian footwear industry into a higher and more productive growth path. But then reality cannot be glossed over for long.

The challenge is then two fold. What are the most impactful and least distortionary levers for government engagement? Does the government have the capacity to engage effectively in this regard? 

Monday, June 22, 2020

Limits to technology in development

There is only so much that technology can do with addressing state capacity weaknesses or public service delivery failings. There is no digital pathway out of poverty or for chronic development challenges.

A reminder of this comes in a good article by Reetika Khera on the problems of excessive technologisaiton of NREGS. When it was piloted in Rajasthan at the turn of the millennium, its implementation was simple,
At that time, a public worksite would be opened in the village, and everyone who showed up was allowed to have their name included on the muster roll (an attendance sheet). At the end of the fortnight, some work measurement (if only notionally) would be done, and the muster roll would be sent to the block office to process payments. The “mate" (a worksite supervisor) or panchayat secretary would collect cash from the block office, and, on the designated day, names would be called out at the worksite for receiving a cash payment and a food coupon.
And this is what technology did,
From e-muster rolls (eMRs) and e-fund management system (e-FMS) and GPS-enabled biometric attendance to geo-tagged NREGA assets, MoRD became the site of a techno-orgy. The less tech-ready the rural area, the more fanciful the tech-fix that was imagined for it. Before first-generation issues with NREGA had been resolved, it was loaded on with more objectives and more technocracy. Workers could no longer just show up for work: e-MRs, with pre-printed names of workers who had ostensibly demanded work, became the norm. NREGA 2.0 was soon burdened with Aadhaar. Aadhaar, in its early years, needed ready-made databases to boost its enrolment numbers. Workers in the NREGA database were sitting ducks: vulnerable and anxious about losing their entitlements, they flocked to enrol. In spite of clear instructions from the Supreme Court, MoRD found ingenious ways of making Aadhaar compulsory. For instance, when “demand for work" was entered in the software at the block office, it could only be registered for workers who had submitted their Aadhaar numbers. Job cards without an Aadhaar number linked to it were cancelled...
The next victim was the payment system. Payments were held up if Aadhaar numbers were not linked to the job card and/or bank account. MoRD surreptitiously made it compulsory to link NREGA bank accounts with Aadhaar numbers. Instead of deploying technology to make things easier for labourers, technocrats started using it to make their own lives easier by centralizing control. Administrators no longer needed to visit villages to monitor its implementation: they merely peered at the NREGA real-time portal, where all was well.
Her suggestion is to revive features of the original NREGS,
One, large worksites should be opened proactively in each gram panchayat without waiting for anyone to apply for work. Such worksites should remain open for the coming months. Two, anyone who shows up to work should be allowed to work. The requirement of demanding work formally must be relaxed. For this, uniquely numbered muster rolls issued to sarpanches and panchayat secretaries, without pre-printed names, can also be considered. Three, states could be allowed to pay wages as cash-in-hand, bypassing the banking system. Many are horrified at the suggestion that we revert to cash payments (it has been projected as th
The main cause of corruption), but there are important reasons to consider it now.

The payment system for many welfare schemes, including NREGA, is beginning to resemble a popular visual trope from India—a tangled web of electricity wires. Instead of simply linking each job card to a bank account to transfer wages, today, four numbers might be needed: job cards, Aadhaar, bank accounts and mobile numbers. As a result, transaction failures are high
In another area of development, education, the promise of technology appears to have hit a roadblock in the form of access. With schools lying shutdown due to the pandemic, supporters have see an opportunity to not only manage schooling in this time but also mainstream Edtech.

But even before we come to issues like content and student-teacher engagement, the issue of internet access (never mind its quality) should be addressed. And, contrary to conventional wisdom, this is far from settled.
Just two states have at least 40% rural households with internet access.

