Friday, July 31, 2020

The perils of excessive specialisation and outsourcing - infrastructure and insurance

I blogged here examining the claims of Infrastructure Investment Trusts (InVits). 

At a basic level, an InVits is an example of unbundling and specialisation in the financing and management of infrastructure projects. There is a project sponsor or promoter who constitutes the InVit; a fund manager who is contracted out the responsibility of managing the investment; a project manager who is entrusted the execution of the project (say, construction or operation and maintenance); and a neutral referee or Trustee. What does this entail in terms of successful management of the scheme?

One, the project has to generate enough revenues to support atleast three purely commercial business lines (sponsor, fund manager, and project manager). Second, given the numerous conflicts of interests (related party transactions, revolving door of personnel etc) and incentive distortions (arising from holding durations etc), the Trustee/Board has to both have the expertise to monitor them and also the commitment to adhere to exceptional standards of governance in resolving issues as required. 

We know that infrastructure is low return asset. These commercial returns have to be squeezed out from this asset. The inevitable consequence is, as is well documented, asset-stripping and renegotiations, with all their public losses and controversies (see this). As to governance expectations from the Trustee, the stakes associated and the revolving door of personnel across different categories of intermediaries makes it perhaps too unrealistic.  

Take another example, of a national health insurance scheme that targets predominantly those outside the formal employment. There is a similar debate about the relative merits of a pure insurance and a public Trust-based insurance system. Like with InVits, an insurance system too has its set of intermediaries. There is a third party authoriser who contracted the pre-authorisations for insurance claims, the sponsor who issues the insurance, and the fund manager who manages the investments for the sponsor. 

Any health insurance scheme runs on three levels of diversification - across patients, across medical conditions, and across time. As I blogged earlier here, when the risk pool is mostly homogenous and consists of high-risk population category (poor), there are limits to such diversification. It is no surprise that such schemes have claims ratio which is pretty much close to 100%. And this is not to speak of the large subsidy in the premiums themselves. 

Therefore, the relevance of the traditional models of specialised commercial insurance become questionable. Neither are the margins enough to sustain them, nor is there likely to be a large enough portfolio of long-term capital that would need to be managed. 

Instead, a more likely effective approach would be a public Trust, which is professionally administered and is managed through appropriately designed service contract(s). Given that there is no getting away from public management of multiple contracts, it is a question of figuring out the the most prudent contract design that is consistent with the messy and uncertain practical realities of implementation. Fundamentally, the issue is about the state capacity to manage contracts. 

At a conceptual level, the limits to the Coasean bargain starts to become evident. The efficiency gains from splitting up activities and outsourcing them runs into both the costs associated with sustaining those individual business lines and the problems of managing the associated multiple contracts. 

It is important to keep this in mind as public policy encounters such financial engineering innovations in public contracting. Most such innovations, while irresistible in their logical appeal, have no track record of definitive success and endures just as is the case with such engineering in the regular financial markets. Unlike in case of the latter where private individuals are making choices with their money, in the case of infrastructure and subsidised health insurance, governments are putting tax payer money at risk. That requires a different level of scrutiny and standard for adoption. 


Ananth sends me these comments on more reasons:
  • Too many specialised roles make for dilution of responsibilities and only complicate simplicity
  • What is the skin in the game for these financial entities? 
  • Where is their expertise in managing infrastructure assets?
  • Most importantly, what exactly is the underlying problem that is being solved or the gap being addressed? If there is none, why do we need a fix? - this might only make funding available for the limited category of financially viable assets. For majority of assets, where funding is needed and where cash flows can be turned over to the investors, the funding won't be available.

Thursday, July 30, 2020

Decoding the hype from reality about InvITs

Infrastructure investment trusts (InVits) have a role to play in infrastructure financing and management. They are one among the several means to mobilise funds and manage infrastructure assets. Fundamentally, they are a type of infrastructure fund, a category of institutions and investors who are widely present globally across infrastructure sectors.

But it is a stretch that their impact will be anything close to be a "landmark systemic change" catalyst, as suggested here. Such simplifications only do more harm than good. In fact, some of the reasons adduced by supporters are clearly self-serving (or conflicted) ones, aimed at expanding their own market. This paper has several reasons with details refuting this argument.

Consider the article mentioned above by Suresh Goyal, the former head of MIRA in India. He argues that InVits can "bring the focus back to core objectives" for NHAI. He writes,
Over the years, NHAI has re-invented itself from a road development entity to a concession-granting one. Recently, it has developed capabilities to monetise roads through the ToT programme. For the roads developed on engineering, procurement and construction basis, it also undertakes operations and maintenance (O&M). It is not easy for any organisation, and more so for a public sector entity, to be effective across the entire gamut of its activities. By launching an InVit, NHAI can not only transfer roads but also the O&M aspects of these roads, enabling it to refocus on its development role and, thus, create the much-needed extra management bandwidth.
In simple terms, the arguments are for NHAI to transfer public assets to InVits and thereby completely outsource the management of public assets (including even the management of the management of those assets). If global evidence on even clearly defined limited infrastructure concessions, much less a wholesale transfer of the entire asset with its management responsibilities, has anything to tell us, such arguments should be treated with extreme caution.

There are two issues.

One, an InvIT does not remove the reality of NHAI needing to have the capacity to service its mandate in a world of private production and maintenance of public goods like national highways. As long as highways remain public goods, there will have to be agency like NHAI managing those roads.

NHAI is fundamentally not a road builder or an O&M service provider. It manages the construction and maintenance of national highways. It is a contracts manager. The terms of reference of contracts can always be designed to outsource the most appropriate set of activities. Take for example, this,
For NHAI, InVits create an opportunity to raise standards by factoring in equipment and processes on these roads, which will not only improve user experience and safety but also create an ecosystem for other road concessionaires to match these standards.
The NHAI can always design O&M concessions accordingly incorporating these conditions. However, having incorporated these conditions, there is no substitute, InVit or not, to NHAI having the capacity to monitor it.

Second, there is no evidence from anywhere in the developed world to make the claim that an InVit does a better job of managing highways over their lifecycle than public agencies directly. Much has been written on this, including extensively in this blog. 

To look at the other reasons adduced for InVits. Let's take monetisation. The NHAI has done all the textbook style requirements - it has bundled road packages, has announced a pipeline of projects for monetisation, and has gone about releasing them gradually. We know what has happened in terms of the lukewarm market response after the first round. In fact, it remains to be seen how successful actually is the first round of "irrationally exuberant" ToT monetisation.

I don't know how an InVit can magically alleviate hard constraints about the market's ability to absorb large volumes of infrastructure assets. Given the reality of limited foreign dry powder available to invest in infrastructure, I am not sure how an InVit can significantly change the situation for the better?  

If there are political economy and bureaucratic constraints that inhibit the processes associated with monetisation by the NHAI directly, those constraints are likely to be even more binding in transferring road packages directly to InVits.

