An anti-trust exhibit - Apple's Epic Battle

One of the most important corporate battles of recent times in the tech space is the anti-trust suit filed by gaming major Epic, the maker of popular Fortinite game, against Apple. The issue at hand is the mandatory requirement of using Apple's in-app payment mechanism for purchases on third party applications through the App store and the collection of a high 30% fee on such transactions. Epic is only channelling what other digital services providers like Spotify, Kobo, Tinder, and so on have long accused Apple.

The crux of the issue is captured in Epic's suit,

“What Epic wants is the freedom not to use Apple’s App Store or in-app purchase, and instead to use and offer competing services.”

The dispute surfaced formally when Epic recently introduced a direct payment option for Fortnite, bypassing Apple's in-app payment mechanism for iPhone and iPad users, and charging 20% less than what Apple does. Apple retaliated by blocking Fortnite from its App store. Almost anticipating this, Epic immediately filed a lawsuit against Apple for anti-competitive and unfair practices. 

Richard Waters touches on most of the important issues at the heart of the dispute,

At the centre of the fight is the “Apple tax” — the 30 per cent levy on some transactions that has made this a big business for Apple. What seemed a fair cut when the store was new and experimental feels, now it has become an integral part of mobile life, more like putting a gate up across one of the internet’s biggest highways and extracting an excess toll. But in challenging how the App Store operates, Epic Games, maker of Fortnite, has done more than take aim at an important Apple revenue stream. More significant are the issues it has raised: Who should have the power to distribute apps — and manage user experiences — on Apple’s mobile computing platform? That makes the fight over the App Store one that Apple can’t afford to lose, and guarantees it will be a long and messy battle... The costs of running the digital storefront are negligible given the scale of the revenue, exposing Apple to charges of price gouging. For companies like Spotify, the fee is also a heavy weight to carry when trying to compete head-on against Apple’s own services.

Rizwan Virk points to another important dimension of the dispute,

Mobile smartphones have become the largest and fastest-growing computing platform in history, and app stores like Apple’s and Google’s have become the standard way to download software onto your device. At stake is whether one company can decide what apps you can or cannot consume by not allowing other app stores to be installed on its company’s devices (in Apple’s case, on iPhones or iPads), such as Epic’s own game store or the popular Steam Store. By not allowing alternative app stores and tightly controlling the payment mechanisms, Apple not only limits competition but plays kingmaker and censor, deciding what you can or cannot do on your personal computing device and forcing apps to play by its rules or lose out on reaching Apple-product users.

Tim Sweeney, Epic CEO, tweeted,

“This is a critical consideration in these 30% store fees. They come off the top, before funding any developer costs. As a result, Apple and Google make more profit from most developers’ games than the developers themselves. That is terribly unfair and exploitative.”

Yes, Apple ends up making more money than the developers themselves! In fact, Apple is the third biggest revenue earner in the gaming industry, without actually making or selling any game! These  should make us sit up and think twice about the pricing.

The exorbitant fee looks more like a parasitic rent than a return on innovation. Just look at the sheer magnitude of the fee, 30%. Yes, 30% of the price goes to Apple as a fee for performing a service which is a bit more than offering itself as a transacting platform and, given the digital space, comes with negligible recurring expense. What's more, the same service is offered by several others at far less than what AppStore charges. In fact, more than any technical superiority of the product, the USP of this platform is the access to a vast network of Apple devices and Appstore users (along with developers). Even utilities who need to recover the very high cost of their pipes do not charge anywhere even remotely close to such exorbitant rates!

Have we reached a stage in human thinking and progress that we find nothing odd about such exorbitant appropriation in itself, verging on gouging or predation? What does it tell us about such progress?

Sample this rationalisation from a Morgan Stanley report pointed to by Richard Waters,

The returns Apple is now reaping don’t look out of proportion to the risk of the endeavour or the scale of its success. Its gross profit margin of 38 per cent has actually fallen over the past five years — the period in which its supposed monopolistic power has come to the fore — as sales growth has lagged and R&D spending has soared.

