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.