I cannot understand how creation of InVits can help crowd-in significant amounts of domestic savings. This paper has clearly outlined the hard constraints facing private capital investments in infrastructure. It is important to not confuse expanding the pool of investible infrastructure projects with expanding the envelope of long-term private capital ready to invest in infrastructure. Policy and financial engineering has a role in the former, but much less, even negligible, with the latter.

Further, it is not as though investors, institutional LPs and retail, currently face a dearth of infrastructure investment opportunities. The former has access to infrastructure funds, and the latter have  infrastructure projects/company equity and bonds, and infrastructure sector equity and debt mutual funds. It is difficult to believe that InVit offers anything dramatically different that these opportunities do not provide.

Similarly, I struggle to understand how privately managed InVits can help with "an independent framework for settlement of issues pertaining to operating roads" which a publicly managed NHAI could not do. Where is the evidence from the world that a private managed entity like InVit has superior governance?

As to "independence" and "fiduciary responsibilities" of investment managers, less said the better.  The managers of infrastructure funds are supposed to be similarly responsible. But Macquarie's own track record in this regard, which is very well-documented and discussed in mainstream media in countries like UK on very high profile projects, are questionable and disturbing to say the least. See this, this, this, this, and this (with numerous links to mainstream papers and research institutions) on UK's controversial experience with the likes of Macquarie.

In fact, independence is not confined to the relationship between NHAI and the InVit, but is even more relevant to the interactions between the various intermediaries of the InVit as well as their interaction with the broader market. Unfortunately, it is here, as evidence from infrastructure funds in particular and finance in general shows, we cannot but be pessimistic. 

The issue is simple. The government wants to monetise its road assets. This has to be done in the most incentive compatible and commercially attractive manner. The former requires clarity in contractual terms of reference. The latter requires returns that are consistent with the expectations of particular categories of investors. I do not understand how an InVit can address either problem. It surely does not entail limiting NHAI's responsibilities and handing over assets to some InvIT. 

In light of the above, I am not sure about the claim of "landmark systemic changes in road sector" in India from the introduction of InVit. If anything, the only landmark change likely from a headlong plunge into InVits is a pile of scams and controversies after a few years which would bring disrepute to the useful institutional idea of infrastructure funds to finance projects in the sector.

Prudence, and not irrational exuberance, should dictate the embrace of any such financing mechanism.

Tuesday, July 28, 2020

The case against expensing interest payments

In an FT article, Jonathan Blake, a private equity executive, makes the argument that capital should be treated the same way as other factors of production, land and labour, and interest expenses should therefore be tax deductible. He, like Jonathan Ford here, suggest treating dividends too as an expense and making them tax deductible, thereby making the playing field level for both types of capital. This, they argue, will also make any policy change less disruptive. 

I have five issues with this point of view. 

For a start, the answer to doing away with a distortionary and  social welfare lowering preferential treatment to something is not to make that benefit available to all others. In general, across countries, not only has the tax-base shrunk (say, in real per-capita taxable amounts), but also the rates too have come down. As the Laffer curve argument informs, this lowering is beneficial only upto a point, beyond which it becomes counter-productive. There is compelling evidence that we may be on the wrong side of the curve. 

Second, a standard Econ 101 response to negative externalities is to tax them. Accordingly, similar tax and non-tax restrictions are imposed on other factors of production to limit their negative externalities. In this case, we are fighting the problem of businesses leveraging up excessively on the back of plentiful and cheap credit available. The answer to this problem therefore is to tax the negative externality creating activity, excess leveraging here.

Third, each factor of production is different and they are compensated differentially based on the roles they play and the nature of the risks assumed. It is therefore misleading to argue that a particular type of compensation or benefit (among several types) applicable to some factor(s) should be available to all others. Labour wages, for example, are largely insulated from the vagaries of the business cycles, but do not share in any upside.  

Fourth, the nature of the factors of production vary widely. It is now widely known that the proportion of business income going to capital is disproportionately higher than that going to either labour or land owner. In both the latter, the benefits are fixed up-front and compensation is therefore, by nature, self-limiting. But, as the egregious example of the totemic tech companies illustrates, the share of profits accruing to the shareholders and executives dwarfs that going to labour by any yardstick of evaluation or comparison. In other words, capital corners a disproportionate share of the benefits compared to other factors of production. Therefore, the removal of the tax deductibility is, contrary to the argument of Jonathan Blake, only an attempt in the direction of reducing the preferential treatment that capital enjoys in the first place. 

Finally, related to the previous point, even within that disproportionate share accruing to the capital, an equal or more disproportionate share is cornered by the equity holders. Besides, the equity holders also benefit from the lower dividend and capital gains taxes. The gains from the tax exemption accorded on interest payment, therefore accrues more to equity holders than debt holders. In other words, the interest deduction is one more subsidy to the equity holders, in whose favour the labour-capital balance is already heavily tilted.  

Ananth has a good post that outlines the issues here.

Monday, July 27, 2020

Limits to outcomes-based policy making - urban and power reforms in India

If wishes were horses, then pigs could fly! On many complex public issues there are logically neat ideas which have the irresistible appeal of appearing to solve the problem. Unfortunately, almost always, they are deceptive and misleading.

Take the examples of power distribution and local government finance, two of the most persistent and intractable of public policy problems in India. Over the years, successive governments have tried several different approaches to address the problem. On the distribution side, they have revolved around efforts to bridge the cost recovery gap by lowering distribution losses and raising tariffs. On the municipal finance side, they have focused on rationalising property tax and raising their rates. Unfortunately, primarily for complex and very sensitive political economy reasons, these efforts have struggled to make much headway.

Experience tells us that such political economy issues cannot be decreed away. Let's examine each of the two areas separately. 

Take the power distribution sector. The new draft Tariff Policy talks about the logically neat and progressive ideas of rationalising tariff slabs into a few consumer categories (some states have nearly a 100), reversing the inverted tariff structure (whereby industrial consumers pay more than the household consumers), penalising discoms for service deficiencies, including load shedding. It even has a neatly structured tariff calculation formula - retail tariff calculated based on 15% loss immediately, and 10% loss in three years.

Without getting into the details, apart from the tariff slab rationalisation (to some extent), the rest are all unlikely to get much far. The distribution loss reduction assumptions, as I have written earlier, here and here, are just completely unrealistic. Somit Dasgupta has a good column on its difficulties.

In simple terms, the Tariff Policy's intent and state-of-art design cannot be faulted. Every expert should embrace it. The problem though lies with its application to the prevailing contexts across Indian states.

Take the other example of local government finance. As part of the post Covid 19 stimulus package, the Government of India enhanced the state government borrowing limits from 3 to 5% of GSDP for the 2020-21 fiscal year on them meeting reform requirements on portable national ration card, ease of doing business improvements, power distribution company reforms, and augmentation of urban local body (ULB) revenues. In case of the ULBs, the states have to notify property tax floor rates in consonance with circle property rates and notify water and sewerage charges.