For a physical product company, Apple's margins are phenomenal. But in any market, such margins will naturally decline. The Morgan Stanley report is subtly normalising such trends by expressing concern at its decline.

Does innovation require such exorbitant margins, and that for sustained periods? And that too in an age where the cost of investment and capital have been declining. Never mind the merits of the  claims of innovativeness of Appstore's service or the value addition to the underlying activity (people's enjoyment from playing games) from the innovation inherent in the AppStore.

Further, if this is what a support service provider can charge for a service, it is only natural to expect the provider of the main service itself to extract a much higher margin from the service. Is gaming a market where margins in the range of 70-80% justified? Alternatively, is the market commercially viable with such margins?

What makes this egregious is also the differential treatment accorded to physical services compared to digital services. Apple has exempted services like Amazon, Uber, Doordash etc from mandatory App store mechanism and have struck separate deals with them collecting lower fees. Furthermore, it is well-known that Apple has its own services in the digital space, and therefore this rent is also effectively an entry barrier on potential competitors. This assumes greater significance in light of Apple's declining profit growth from its traditional hardware business and increasing reliance on its digital marketplace business.

A final word. This is not an issue of Apple Vs Epic. Epic's motivations too are not exactly altruistic. Epic is doing what Apple did when it fought IBM in the eighties. It need not come as any surprise if Epic emerges as the Apple of gaming world in a few years, indulging in all the same practices to keep competitors out. The issue is about competition and conflicts of interest in networked digital marketplaces. I'll discuss that in the next post.

Weekend reading links

1. Very interesting analysis of demographic trends across Indian states by S Rukmini. The salience of the north-south divide will become starker by 2036. Some interesting snippets,

Over one-third of the total increase in India’s population between 2011 and 2036 will come from two states alone - Uttar Pradesh and Bihar - new census population projections show, while all of the southern Indian states will see their share in the population declining... People from the four most populous southern Indian states will account for fewer people than from Uttar Pradesh alone... India will move from being a very young country, to increasingly resembling something closer to a middle-aged country... By 2036, Bihar will be the only state that has not achieved replacement fertility.

2. A useful listing of all benefits to MSMEs announced by government of India in recent times.

3. It is reported that 16.8 GW of solar and wind power projects, with investment worth about Rs 600 bn, which have been publicly auctioned and awarded are in limbo because state government owned distribution companies (discoms) are refusing to sign the contracts. These projects have been auctioned by Solar Energy Corporation of India (SECI), who in turn sign power supply agreements (PSAs) with discoms. The discoms are balking at signing the PSAs since they have been encouraged by the low rates discovered in subsequent tenders and prefer to do tariff shopping. The Government of India is now planning to bundle different power projects and sign PSAs at weighted average tariffs. 

4. The rising job losses among the salaried people in formal jobs is a big concern for the Indian economy. It has risen to 18.9 million, with 5 million such jobs lost in July, as per CMIE estimates. Besides, the latest corporate results are a matter of big concern.

But indicators also points to recovery happening, though much of it is obviously base effect from a washout previous quarter.

5. Good profile of Vivek Chaand Sehgal, founder of car parts supplier Motherson Sumi, one of the true Indian manufacturing success story.

6. I have blogged here about how the National Infrastructure Investment Fund (NIIF) is displacing private capital. It is reported that the government has roped in NIIF as a bidder to redevelop and transform Mumbai’s Chhatrapati Shivaji Maharaj Terminus railway station.

This may be a good use of NIIF only if there is limited market interest or competition for the Terminus development project. But if there is limited commercial interest for a project like the Mumbai terminal, arguably the prime asset for the Indian Railways (along with New Delhi Station), then it raises questions about either the commercial viability of the whole PPP-based railway stations redevelopment project itself or the terms of these tenders.

However, I foresee a good use of NIIF's capital to de-risk the project and crowd-in private capital for some second tier city terminals, where commercial interest could be justifiably lower.

7. An example of where regulators like SEBI could do with some state capacity to make better use of their already existing powers and regulate more effectively.