The access challenges are well known and large as captured in this article,
According to a global survey by Pew, only 24 per cent Indians have access to smartphones. Not only does India lag among the list of emerging economies, there is also severe disparity in the ownership of smartphones between the genders: 34 per cent of men own smartphones as opposed to 15 per cent of women. The situation is no better when it comes to internet connectivity. “Many of my students are unable to access notes, audio clips and so on because they don’t have enough money to recharge their data packs,” says Rumi. According to a National Statistical Office (NSO) survey, only 23.8 per cent households in the country have internet connectivity and only 10.7 per cent have access to computers. So while students like Shruti are engaged in e-learning via apps such as Zoom and Microsoft Teams, teachers and students such as Rumi and Sangeeta are struggling to get by with low-resolution cameras and WhatsApp audios. The divide isn’t only between the rich and the poor, it exists between genders and states and is also determined by several socio-economic factors.
Further, like with all else, shutting down schools hurt children from the lower income categories, who are also those with lower learning levels and who are least likely to get any parental support in their learning process. In simple terms, lockdowns hurt the children from poorer income groups and causes permanent income loss.

It is imperative that primary schools open at the earliest, since early learning loss transmits forward and prolonged lockdowns are increasing the likelihood of permanent learning and income losses.

Yet another area where supporters proclaim a new dawn is fintech. I have blogged earlier here and here about its limitations. But here comes more evangelism from Navin Kukreja, who argues for "going completely digital",
By going completely digital, lenders will be able to lower their cost of operations. The benefit accruing from this can be eventually passed on to customers in the form of lower charges, fees, interest rates, etc. Digitisation should lead to better quality data becoming available to lenders. The more agile among them will be able to use it to offer better and more customised products to their customers. Digitisation will also enable borrowers from remote towns and cities to get access to credit from banks and other large lenders. One roadblock in the path of financial inclusion for credit products has been the need to be physically present to service borrowers. With digitisation, lenders with the right risk appetite and risk models will have the reach to deliver their products without the need to have branches and employees in specific locations. This could prove to be a turning point in bringing a significant part of the population under the umbrella of formal credit. Collections, too, could be digitised. Until now there has been a tendency to use “workforce in physical location” as the primary means to collect.
This assumes that everyone is linked to the digital system in such a way that their actions can generate digital trails which are sufficient to both make them credit-worthy enough as well as enable access to its use. In this context, The Economist has an entire survey which highlights the emerging limitations of artificial intelligence. 

Saturday, June 20, 2020

Weekend reading links

1. The woes of India's realty sector,
According to the latest reports, developers in the top seven cities of India are sitting on unsold inventories worth a staggering Rs 3.7 trillion. According to other reports, more than 600,000 homes are currently lying unsold. With such a huge pile-up of unsold stocks that are finding no takers, the time to sell these has been estimated at approximately 3.3 years. With the advent of the current crisis, there are no prizes for guessing that this figure is highly likely to shoot up even higher.
2. Agreement signed with the Government of Andhra Pradesh for GMR to develop the new greenfield airport in 2200 acres at Bhogapuram in Visakahapatnam. It had won the competitive bid by offering the highest per passenger fee of Rs 303, after the original bid won by AAI on revenue share basis (it had offered revenue share of 30.2%)

3. Manish Sabharwal writes about skill universities and the regulatory changes required,
A skill university differs from a traditional university in four ways. It prays to the one god of employers; for governance, faculty, curriculum, and pedagogy. It has four classrooms; on-campus, on-line, on-site, and on-the-job. It offers modularity between four qualifications; certificates, diplomas, advanced diplomas, and degrees. And it has four sources of financing — employers, students, CSR, and loans (though employers contribute more than 95 per cent of the costs).
This about over-education is important,
The world produced more graduates in the last 35 years than the 700 years before and graduates now include 60 per cent of Korea’s taxi drivers, 31 per cent of US retail check-out clerks, and 15 per cent of India’s high-end security guards. Second is broken financing. More than 50 per cent of $1.5 trillion in student debt was expected to default even before the COVID pandemic. Indian bank education loans have high NPAs.
4. A snapshot of commercial credit to MSMEs in India,
Taking into consideration available information, exposure to the banks and past payment history, a recent study of credit information company Trans-Union CIBIL Ltd says that of the 8.9 million such MSME units, 74 per cent are creditworthy. Their exposure to the financial system in December 2019 was Rs 11.04 trillion. Around that time, the pie of commercial credit (excluding agriculture and retail) was a little over Rs 64 trillion. Of this, the share of units with a maximum Rs 50 crore exposure was Rs 17.94 trillion, a little less than 28 per cent.
5. FT reports that global debt has now topped World War II levels.