I am generally in agreement of using conditionalities on state governments for additional financing from the Government of India. Given the country's chaotic political economy, such conditions may perhaps be the only way in which certain politically sensitive reforms are achieved. But such conditionalities should satisfy the test of practical feasibility. While some are certainly achievable, the realisation of the ULB reforms within a year is certainly impossible. The same set of ULB reforms have been pushed several times over the last 2-3 decades, with limited results. In fact, given the economic damage, such a reform, with its contractionary effect on household incomes, is most likely to have a negative impact. This is a good summary of the challenge,
The history of ULB revenue reforms in India is dismal. Even incentivised funding schemes like JNNURM and AMRUT have not been able to push these reforms. In fact, ironically while the population of Indian cities is growing, ULB revenue is decreasing. An ICRIER report, which is based on data from 37 municipal corporations, shows that the total municipal revenue has declined from 0.49% of GDP in 2012-13 to 0.45% in 2017-18. These corporations’ own source revenue has also dropped from 0.33% of GDP in 2012-13 to 0.23% in 2017-18.
The ICRIER Report, State of Municipal Finances in India, 2019, here, shows that municipal revenues of all kinds have not only not changed over more than a decade but has even been declining.

Of course, enterprising state governments will always find ways to work around these requirements. For example, states may move over from the prevailing system to assessment based on ready reckoner rates, but would keep the ready reckoner rates low or tweak the formula to keep the percentage of it low. In fact, a property tax calculation formula with ready reckoner rates can be easily manipulated to get whatever result the state wants. 

Both these are good examples of outcomes-based policy making. There is an irresistible allure around the idea of focusing on the destination and framing policy around it so that the stakeholders can adjust their actions accordingly. The problem, as I have written earlier (see this, this, this, this, this, and this), is that the destination itself is most often impossible to achieve. Deep political economy and acute state capacity constraints cannot be decreed away to realise destination. The hard work will have to be done. 

Even as power distribution sector struggles to get its act in order, the upstream generation remains hobbled by regulatory uncertainties which are exacerbated by inordinately delayed litigation. The latest example is the plight of the PPAs with the Mundra-based Adani (4620 MW) and Tata CGPL (4000 MW) and Salaya-based Essar Power (1320 MW), which have been stuck in litigation after the Indonesian government revised its coal pricing policy in 2010. The subsequent process of renegotiation is exceptionally tardy by any standards.

In 2012, Adani and Tata sought compensatory tariff from CERC, which ruled in their favour in 2014, only for APTEL to reject and then accept the CERC order in 2016, and for Supreme Court to reject the developer's claim in 2017. Since then, it has been pending with the PPA signing state governments to consider the claims. The Gujarat government, after having accepted a revised PPA in 2018 with cost-sharing among all sides and based on the recommendations of a high-power committee appointed by it, has now revised its stance and cancelled the supplemental PPA!

The reasons indicated being "the market trend of Indonesian coal prices (have) changed the scenario and to safeguard the interest of consumers, the government of Gujarat has revoked the regulation dated December 1, 2018 as the same was not fulfilling its objective and purpose"; and "supply of power to Gujarat.. shall not be at a higher tariff than the tariff charged to other procurer states". It appears that we have policy being tweaked opportunistically to change the rules of the game. In sum, ten years on and after several rounds of litigation, we are no closer to a settlement to the claim. 

Saturday, July 25, 2020

Weekend reading links

1. US Attorney General William Barr has a speech which highlights how systematic abuse by Chinese authorities and business greed of American companies contributed to China's economic rise. He points to the abusive economic practices of the Chinese Communist Party,
To tilt the playing field to its advantage, China’s communist government has perfected a wide array of predatory and often unlawful tactics: currency manipulation, tariffs, quotas, state-led strategic investment and acquisitions, theft and forced transfer of intellectual property, state subsidies, dumping, cyberattacks, and espionage. About 80% of all federal economic espionage prosecutions have alleged conduct that would benefit the Chinese state, and about 60% of all trade secret theft cases have had a nexus to China.
He draws attention to the consistent Chinese playbook across industries,
To achieve dominance in pharmaceuticals, China’s rulers went to the same playbook they used to gut other American industries. In 2008, the PRC designated pharmaceutical production as a “high-value-added-industry” and boosted Chinese companies with subsidies and export tax rebates. Meanwhile, the PRC has systematically preyed on American companies. American firms face well-known obstacles in China’s health market, including drug approval delays, unfair pricing limitations, IP theft, and counterfeiting. Chinese nationals working as employees at pharma companies have been caught stealing trade secrets both in America and in China. And the CCP has long engaged in cyber-espionage and hacking of U.S. academic medical centers and healthcare companies... By imposing a quota on American films, the CCP pressures Hollywood studios to form joint ventures with Chinese companies, who then gain access to U.S. technology and know-how.
And how American companies compromised on US national interests,
China’s communist leaders lured American business with the promise of market access, and then, having profited from American investment and know-how, turned increasingly hostile. The PRC used tariffs and quotas to pressure American companies to give up their technology and form joint ventures with Chinese companies. Regulators then discriminated against American firms, using tactics like holding up permits. Yet few companies, even Fortune 500 giants, have been willing to bring a formal trade complaint for fear of angering Beijing.
The speech links to this Newsweek article by Bill Powell from last year which describes how American companies help build up China's economic prowess. The article outlines how US corporate interests lobbied hard to make policy that channelled US investments to China and integrated the country into the world economy. In particular, the permanent normalisation of trade relations with China in 2000, opened the floodgates for US companies to build China-centric supply chains. This was followed up in 2001 with the US supported entry of China into the WTO.

Barr's speech was part of an escalation of public accusations of Chinese spying and theft of US intellectual property by a string of top US officials. One estimate of US intellectual property theft by China puts it in the range between $225 bn and $600 bn a year. It has culminated in the US directive for immediate closure of the Chinese consulate in Houston which has been accused of being the centre of Chinese corporate theft in the US. China predictably responded with ordering the closure of Chengdu consulate, which looks after Tibet. There have also been arrests of Chinese students and professionals in the US who have close links with the Peoples Liberation Army.

The present US administration has on several occasions spoken about the need for an alliance of democratic countries to fight the Chinese aggression. C Rajamohan argues in favour of India joining a US led coalition of democracies to forge partnerships in combating China. 

2. When all the expertise talking on Covid 19 is done with, it is most likely to emerge that the most effective strategy to combat the disease is the simple use of masks. Sample this remarkable factoid,
Researchers say the benefits of widespread mask use were recently seen in a Missouri hair salon, where two stylists directly served 139 clients in May before testing positive for Covid-19. According to a recent report published by the CDC, both wore either a double-layered cotton or surgical mask, and nearly all clients who were interviewed reported wearing masks the entire time. After contact tracing and two weeks of follow-up, no Covid-19 symptoms were identified among the 139 clients or their secondary contacts, the report found. Of the 67 who were willing to be tested, all were negative for Covid-19.
3. On the challenges faced by the solar sector in India. Interesting developments in India's power sector. During Covid 19, as the power demand declined, discoms were contractually obliged to keep purchasing power from renewable generators, as part of the must-run status in the contracts. The result,
Electricity procurement from coal-fired power in India’s energy mix fell from 75% in early March to 63% in May, while the contribution of clean energy sources—solar, wind and hydroelectric power—rose from 16% to a never-before-seen 28%, according to data from the national load despatch centre.
The article also points out that the sectoral boom is being kept alive by foreign investors, and their pool has been expanding in recent months. 