8. James Anderson has become the first fast bowler to take 600 wickets. However, I don't think that by any stretch can Anderson be called an all-time great. Among modern fast bowlers (since the seventies) the following will stand apart (for number of wickets, average, strike rates, and performance across the world) - Marshall, Roberts, Holding, Garner (never played in India), Ambrose, Walsh, Lillee (never played in India), McGrath, Hadlee, Imran, Wasim, Waqar, Donald, and Steyn. The next level will consist of Botham, Kapil, Pollock, Anderson, Brett Lee, and Broad. 

The closest comparison I can think of is with Anil Kumble. Like Kumble, on helpful home conditions, Anderson is exceptional. But outside of those, they are surely not the top bracket. That's unlike the names indicated in the first category.

9. Simon Kuper has two very good football articles. As talks about his exit surface, this on Lionel Messi highlights Barcelona's over-reliance on its star and why that could create the conditions for a cliff-edge fall when he departs or retires. The article is also a brilliant portrait of Messi's enigmatic hold on Barcelona's football system. 

The best footballer of probably any era has lived for almost his entire career in the unremarkable town of Castelldefels, outside Barcelona... the essential underpinning of 15 years of routinely brilliant football is a boring life... The Argentine became an umbrella for the organisation. He made running Barça relatively easy.

This on the European Champions League runner-up and Qatari owned Paris Saint Germain (PSG) and how it has slow come to represent Paris. It has involved reclaiming PSG's association from the suburban banlieues and unmarking it to the Parisian elites too.

In 2016 PSG upgraded the stadium, more than doubling the number of VIP seats to about 4,500. Tom Sheehan, the project’s architect, said: “What PSG wanted us to do was look at how we could breathe the identity of Paris into the Parc itself. Paris is a very luxurious destination. We’ve tried to make the Parc a chic destination.” He likened the stadium’s renovated VIP entrance to the entrance hall of Paris’s Opéra Garnier, “where people come early, to see and be seen”. Young banlieusards drinking beer and smoking pot on the surrounding pavements didn’t fit PSG’s plan. In effect, chic Paris was reclaiming the club from the banlieues. The new owners redrew PSG’s badge, making the word “Paris” very big, above a large Eiffel Tower, with “Saint-Germain” in smaller type underneath. Blanc said, “We are called Paris Saint-Germain, but above all we are called Paris.” Sleek men in white shirts in PSG’s sun-filled offices defined (in their new “brand book”) exactly what PSG should stand for: the elegance, beauty and excellence of Paris itself.

10. Jacob Helberg points to how America's de-industrialisation has accompanied China's rise as the world's factory,

In the first decade of the 21st century, more than 66,000 manufacturing facilities closed down or moved overseas. America’s share of the world’s printed circuit board production has dropped 70 percent since 2000; China accounts for around half of global production today. The high-tech industry is hardly exempt: As of 2015, Chinese factories produced 28 percent of the world’s cars, 41 percent of ships, more than 60 percent of TVs, and a staggering 90 percent of the world’s mobile phones.

He points to the strategic risks from US deindustrialisation and the rise of an aggressive China,

Currently, Taiwan—which China dubs a renegade province—is home to Taiwan Semiconductor Manufacturing Company, which accounts for half the global supply of computer chips used in everything from F-35 fighter jets to Apple devices. The United States cannot afford to ignore China’s plans to eventually seize control of Taiwan and the consequences this would entail for the entire U.S. technology industry.

11. A very detailed investigation of the activities of the United Front supported Chinese Communist Party's talent recruitment programs aimed at diaspora Chinese in developed economies and who are working in strategic sectors there and could serve as conduits to access confidential business and other information. (HT: Ananth)

12. Milind Sohoni and Oshin Dharap have an excellent article that draws attention to a less discussed damage done by UGC's quest to standardise university curriculums and examinations on a national or global basis, thereby completely overlooking local contexts and requirements and disconnecting students from engagement with local issues.