Interestingly, Kenneth Rogoff, whose caution about debt to GDP ratio crossing 90% during the GFC was an important reasoning behind the austerity measures by several countries, has this to say about the rising debt,
“I would have no problem with policymakers taking the same actions twice over if it means we get out of this in one piece,” Mr Rogoff told Goldman. While rising debt was not a free lunch, he said, “that doesn’t mean we shouldn’t be buying lunch for everyone right now. We should be”.
The article points to the work of Amir Sufi et al, who argue that the secular rise in debt poses serious problems since the lenders are people who are unlikely to spend their earnings and borrowers are being squeezed by ever increasing pile of debt.

6. FT has an article which is only the latest to argue that private equity returns, net of fees, matches the public markets.
A handful of super wealthy multibillionaires have accumulated vast riches from running private equity funds that have performed no better on average than basic US stock market tracker funds since 2006. The number of private equity barons with personal fortunes of more than $2bn has risen from three in 2005 to 22, according to a new analysis which estimates investors paid $230bn in performance fees over a 10-year period for returns that could have been matched by an inexpensive tracker fund costing just a few basis points... Mr Phalippou’s analysis indicates that large US public pension plans earned about $1.50 (net of fees) for every $1 invested in private equity funds between 2006 and 2015. This translates into annualised returns of about 11 per cent, little different from the US stock market over the same period. “The performance of PE funds, net of fees, matched that of public equity markets since 2006,” said Mr Phalippou.
Ludovic Phalippou is a Professor at Oxford and has an article here.

7. NAR on the digital plans of Reliance and Mukesh Ambani.

With the contours of Reliance's ambitions becoming clearer with its recent spree of acquisition, Prabal Basu Roy looks ahead at the future of India's telecoms and e-commerce market. He foresees Reliance Jio/Facebook competing with a partnership between Bharti and Amazon, and potentially Vodafone and Google.

8. The story of the Chinese subsidiary of Cambridge UK-based and Softbank owned Arm Limited, the world's largest mobile chip designer is a cautionary tale and foretaste of what could happen with Chinese subsidiaries of western multinationals. The current problem arose after the parent company removed the CEO of its subsidiary for "irregularities and conflicts of interests according to whistleblowers' evidence", which is now being disputed by the Chinese entity as illegal. The local managers have gone public supporting the removed CEO.