4. Yuvraj Malik has a good primer on Huawei and on the issues with keeping Huawei out of India. This on the company's large India footprint,
There are 560,000 mobile towers in India, according to the Department of Telecommunications (DoT), and two-thirds of these, according to experts tracking the space, run on Huawei equipment. Huawei has also been a massive supplier for more than a decade, to Airtel and Vodafone-Idea, which will lose their competitive advantage if the Chinese firm is barred, experts say... It has about 6,000 employees in the country, about 4,000 of them serving at its R&D facility in Bengaluru. The Bengaluru centre, opened in 2015, is Huawei's largest overseas research hub, people close to the company say. It also houses a business unit called Global Service Centre, which supports carrier network operations (support work) for Huawei’s customers in over 30 countries. India GSC is also the largest in the world for Huawei.
Any bank on Huawei in India will be a significant benefit to Reliance and cost Bharti and Vodafone. In the interests of the telecom sector in the country, it is therefore incumbent on the government, on strategic considerations, to support these companies transition out of Huawei. One way would be to discount their losses (or cost-differetial) due to shifting away from Huawei in the forthcoming 5G spectrum auctions. Howsoever messy a quantification of the cost differential, it is important that some such decision be taken to compensate the telecoms providers due to a decision which is surely a force majeure over which they had no control.

5. Latest, from January 2020, on cost and time overruns of public infrastructure projects worth over Rs 150 Cr each or more in India. The total cost overrun was Rs 4.02 trillion.
Of the 1,692 such projects, 401 projects reported cost overruns and 552 projects time escalation. "Total original cost of implementation of the 1,692 projects was Rs 20,75,212.70 crore and their anticipated completion cost is likely to be Rs 24,78,016.45 crore, which reflects overall cost overruns of Rs 4,02,803.75 crore (19.41 per cent of original cost)," the ministry's latest report for January 2020 said. The expenditure incurred on these projects till January 2020 is Rs 10,97,604.64 crore, which is 44.29 per cent of the anticipated cost of the projects... Out of 552 delayed projects, 168 have overall delay in the range of 1 to 12 months, 125 with delay in the range of 13 to 24 months, 145 projects reflect delay in the range of 25 to 60 months and 114 projects show delay of 61 months and above. The average time overrun in these 552 delayed projects is 39.71 months. The brief reasons for time overruns as reported by various project implementing agencies are delay in land acquisition, delay in obtaining forest/environment clearances and lack of infrastructure support and linkages. Besides, there are other reasons like delay in tie-up of project financing, delay in finalisation of detailed engineering, change in scope, delay in tendering, ordering and equipment supply, law and order problems, geological surprises, pre-commissioning teething troubles and contractual issues, among others, the report said.
6. Tamal Bandhyopadhyay raises concerns about a discussion paper by the RBI on banking sector governance. In light of the recent scandals and misgovernance in private sector banks, the paper appears to be an effort to fashion a new governance system for them. It proposes making the CEO virtually a titular head, with all powers being vested in sub-committees of Boards.
Going by the paper, a bank must have three lines of defence for risk management — the business line (including a robust finance and accounting function); a risk-management function and a compliance function independent from the first line of defence; and an internal audit and vigilance function, independent from the first and second lines of defence. No one can challenge the proposition but the devil is in the detail. How will it be executed? The chief risk officer, the head of internal audit, the chief compliance officer and the internal vigilance head will report directly to the respective board committees. The company secretary will report to the chairman and the head of human resources will report to the nomination and remuneration committee. Such committees will be responsible for the selection of the executives, approval of their budgets, performance appraisals and compensation. The CEO will neither be able to guide the senior team in operational matters nor decide on their appointment, compensation or removal. Yet, the CEO is responsible for the profit and loss of the bank!
On public sector bank governance, Debashis Basu points to the pervasive culture of suppressing information and dressing up of accounts. The article highlights the example of management of the non-performing assets and recovery rates from written off assets. An RTI application revealed that in the FY13-FY20 period, the SBI wrote off Rs 1.23 trillion but managed to recover just 7% or Rs 8969 Cr. However, the annual reports of the SBI appear to point to a number which may be much higher.

7. Instead of focusing on mergers and privatisation, TT Rammohan makes the case for recapitalisation of public sector banks in light of the likely Covid 19 impact of rise in NPAs. He also calls for measures to alleviate the decision paralysis concerns.

8. A final tally of Reliance investors
Andy Mukherjee has a very good article looking forward into Reliance's ambitions.

9. An argument for bringing the insurance sector under either SEBI or RBI. The point being IRDAI has been sorely deficient in its regulatory role and does not possess the expertise to do so.
... it worthwhile to consider bringing the insurance sector under either the market regulator Securities and Exchange Board of India or the Reserve Bank of India, with an Irdai playing a limited role as a self-regulatory organisation to manage insurance policy issues, agnostic of the financial health of the companies. There is a precedent, too. After trying for decades, the government has removed the National Housing Bank (NHB) from its role as the regulator of the housing finance companies. The government has correctly argued that the NHB has too few resources, financial or human, to dictate to lenders... No major economies have an independent insurance regulator. USA runs a hybrid with the National Association of Insurance Commissioners created by the state insurance departments. But the key call is taken by the Federal Reserve. China has a common regulator for banking and insurance, while the UK has the Prudential Regulatory Authority within the Bank of England. They are none the worse for it.
10. In another blow in the direction of protectionism, Democratic frontrunner Joe Biden puts forth an ambitious Buy American agenda,
On Thursday, Mr. Biden specifically proposed a $300 billion increase in government spending on research and development of technologies like electric vehicles and 5G cellular networks, as well as an additional $400 billion in federal procurement spending on products that are manufactured in the United States. Mr. Biden described it as a level of investment “not seen since the Great Depression and World War II” and emphasized that a top priority was to expand prosperity to all corners of the country, both racial and geographic.
11. Apple, Microsoft, Amazon, Alphabet, and Facebook form nearly a quarter of the market capitalisation of S&P 500, up from 15% in early 2019.

12. The Competition Commission of India (CCI) approves the Adani Ports' acquisition of 75% of Krishnapatnam Port from the CVR Group. Adani now has ten domestic ports in six maritime states - Mundra, Dahej, Kandla and Hazira in Gujarat, Dhamra in Odisha, Mormugao in Goa, Visakhapatnam in Andhra Pradesh, Kattupalli and Ennore in Tamil Nadu. They have the capacity to handle a combined 395 mt of cargo, accounting for 24% of the country's total port  capacity. It is also developing a container transshipment facility at Vizhinjam. 