Should a “good” student be able to write a newspaper article on a local issue, or conduct a study? Should IIT Bombay or Shivaji University analyse the Kolhapur floods or measure the parameters of the epidemic in their cities? Can the state rely on its colleges for research on drinking water? Should the nation expect that elite institutions will work to improve the railways and devise timetables for shramik services? These questions have never been answered... The case study on local problems has been absent in the curricula. When states innovate, the MHRD is more likely to steam-roll it. This was witnessed in Maharashtra, where its innovative programme, Unnat Maharashtra Abhiyan, linking colleges with district administration was refused support by the MHRD... The most exceptionable is the UGC-NET, the qualifying exam for college teachers. Their curricula are, of course, “national” or for that matter “global”. In Economics, it is the last chapter (of 10 chapters), where the Indian Economy is finally introduced. Missing is the District Economic Plan, a document which is regularly prepared by state governments, or the economics of the city. Sociology wends its way through Marx and Weber, ignores key development programmes such as MGNREGA and forbids any regional content. In Engineering too, the national curriculum for civil engineering is the same for Himachal Pradesh and Maharashtra. The national governing body for engineering has now determined that Virtual Reality and Quantum Computing are important emerging areas! Thus, the Centre decides the curricula, the teachers and their salaries. The states pay.

The MHRD and other central government agencies quest to exert control and regulate national development and economic growth at the cost of the agency of state and local governments is most certain to backfire.

13. The Chinese bullying of Australia should be a wake up call for the Europeans sitting on the fence, if at all any such call was needed. Ananth points to this article about how the Australian government is waking up to tighten restrictions on Chinese engagements in the country.

14. I have blogged about this earlier. A rare example of Indian manufacturing success is that of motorcycles. Three manufacturers - Hero MotoCorp, Bajaj Auto, and TVS - dominate the global market. In the Indian market which forms 40% of the global market, these three account for 77% share. All three started out with partnerships with foreign companies (Honda, Kawasaki, and Suzuki respectively), gradually mastered the production technologies, exited the partnerships and struck out on their own.

Besides, all three have had the vision to invest in R&D to develop in-house capabilities to stay ahead of the global market as well as cultivate their suppliers and a supplier eco-system that is critical to stay competitive in any such market. This and this are two very good articles that explain the story.

15. On substantive economic issues, the returns from India's investment in President Trump may not be much to shout about,

Trade relations have been a major casualty with Mr Trump terminating, in March last year, India’s preferential trade (essentially duty-free) status for a range of products under the Generalised System of Preferences programme, impacting about $5.6 billion worth of Indian exports, mostly from small and medium enterprises. A trade deal, which was likely to address this issue, has proved elusive principally on access to agriproduct markets. At the same time, Mr Trump’s crackdown on immigration in general and his June executive order freezing access to H1B visas, topping months of warnings that the system would be overhauled to limit these permits, has hit the Indian IT industry at an inopportune moment, with the pandemic shrinking job opportunities.

16. Finally Jerome Powell gave the much-awaited Jackson Hole speech on Thursday where he announced a paradigm shift in Fed's monetary policy assumptions. This about inflation,

Our statement emphasizes that our actions to achieve both sides of our dual mandate will be most effective if longer-term inflation expectations remain well anchored at 2 percent. However, if inflation runs below 2 percent following economic downturns but never moves above 2 percent even when the economy is strong, then, over time, inflation will average less than 2 percent. Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down. To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.

In seeking to achieve inflation that averages 2 percent over time, we are not tying ourselves to a particular mathematical formula that defines the average. Thus, our approach could be viewed as a flexible form of average inflation targeting. Our decisions about appropriate monetary policy will continue to reflect a broad array of considerations and will not be dictated by any formula. Of course, if excessive inflationary pressures were to build or inflation expectations were to ratchet above levels consistent with our goal, we would not hesitate to act.

And this about unemployment rate,

... our revised statement says that our policy decision will be informed by our "assessments of the shortfalls of employment from its maximum level" rather than by "deviations from its maximum level" as in our previous statement. This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation. In earlier decades when the Phillips curve was steeper, inflation tended to rise noticeably in response to a strengthening labor market. It was sometimes appropriate for the Fed to tighten monetary policy as employment rose toward its estimated maximum level in order to stave off an unwelcome rise in inflation. The change to "shortfalls" clarifies that, going forward, employment can run at or above real-time estimates of its maximum level without causing concern, unless accompanied by signs of unwanted increases in inflation or the emergence of other risks that could impede the attainment of our goals.