In 2018, Arm sold a 51% stake in its Chinese subsidiary to a consortium of Chinese investors for $775 m. The terms were surprisingly favourable to the Chinese partners,
According to an internal document obtained by Nikkei, Arm China's boardroom consists of nine directors, including four appointed by the U.K. company and another four from the Chinese investors, with the ninth director chosen from a local "ecosystem partner" and appointed by consensus of the board. Arm China itself argues that it is legally a Chinese entity and that its U.K. parent does not have the authority to remove its CEO... Under the terms of the original sale, Arm China not only has full access to its parent company's intellectual property, it also took over all of its existing business, assets and employees in China, and became the exclusive channel for licensing its technologies and serving customers there, according to the document obtained by Nikkei. Even without the geopolitical backdrop, such generous terms would be unexpected, according to experts. "It's unusual for Arm to form a unit like Arm China to be responsible for all the tech licenses and operations in the country, and then not really have full control of that unit," said Shih Po-jung, a senior geotechnology analyst at Market Intelligence & Consulting Institute.
This stake sale and terms were all the more surprising given the geopolitical considerations,
Arm's biggest customer in China is Huawei, the Chinese tech group that is the object of an increasing U.S. crackdown over security concerns, and the relationship has put Arm in an awkward position. Last year, when Washington added Huawei to its trade blacklist, Arm had to suspend support to the Chinese company and later resumed services for non-U.S. origin technologies. Arm has a major R&D center in the U.S. as well as in its headquarters in Cambridge. Industry sources say that against this backdrop, Arm China's own ambitions have unsettled its parent. "We heard from time to time that Arm China hopes to forge closer collaborations with local partners as well as government partners, too, but its parent company is not always comfortable with those collaborations," a chip industry source with knowledge of the matter said.
9. Paul Krugman points to the US market madness illustrating with the example of Hertz,
Last month the company, which is deeply in debt and has seen its business plunge amid the pandemic, filed for Chapter 11 protection. This is a form of bankruptcy that keeps a company operating by restructuring its debts. But while companies that enter Chapter 11 often survive, their stockholders are normally wiped out. So Hertz stock should have become more or less worthless. Sure enough, Hertz’s stock price fell from more than $20 in February to less than $1 in early June. But then a funny thing happened: Investors suddenly piled into the stock, driving it up by more than 500 percent. And Hertz — in bankruptcy! — announced plans to raise money by selling more stock.
The Economist writes about the emergence of day traders,
The retail army has marched into America’s evergreen tech stocks. Less predictably they are also keen buyers of grounded airlines, of beached cruise liners and, strangest of all, of Hertz, a car-rental firm that has filed for bankruptcy... Rumour, connections (real or imagined) and tips have always played a big role in determining what stocks retail speculators buy... What has changed is the speed at which tips spread and so how synchronised retail buying has become. The result is a rapid succession of fads: first tech darlings; then bombed-out stocks; then something else.
10. On the India-China border stand off, see this, this, this, this, this, this, this, this, and this. It is difficult not to believe that this is not a watershed, and a normal relationship is now off the table. The need to limit the import dependence on China is important. There are now several articles which show satellite images about construction activity on the Chinese border. All these images come from Planet Labs. A contract with Planet Labs to purchase weekly maps so as to document changes at all critical locations on the LAC should have been a basic requirement.

The Indian economic dependence on China is a matter for concern. Sample this about power sector, 
Chinese firms supply equipment for 78 per cent of India’s solar power project market... Barring a few, all privately-owned thermal power units, roughly about 40,000 Mw, constructed over the past decade were built using Chinese equipment. While public sector units have relied on BHEL for Boiler-Turbine-Generator (BTG) for their units, private players like Essar Power, Adani Power, Reliance Power, and GMR Energy have Chinese companies as their BTG suppliers, according to data from the Central Electricity Authority... Chinese solar cells and modules have been instrumental in the growth of Indian solar power generation. The primary reason for this is the lack of an Indian solar supply chain, said a Delhi-based solar project developer. India’s solar cell manufacturing capacity stands at 3 Gw and for modules (finished product) it is 5 Gw, while the country’s solar power generation capacity stands at 32 Gw.
Chinese brands make up 80% of the smartphones market. 
See this on the major components of bilateral trade. Boycotting Chinese goods, while appealing, is fraught with several challenges. It is time for corporate India to step up.

11. As President Trump dilutes US engagement and the cold war between US and China intensifies, the impact on global institutional mechanisms is being felt.
China’s stature is growing along with its contributions—it now pays 12% of the un budget compared with 1% in 2000. Its diplomats head four of the un’s 15 specialised agencies, and America just one.
12. Nice graphic that captures the various types of cross-border capital flows to low and middle income countries.

A point to note is that aid is the smallest of the four sources of such capital flows. And a fifth, philanthropy, is the smallest. Remittances and FDI are the two largest sources, and they are each more than double the other sources.

13. TT Rammohan points to significant reforms proposed by the RBI on commercial bank governance practices. One of the important one concerns transferring the power to appoint the chief risk, audit, internal control, and vigilance officers from the CEO to the board committee concerned.