13. Very good data series piece in Livemint which captures the problems with India's GDP calculations. This graphic comparing the periods from 2005-11 and 2012-18 says it all.
So does this about wage indicators
This first part of the data series has a good graphic on the relative performance of India over the last two decades, and it's very impressive.
14. A reality check on the performance of the Indian equity markets,
In the last five years, returns have been around 6 per cent (in rupee terms). From 2010, the Sensex returns have seen compound annual growth (CAGR) of around 6 per cent in rupee terms. In dollar terms, CAGR returns have been abysmal 1.5 per cent over a decade. While we keep getting excited, long-term returns from Indian equities have been below fixed deposit (FD) returns for several years now.
15. Finally, a well argued case for Presidential system for India by Shashi Tharoor. Needless to say, this is a very complex issue with no clear answers. Advocates will always be excessively optimistic and critics always excessively pessimistic.

Thursday, July 23, 2020

Lessons from Chinese infrastructure investments

Atif Ansar and Bent Flyvbjerg have a neat 2017 paper examining China's infrastructure investments. The first line of the brief explaining their work is an apt summary,
A typical Chinese infrastructure investment suffers a double whammy of cost overruns and benefit shortfalls so large that it destroys economic value.
They have five salient takeaways,
First, China is now the world’s biggest spender on fixed assets in absolute terms. The scale and speed of China’s investment boom are staggering. China spent $4.6 trillion in 2014, accounting for 24.8 percent of worldwide total investments and more than double the entire gross domestic product (GDP) of India. By way of comparison, China’s total domestic investment was merely 2.1 percent of the world total in 1982. Undoubtedly, China has been in the grips of the biggest investment boom in history for over 15 years.
Second, in line with global trends, in China actual infrastructure construction costs are on average 30.6 percent higher than estimated costs, in real terms, measured from the final business case. The evidence is overwhelming that costs are systematically biased toward underestimation.
Third, in terms of absolute construction time schedule overrun, China performs better than rich democracies. In democracies, politicians seem to have an incentive to over-promise and then under-deliver. China has built infrastructure at impressive speed in the past but, it appears, by trading off due consideration for quality, safety, social equity, and the environment.
Fourth, with respect to traffic performance, demand in China represents two extremes. A majority of the routes witness paltry traffic volumes but a few routes are highly congested. Too little and too much traffic of this magnitude both indicate significant misallocation of resources.
Fifth, 55 percent of the projects were economically unviable at the outset of their operational lives. Another 17 percent of the projects generated a lower-than-forecasted benefit-to-cost ratio. Any future risks, such as greater-than-expected operation and maintenance costs, can impair the future economic viability of these projects. Only 28 percent could be considered genuinely economically productive.
Its consequences for the economy as a whole, 
The pattern of cost overruns and benefit shortfalls in China’s infrastructure investments is linked with China’s growing debt problem. Cost overruns have equaled approximately one-third of China’s $28.2 trillion debt pile. China’s debt-to-GDP ratio stands at over 280 percent, exceeding that of many advanced economies, such as the United States, and all developing economies for which data are available. Because many corporations and financial institutions in China are state owned, our revised calculation of China’s implicit government debt as a proportion of GDP suggests that China’s is the second-most indebted government in the world after Japan’s. Extraordinary monetary expansion has accompanied China’s piling debts: China’s money supply, broadly defined, grew by $12.9 trillion in 2007–2013, greater than the rest of the world combined. The result is increased financial and economic fragility.
Their overall policy takeaway from the Chinese experience is that of a "model to avoid",
First, China’s high-octane investment program in infrastructure is not a viable strategy for other developing countries such as Pakistan, Nigeria, or Brazil. Instead, China’s is a model to avoid. It is a myth that China grew thanks largely to heavy infrastructure investment. It grew due to bold economic liberalization and institutional reforms, and this growth is now threatened by overinvestment in low-grade infrastructure. The lesson for other markets is that policymakers should place their attention on software and orgware issues (deep institutional reforms) and exercise far greater caution in diverting scarce resources to large-scale physical infrastructure projects.
Second, less is more when it comes to infrastructure investments. Infrastructure supports economic development if the investments are productive. This big “if” is all too often ignored in policy debates, leading to the predicament in which China now finds itself. Our findings suggest that had China focused on about a third of its most productive investments it would have reaped lasting economic benefits without the debt overhang it is currently suffering.
Finally, incurring huge piles of debt to fund infrastructure is a destabilizing strategy. New-Keynesian arguments that see public debt in a benign light are misguided at the level of debt we see in China. Negative macroeconomic impacts include volatile movements in interest, exchange, and inflation rates; unpredictable movements in asset prices, such as house prices and listed public equities; adverse growth outcomes; rising unemployment from deleveraging; and lack of capital to finance productive investments. Several of these negative consequences were already materializing in China in 2016.
In another paper, Genia Kostka finds merit in delegating project execution, 
One takeaway from the Chinese experience is that compared to the central government, local governments can be more effective in planning and delivering local infrastructure. For instance, in my research of 136 large infrastructure projects in China constructed between 1983 and 2015, I found that projects’ cost and time overruns were lower when provincial or municipal governments were in charge rather than the national government.

Wednesday, July 22, 2020

What Hertz tells us about capitalism in the Age of Debt

The FT has a nice story on Hertz, the poster child of rental cars, which has gone bankrupt. It highlights several points.

1. It is human to attribute or apportion excessive credit and blame when things go spectacularly well or equally bad respectively. All things being equal and everyone meeting some basic qualification, plain good luck is confused for great skill and bad luck for all deficiencies. This applies just as much to business and to strategies followed by business leaders of large companies.

But the narratives around great business strategy, stock picking, and so on persists despite numerous studies to the contrary. Hertz is just another example. Sample this about the contrasting denouements to two episodes of debt gorging from Hertz's own history,
The year was 1973 and as the Vietnam war wound down, an oil embargo was threatening the very foundations of the US economy. Petrol stations were running dry and highways began to empty. At Hertz, the car rental company then known for its pioneering computerised booking system, executives realised that transport companies would inevitably be among the first casualties. Hertz’s response? It loaded up on debt. Within weeks of the embargo starting, Hertz was selling off the gas guzzlers that made up three-quarters of its fleet, and borrowing heavily to replace them with smaller, more efficient cars. The gamble proved wildly successful. The next year, as an oil price shock ravaged competitors and triggered a bout of “stagflation” as high inflation combined with low growth, Hertz’s revenues and profits hit new records... Yet almost half a century later, Hertz is bankrupt, the victim of a coronavirus pandemic that has brought large parts of the global economy to a standstill. The company, which employed 38,000 people last year, and operated from about 12,000 locations, was unable to escape the weight of a $17bn debt pile. The bet that prospered in the 1970s has come unstuck in the 2020s. Other rental chains have taken out new loans to ride out the drought in travel bookings, but Hertz’s borrowing capacity was already spent: after 15 years of aggressive financial engineering, it owed $12,400 for every car worth $10,000. Much of the money came from complex financial instruments that allowed creditors to demand their cash back when the company could least afford it.
There are no universal strategies. All good businesses make such bets. Those which generate outsized gains also comes with outsized risks. When it pays off, as it did with Hertz first time, it is great. But when it fails, as is the case now, it can look spectacularly reckless. The only difference was plain bad luck.