These may appear small shifts, but they can have significant consequences. More on this later. 

The TBTF risk with infrastructure companies

I blogged earlier about the problems facing GVK and the likely risks with the Adani Group. It is now being reported that the Adani Group will be acquiring GVK's stake in Mumbai International Airport Ltd (MIAL). Besides, it will also be acquiring the stakes of minority partners Bidvest Group and Airports Company South Africa (ACSA), thereby giving it a 74% state in MIAL (the remaining 26% being with Airports Authority of India (AAI). This also marks the exit of GVK from MIAL. 

With six airports already won in an earlier tender, Adani now becomes the second largest private airport operator after GMR Group, which operates Delhi and Hyderabad airports. Besides this acquisition gives the Adanis ownership of the upcoming Navi Mumbai airport, in which MIAL holds 74% share. 

This latest airport acquisition of Adani Group raises several concerns. For a start, unlike GMR and GVK which have well established credentials as effective airport operators, the Adani's have no experience of building or operating any airport. In fact, that the second largest airport operator of India will be a company with no experience in airports sector should be considered a matter of concern.

What makes this an even greater concern is that the MIAL deal, involving the AAI, comes even as the Adani Group have formally expressed their inability to the AAI to takeover the three airports awarded to them in 2019 (the other three airports are stuck in litigation). So effectively, while on the one hand Adanis are washing their hands off earlier bids on debatable grounds, on the other hand they are taking over the country's second largest airport.

An editorial in Business Standard wrote this,

The Adani group has now got control of as many as six airports in spite of having no real experience in the field and a debt pile that stood at Rs 1.3 trillion at the end of the last financial year, during which it also saw a 64 per cent decline in net profit year-on-year. Also, the Cabinet approved leasing three airports to the group — Jaipur, Guwahati and Thiruvananthapuram — even though it has sought to delay taking over the three other airports — Mangaluru, Ahmedabad, and Lucknow — for which it won bids in February last year.

In fact, with MIAL in their bag, the Adanis may now think of reconsidering their request to cancel the bids on the three airports. As we shall discuss latter, a balance sheet with six Tier II airports and two metropolitan airports (Mumbai and Navi Mumbai), even without any sectoral experience, presents several opportunities.

Furthermore, the Group's land-grab, in terms of winning tenders, is not restricted to airports. The Group has won big enough tenders in solar and city gas distribution, both areas where it has little or no internal expertise. The spectacular expansion in ports sector from just one port to being now in control over 45 berths and 14 terminals in ten locations in less than a decade is well-known. In fact, most of this expansion too has been in just recent times and through acquisitions.

In short, in just a couple of years, the Group has quietly imposed itself as large player in several important sectors of the economy with no prior experience. Neither does it appear that the Group has forged strategic partnerships with experienced operators (except Total SA in Gas distribution).

This is disturbing for at least two reasons. One, unlike the Reliance Industries, the Adani Group's track record of painstaking execution and operations, of the sort that is required in messy infrastructure sectors, is limited and questionable. Its track record (of relevance here) is largely restricted to running a port and a power plant. It has come to own assets or projects in several sectors in one big flush and it now remains to be seen how it can mobilise the capacity to execute or operate them. The failure to takeover the three litigation-free airports for more than a year after it won the bid and before Covid 19 struck only heightens the concerns.

Second, as I have blogged here, the Adani Group's growth has been characterised by disturbingly high levels of leverage. Many of the major scheduled commercial banks have significant exposures to the Group. And the nature of the exposure, arising from a feature of infrastructure financing in India, is a matter of concern. 

Infrastructure companies buy or bid for large projects. These projects require mobilisation of capital for financial closure. So, after winning the bids, they pursue different avenues to mobilise capital to achieve financial closure. This invariably involves raising bank loans or issuing bonds by leveraging the expected revenues and receivables from the contract as the collateral.