2. The US economy is sitting on a massive corporate indebtedness problem,
In the US, non-financial corporate debt was about $10tn at the start of the crisis. At 47 per cent of gross domestic product, it has never been greater. Under normal conditions this would not be a problem, because record-low interest rates have made debt easier to bear. Corporate bosses, by levering up, have only followed the incentives presented to them. Debt is cheap and tax deductible so using more of it boosts earnings. But in a crisis, whatever its price, debt turns radioactive. As revenues plummet, interest payments loom large. Debt maturities become mortal threats. The chance of contagious defaults rises, and the system creaks.

The Fed's $750 bn corporate bond purchase program, with all its salutary effects, has only added to the incentive distortions.

The IMF has warned of a massive debt problem,
At the end of last year, the IMF issued a striking warning: as much as $19tn of business debt in eight countries led by the US — or 40 per cent of the total — could be vulnerable if there were a “material slowdown” in the economy, a scenario that, if anything, now seems tame.
3. The logic behind the extraordinary monetary accommodation pursued by governments and central banks,
The authorities are effectively betting that a revival in the economy will allow many companies to grow out of their new debts. “By subsidising the debt markets, we were able to avoid a liquidity problem becoming a solvency problem,” says Mr El-Erian. “That’s exactly what central bankers will tell you: we’re going to keep finance going through higher debt — and we hope that higher debt will be validated by growth coming back.”
4. Narratives and norms change pretty quickly. Till the seventies, debt carried an element of stigma. In stark contrast, today leveraging up to maximise returns is considered the smart thing to do. The most glamorous part of the financial market, private equity, is built largely on debt. For such a reversal in attitude towards debt, it happened pretty quickly,
The leveraging of America was little more than an idea until a young bond salesman reimagined the function of the credit markets, and set in motion a debt machine that would change the rules of business. Michael Milken’s insight was that lending to risky companies at high interest rates could be more profitable than earning reliable but meagre returns from the debt of industrial champions. By the late 1970s, he had graduated from trading the deeply discounted bonds of struggling companies to inventing a form of corporate venture capital, issuing debt for companies whose prospects were so uncertain that their bonds were rated as junk from the start...
The craze for debt spread far beyond junk bonds, which were being issued at a rate of $25bn a year by the end of the 1980s, up from barely $1bn at the beginning of the decade. Industrial conglomerates, utilities and other investment grade borrowers also loaded up. Even far smaller companies got in on the act, taking out loans that were often repackaged into securities that could be traded on the markets. Insurance companies and pension funds — many of which have regulatory reasons to avoid investing in equities — lined up to buy it all.
Hertz was only following the Milken script, piling up debt even as its valuations declined.
Econ 101 teaches us about the difference between debt and equity and the reasons for their respective legal status. For sure, as the likes of Michael Jensen have argued, debt has a disciplining role arising from the invisible hand of the financial markets. 

But what if the invisible hand becomes ineffective and the financial markets lose their disciplining powers? A combination of leveraged buyouts and ultra-low interest rates (and the strong likelihood of it remaining so for a long time), that too when done by the largest financial institutions and companies, have changed the risk-return calculus which traditionally underpinned the differential status of debt and equity. 

5. It is therefore time to correct these distortions by changing the legal treatment accorded to debt. In particular, the tax deduction on interest expenses should be removed and interest expenses should be included for tax calculation. Another reform should be to have minimum cash reserves for large companies.

6. Several important areas within the financial market are characterised by asymmetricity, an important reason for the weakening of the invisible hand of the market dynamics. Three in particular stand out. At the corporate level, large companies in many sectors today assume massive risks with the firm belief that the can appropriate all upside and externalise all downsides. At the individual level, while executive compensation gives out bonuses when there are profits, there are no counteracting penalties or salary cuts when there are losses. At the level of business models in important industries like private equity, the firm earns its massive management fee irrespective of what happens on returns. If returns are positive, it earns windfall carried interest, but does not suffer any haircut on management fee if the returns are negative. 

7. If evidence counted for anything, with this latest addition from Ludovic Phalippou, the narrative around the attractiveness of private equity, at least for institutional investors, should have been history. This balance sheet of Hertz from private equity ownership is only the latest exhibit,
The $15bn private equity deal that took Hertz private in 2005, led by Clayton, Dubilier & Rice, was the second-biggest on record. It also turned out to be one of the shortest; just nine months later, Hertz returned to the stock market. But even that brief period under private equity ownership transformed Hertz’s balance sheet. Before the 2005 buyout, interest payments on the company’s borrowings absorbed about one-fifth of its operating income. Under new ownership, Hertz added $4bn to its debt pile, Moody’s cut its rating to junk, and the average interest rate on the company’s borrowings increased. After that, interest absorbed nearly three-quarters of the company’s operating income... This exercise in financial engineering was a triumph. When Hertz returned to the stock market in November 2006, its equity was worth about $4bn, roughly double what the private equity firms had paid for it a year earlier. When CD&R sold its last shares in 2013, the firm listed its achievements at Hertz, which it said included improving operating efficiencies, changing the way the company bought and sold cars and creating a flexible capital structure that withstood the great recession. But one powerful legacy was the vast pile of debt, and long after the private equity firms had gone, Hertz’s management team kept adding to it. By last December, borrowings accounted for $17bn of the rental company’s $19bn enterprise value, with only a sliver of equity on top.
I had blogged earlier here about the problem of debt as the world faces the biggest economic crisis in nearly a century. 

Monday, July 20, 2020

Some narratives which could flip over

I have been thinking of some of the entrenched narratives of today's economy. See this for the misleading narratives of our times. What is the basis of their hold on our collective imagination? What prevents them being upended by a counter-narrative?

Consider some of the central tenets of modern capitalism and the free-market economic system. And also consider some of the alternative scenarios or questions.

1. Managerial capitalism and the idea of separating ownership and operations by entrusting it to professional managers.  

What if managerial capitalism was only relevant for certain economic times, and its costs exceed benefits today? What if the incentives associated with managerial capitalism have been upended irreversibly (at least for now) and for the bad? What if family owned businesses or owner operated companies are better suited to the changed times?

2. The idea that businesses have to be managed to maximise shareholder value, to the exclusion or marginalisation of all else, including value to workers and society at large. 

What if a new narrative emerges that places, for whatever reasons, labour or society at the centre of the value created by a business?

3. Free market capitalism is the most efficient ordering of the economic system. 

What if free-market capitalism was suitable for a bygone era and is not well-suited to addressing the challenges of this different time? What if a world of deep uncertainty and geo-political tensions demands a different form of economic ordering?

4. The idea that a system of exclusion like patenting is required to incentivise R&D investments among businesses. 

What if there are few more examples of price gouging like Martin Shkreli and Valeant, say, for a new Covid 19 drug, which turns the tide on patent exclusivism? What if there are few examples of high-profile drug discovery efforts    ?

5. The idea that lower taxes are required to incentivise effort and investments by entrepreneurs and investors. 

What if the governments in a new era decide that the public under-writing of the plumbing of a limited liability company or contract law in general demands a much higher return to the government in the form of taxes? What if the social cognition on a new layer of high net worth individuals, say top 1-2% of the tax payers, becomes salient, with demand for a much higher marginal tax rate?

6. The idea that minimum wages can discourage labour hiring by businesses. 

What if a few cities or regions that break-out and raise minimum wage do far better compared to their counterparts in the coming uncertain times ahead, and their stories take hold of public imagination?

7. The idea that the exorbitant executive compensation is just desserts for attracting and retaining talent. This has perpetuated the system of widening salary gap between top executives and the median workers in any business.

What if there are few high-profile examples of exorbitantly paid chief executives who bring down their companies? What if a corporate raider or activist investor takes aim at some totemic company and mobilises enough shareholder support to tip the balance on executive compensation? Also, why should shareholders find a chief executive so much more valuable than employees?

8. The idea of leveraged investments in businesses and financial instruments. 

What if a generation of businesses who loaded up on leverage lose their shirts and are irreparably scarred during the next down-turn? What if that ends up stigmatising debt accumulation? What if a few stories pop-up from among them which lead the charge on a counter-narrative?  

9. The idea that venture capital (VC) financing optimally aligns incentives and promotes start-up entrepreneurship.

Like good things happening to ordinary ideas, what if the emergence of VC financing just coincided with the eruption of technology start-ups due to the ripening of a host of digital technologies? What if there is a crop of a clutch of high-profile bootstrapped and profit-financed start-ups who grow on to become market segment leaders? What if there are a few high-profile VC failures?

10. The idea that an independent central bank is essential to ensure macroeconomic stability. 

What if the world economy lands up in a prolonged period of stagflation, exposing all the excesses accumulated by various actors over the decade of extraordinary monetary accommodation? What if the seeds of debt accumulation sown by central bank policies reach payback in a most calamitous manner for large parts of the economy?

Much the same logic could be applied to various management theories on personnel management, organisational discipline and incentivisation, organisational structure, and so on which are prevailing dogmas of our times.

If you pause and think deeply enough about each of these, you'll realise that they are all just ideas. They are not grounded on any non-falsifiable evidence. Even in their heydays, at best, they were contentious propositions. 

None of these prevailing beliefs are based on any unambiguous or completely objective truisms. They are all narratives that have emerged over time, for whatever reasons. Having emerged, they have become entrenched and are being perpetuated by the vested interests who benefit from them, irrespective of whether the conditions that led to their emergence in the first place have changed or not. 

Neither are any of these enduring or perennial truths or realities. They all have emerged into their current position of dominance no earlier than a few decades back. They are all ephemeral, like all other social trends. There were other dominant narratives on each before their arrival. 

At an epistemological level, all research that explores these issues and comes up with some definitive verdict is deeply flawed. They are blinded by the trappings of rigour in their research to make definitive conclusions about what are essentially subjective issues of ethics and politics.

Note also that in all these cases, the entrenched narrative will not give way based on logic and reasoned arguments, much less evidence. Instead, they are likely to only give way to another narrative which emerges from a story or some high-profile examples that illustrate a counter-narrative. A narrative is a faith. And faith can be displaced only by another faith.

As a mechanism of change, in each of these cases, the narrative gets upended either when it is discredited or when a new narrative suddenly erupts into the scene and takes hold of public imagination. The former can happen either through the gradual erosion of the prevailing narrative or its sudden disruption. Into the vacated space a new narrative invariably takes centerstage. 

The history of ideas is littered with the trajectory of ideas taking hold, deepening their roots on public imagination, and the decaying and being replaced by a counter-idea. 

The world with these counter-narratives could look very different. And there is nothing that prevents these counter-narratives from taking hold anytime. We should not be surprised when that happens. 

Saturday, July 18, 2020

Weekend reading links

1. It is a sign of times that the IMF has advocated the once unthinkable idea of governments taking equity stakes in private companies instead of offering them debt. This is what the Chief Economist, Gita Gopinath had to say,
Because there's a bigger insolvency issue here, government support would have to shift more towards being equity-like as opposed to debt-like. Otherwise, you would end up with a lot of firms that exit this crisis with a huge amount of debt over-hang. If the lending takes form more like equity ... then that's less onus on the firms. That will make it easier for firms to recover from the crisis.
2. Ajay Shah writes about the value of informal traditional business relationships (landlord and tenant, lender and borrower, large firm and suppliers etc) in times of crises like the Covid 19. They act as automatic stabilisers, with the parties negotiating revised contracts on leases, payment dues etc.

3. The less discussed migrant problem is one of returning migrants from the Gulf. While Covid 19 has hastened the process, there are also localisation forces at play in the Gulf countries. Kuwait recently took the decision to limit migrant population from 70% to 30%. India received $83 bn in remittances in 2019, the largest among countries. It also creates major labour market concerns,
Since the global financial crisis of 2008, the number of Indian workers travelling to West Asia has fallen from 762,484 to 321,721 in 2018, according to the Ministry of External Affairs. At least part of this has to do with falling wages, which have prompted skilled workers from Kerala and Tamil Nadu to search for jobs in India (since the wage differential has narrowed considerably) even as West Asian locals have moved up the skills value chain to occupy those jobs in their own countries... Kerala accounts for a fifth of remittances... Since 2009, it is the investment-poor states of Uttar Pradesh, Bihar, and West Bengal that have accounted for the bulk of the migration to West Asia. The first two states alone accounted for 145,454 workers in 2018 — mainly for the hard-scrabble blue-collar jobs that locals are loath to do. Many of them come from India’s poorest districts.
4. The Mumbai-Ahmedabad bullet train project faces the usual issues of land acquisition and other delays, with implications of cost overrun, as it races against its 2023 deadline.

Alon Levy had a very informative post which raises questions on the use of standard gauge Shinkansen technology, when Indian Railways runs on broad gauge.  

5. Good Livemint status report on the Covid 19 vaccine development. This is one huge challenge, if precedents are any indication,
An analysis of all vaccine projects in development from 1998 to 2009 found that the average vaccine took 10.71 years to be developed from the preclinical phase, and had a market entry probability of 6%.
6. Very good essay on how Amul managed to ensure that its supply and distribution chains for milk and milk products remained unaffected during the Covid 19 lockdowns. 
The Gujarat Cooperative Milk Marketing Federation or GCMMF, which sells its products under the Amul brand, is owned by 3.6 million farmers. Of these, around 2.6 million farmers bring their milk twice daily to 18,600 village societies from where chilled milk is transported to district milk unions for processing into packaged milk and value-added products. The products then reach over a billion consumers daily via 10,000 distributors and a million retailers.
This is a summary of the basic things that Amuld did right,
Soon after the lockdown was in place, Amul announced cash incentives for dairy plant workers, drivers, sales executives, distributors and retailers. While casual workers received between ₹100 to ₹125 extra cash support for working during a pandemic, distributors got an extra 35 paisa incentive per litre of milk. Food and stay arrangements were made for workers inside dairy plants to avert any labour shortages. Simultaneously, the company reached out to the Union home ministry and state animal husbandry departments to arrange passes for its workers and ensure that empty trucks were allowed to return (after delivering milk products). To ensure uninterrupted supply of packaging materials, it engaged with district collectors where packaging factories were located. Amul even arranged for cattle feed to be transported from states like Punjab and Haryana for its farmers in Gujarat. Close to 45% of its products were moved via freight trains, which cut down transit time.
With hotels and restaurants closed, demand naturally fell. But Amul bucked the trend,
As unorganized trade and small dairies withdrew from milk procurement, Amul received 15-17% more milk from farmers. Demand for Amul’s liquid packaged milk went up by 5-7% compared to pre-covid times as households chose a trusted brand over loose milk. Demand for cheese and paneer is at least 30% more despite closure of hotels and restaurants, while butter and ghee sales are up by 10-20%. Demand for ice creams nosedived during the lockdown but Amul was quick to divert its distribution network for ice creams to other product segments... Amul is likely to gain market share. In 2020-21, Sodhi is expecting an enviable 15-16% revenue growth, only marginally lower than the 17% CAGR seen in the past years.
Amul has several lessons to improving India's agriculture. It has also lessons for the Indian private sector firms, including e-commerce ones which struggled during the pandemic. 