The underlying source of the contractual commitments vary across sectors. For roads, it is either the potential toll revenues or the annuity payments committed by the contracting agency. The latter naturally lowers the cost of capital. In case of power generation projects, the Power Purchase Agreements (PPAs) and Fuel Supply Agreements (FSAs) serve this role. In case of airports, like with the roads, the traffic estimates are the collateral. In case of ports and gas terminals, often there are long-term contracts with large port/terminal user companies that assure demand.

Never mind the uncertainties associated with such receivables, these commitments help developers achieve financial closure and start construction. In fact, it is a common practice for developers to undertake financial engineering and gold-plate their investments or inflate asset valuations to maximise what they can squeeze out from lenders. It does help that banks do not have the expertise to undertake serious due-diligence and price their loans accordingly.

In the world of balance sheet financing (as against project financing), especially by banks, this money is, in turn, rotated to acquire newer assets and so on. As the pile of assets owned by a company rises, a giant Ponzi scheme develops - you raise money for a project and use it to acquire new projects, or payoff liabilities and cashflow problems elsewhere in the group's holdings. In a context of weak diligence and monitoring by banks and deficient oversight by regulators, a complex web of highly opaque inter-company transfers takes place. Once the tide drops, as it should with such risky exposures, everyone stands exposed.

As an illustration, one can be certain that the Adani Group will have leveraged its winning of six bids to raise the capital to finance any acquisition of a controlling stake in MIAL. Why else would any financier lend to a company which has no experience whatsoever in the aviation industry, even if there is an underlying physical asset? It is difficult to disentangle such contributions and effects, but the reality will be easily acknowledged in private by everyone concerned.

It also fuels a dynamic of the bigger companies being able to attract more financing, purely on the basis of their size. In case of the Adanis in airports, despite all other risks and concerns, a balance sheet with eight possible airports is a strong attraction to prospective lenders.

But this concentration of projects with a developer also raises moral hazard concerns. Unlike regular commercial companies, infrastructure operators manage assets and deliver services that are essential, often some form of public goods. It is not possible to let these assets disappear or be liquidated away. So, even if the operator runs into problems, in public interest governments will be pressured to step in and bail them out. The large exposures of the banking system to the developer only adds to the moral hazard. This is the Too Big to Fail (TBTF) moral hazard with large infrastructure contractors.

Make no mistake, based on all information available as on date, and even with generous optimism, it is hard not to allocate a very high risk rating to the Adani Group and all its portfolio of projects. There is a serious risk of all these projects being delayed inordinately, if not having to be re-bid. And we've been here before numerous time across the world and in India itself to have not learnt the lessons.

This entire episode is in line with the global practice and trends in the infrastructure sector as outlined in this paper.

Update 1 (31.08.2020)

Adani Group formally takes over the Mumbai airport. A Business Standard editorial lays down the disturbing issues with the Adani Group's take over of  the GVK share in MIAL.

Update 2 (01.09.2020)

The biggest risk with all the greenfield projects that the Adani Group have accumulated concerns the Group's ability to raise the financing required to execute them. This article highlights the problems with its debt exposure.

Update 3 (03.09.2020)

Talking about aggressive bids, sample this,

At Rs 115 per passenger for Mangaluru and Rs 171 for Lucknow, the group’s bids were over 500 per cent more than the ones received from the GMR group and PNC Infratech, respectively. Similarly, the Adani group placed a bid of Rs 177 for Ahmedabad airport, nearly 200 per cent more than that of Autostrade Indian Infrastructure Development.

So we are talking about bids for six airports, all made by one operator and all offering fees in multiples of that offered by nearest competitor! Even assuming any strategic or grand intentions behind such bids, it is hard to believe that only one company could see so much money lying on the sidewalks!

And this.

Update 4 (12.09.2020)

With the MIAL acquisition, one in four airline passengers in India will pass through Adani owned airport. This article is a good summary of the lead up to the Group coming to acquire seven airports.