7. As commentators hype up the Indian digital commerce economy in the aftermath of the pandemic, it is useful to keep in mind this,
In 2019, of the 583 million internet users in India, only 232 million people paid for any service or product online at least once (the rest used the internet primarily for messaging and browsing), according to RedSeer. And even among the 232 million, only 135 million bought products from e-commerce platforms, indicating the relative shallowness of the internet economy. According to RedSeer, it is largely the same set of users that has driven the recovery in the internet economy since May. What’s different is that users who were earlier only buying something once or twice a year in the past have now been forced to buy both more frequently and a wider range of goods and services. “There hasn’t been much expansion in the overall number of transacting users, but there is a steep growth in the number of serious or holistic users who are shopping on multiple platforms," said Mrigank Gutgutia, an associate director, RedSeer.
Covid 19 and the banning of the Chinese apps means that there cannot be a opportunity for Indian developers to bring out something original or global scale in the digital domain. This will be a test for the much hyped Indian start-up eco-system. 

The race seems to have started in great earnest. An Indian TikTok or Facebook, but which is not a mere clone?

8. Shyam Saran makes the case for India to devise a strategy to respond to the Chinese two steps forward, one step backward approach at the India-China border.

9. Jugal Mahapatra and Siraj Hussain argue in favour of extending the additional allocation under National Food Security Act (NFSA) till March 2021 and also expanding its coverage by another 10 million. This is an important point to be borne in mind,
If there are no reports of starvations, even from the poorest districts of India, despite loss of income of crores of people, the credit should go to National Food Security Act, 2013.
10. Far too often policy targets are completely unrealistic. But even by those standards, this needs revision big time,
The production target in the electronics sector for 2025 is $190 billion, with a 30 per cent share in global value creation, as distinct from the current figures of $29 billion and 5 per cent, respectively. This is massively ambitious, and can only be achieved through export promotion.
11. Important area for expediting policy action is the regulatory space on digital economy, especially on data protection and privacy. This from a Business Standard editorial highlights the concerns,
The draft legislation has been pending since 2018, when the B N Srikrishna Committee submitted it, and has been amended by a Parliamentary committee. The new draft has no safeguards against blanket surveillance by government agencies. In addition, the government is pushing for complete access to non-personal data, which means the commercial secrets of businesses would be at risk. It would also like access to source codes of telecom equipment, including mobile devices, and has reportedly asked for social media data to be stored on local servers and deciphered on demand, breaking end-to-end encryption. These demands might retard the development of this huge market and put citizens’ privacy at risk. Therefore, the government should get the data protection law passed with adequate protection. A more robust legal framework will increase activity in the sector and attract investment.
12. Madan Sabanvis makes the important point about exiting the stimulus in India, especially on the liquidity support and debt forbearance side measures. These will not be easy and the government and RBI will have to carefully plan for them.

13. Bari Weiss (HT: Ananth), an editor with the New York Times has a scathing indictment of the culture of self-sensorship and political correctness within the Times. Her resignation letter captures the issues nicely.
A new consensus has emerged in the press, but perhaps especially at this paper: that truth isn’t a process of collective discovery, but an orthodoxy already known to an enlightened few whose job is to inform everyone else... Stories are chosen and told in a way to satisfy the narrowest of audiences, rather than to allow a curious public to read about the world and then draw their own conclusions... Why edit something challenging to our readers, or write something bold only to go through the numbing process of making it ideologically kosher, when we can assure ourselves of job security (and clicks) by publishing our 4000th op-ed arguing that Donald Trump is a unique danger to the country and the world? And so self-censorship has become the norm.

What rules that remain at The Times are applied with extreme selectivity. If a person’s ideology is in keeping with the new orthodoxy, they and their work remain unscrutinized. Everyone else lives in fear of the digital thunderdome. Online venom is excused so long as it is directed at the proper targets. Op-eds that would have easily been published just two years ago would now get an editor or a writer in serious trouble, if not fired. If a piece is perceived as likely to inspire backlash internally or on social media, the editor or writer avoids pitching it. If she feels strongly enough to suggest it, she is quickly steered to safer ground. And if, every now and then, she succeeds in getting a piece published that does not explicitly promote progressive causes, it happens only after every line is carefully massaged, negotiated and caveated.
In this context, this from JS Mill assumes relevance (via Walter E Block)
“He who knows only his own side of the case, knows little of that. His reasons may be good, and no one may have been able to refute them. But if he is equally unable to refute the reasons on the opposite side; if he does not so much as know what they are, he has no ground for preferring either opinion. . . . Nor is it enough that he should hear the arguments of adversaries from his own teachers, presented as they state them, and accompanied by what they offer as refutations. . . . He must be able to hear them from persons who actually believe them; who defend them in earnest, and do their very utmost for them.”
14. Sanjaya Baru writes about the brain drain problem facing India. This may turn out to be true for a majority of elite-children,
Children of business leaders, politicians, government officials, diplomats and just about every influential section of society are seeking exit visas. The next generation of the Indian elite is increasingly domiciled overseas.
15. Andy Mukherjee examines Reliance's plans to become a competitor to Tencent (digital platform), Huawei (5G equipment and telecommunications), and Xiaomi (mobile phone). In the context of the 5G race, The Economist writes,
On July 15th Reliance Industries, an Indian conglomerate, announced that its Jio network, which uses a Samsung 4G network, will be building its own 5G infrastructure and selling it to others. Jio is likely to follow in the steps of some other carriers, most notably Rakuten Mobile in Japan, which are betting on networks based on advanced software, off-the-shelf hardware and open standards, thus side-stepping the need for systems integrators like Ericsson, Huawei or Nokia.
This is a sceptical look at Reliance's claims. V Sridhar feels that Reliance may be talking about 5G-like network. It is likely to be the case.

16. Interesting that the UK government and Bill Gates Foundation are the largest funders of WHO in 2020-21.