This article raises questions about the bidding process followed for the six airports privatised in the first round of PPPs, and how it could make flying expensive and hurt the sector's growth prospects. Unlike the existing airports, where AAI gets a share of the revenue, in these six airports, the winning bidder pays a per passenger fee. AAI has 45.99% revenue sharing with DIAL (Delhi) and 38.7% with MIAL. The concession agreements signed for Ahmedabad, Lucknow and Mangaluru airports, Adani will pay AAI Rs 177, Rs 171 and Rs 115 respectively for every domestic passenger, and double these for every international passenger. The concessionaire has these revenue streams - charging passengers a user fee, charging airline operators, real estate development, and maintenance, repair, and overhaul (MRO) activities for commercial aircrafts.

The bid parameter does not incentivise the operator to improve efficiency and keep costs down, and allows them to maximise fees from passengers and airlines.

The airport sector regulator, AERA has pegged a cap of 30% of revenues as royalty that can be allowed as ‘pass-through expenditure’ (that is passed on to the consumer) for all ground-handling and cargo-handling and other aeronautical services. “This means that the operator can outsource these services and charge the subcontractors high royalties. If not royalty, operators will charge a licence fee," said the lawyer. “The fact is that subcontractors are more than willing to pay as much as 200% of their revenues while bidding shows a big anomaly in the system. Obviously, this will lead to overcharging the customers and underreporting their revenues," he added. The reference here is to AAI cancelling bidding of ground-handling services for 76 airports in June, 2019, following concerns over some short-listed bidders offering steep royalties as high as 226%. There is also no cap on royalties on subcontractors providing non-aero services such as hotels, duty-free shopping and liquor sales since they don’t come under the purview of AERA. Airport operators continue to levy huge royalties or licence-fee on those service providers. “Strangely, in most cases, the bidding and selection is based on royalties—meaning how much revenues will the subcontractor share with the airport operator, and not on technical parameters and financial strength of bidders," the lawyer quoted above added.

AERA had in 2018 capped the royalty charged by airport operators on independent service providers (companies dealing in ground handling, cargo handling, and fuel services) to 30% of the latter's gross revenue. Given that the ISP's charge the airlines for their services, a high royalty by the operator naturally gets passed through to airlines, who in turn pass them on to passengers.

Update 5 (23.09.2020)

Adani is also the world's largest solar developer by capacity,

According to a ranking renewable energy consultancy Mercom Capital Group, Adani Green is currently the top global solar developer with 2.3 GW of operational projects, 2 GW under construction, and 8 GW of awarded projects (with contracted PPAs) for a total capacity of 12.3 GW. Hong Kong-based GCL New Energy is the second largest global solar developer with 7.1 GW, followed by SB Energy, Enel Green Power, Brookfield Renewable, First Solar, AES Corporation, Invenergy, Lightsource bp, and ENGIE. In June, Adani Green Energy Ltd bagged a manufacturing-linked solar contract from the Solar Energy Corporation of India (SECI) to develop 8 GW of projects. The transaction is valued at ₹45,000 crore, or $6 billion.

Again, the vast majority being projects awarded, and with a far smaller track record of execution. And as it goes ahead with execution, it will face the problems of land acquisition etc, as outlined here. 

Agriculture reforms - replace crop insurance with direct payments

I have blogged on multiple times about the problems with market-based insurance approach to address complex development issues. See this on the enduring seductive appeal of insurance for crops, health, and savings for the poor, and this on financial engineering in general as a meaningful poverty eradication strategy. 

This post discusses why health insurance is not only likely to be neither effective nor sustainable but also likely to end up weakening the public health system. 

Never mind, researchers including those from the likes of World Bank continue to believe in such simplistic but logically appealing PPP-type solutions. 

I had blogged earlier here about the problems and limitations of crop insurance. 

A report in Business Standard raises the inevitable problems with the latest crop insurance effort, PMFBY,

Several states feel the claims paid by insurance companies in comparison to the premium collected are quite low while their financial burden has increased manifold as they have to bear 50 per cent of the premium subsidy. The latest Central government guidelines which further capped the premium subsidy at 30 per cent in un-irrigated areas and 25 per cent in irrigated, also pushed the burden of running the scheme towards the states particularly in crops and areas that are risky... States fear that after the latest changes in PMFBY, their share of subsidy burden will increase as the Centre has capped its subsidy burden at 25 per cent and 30 per cent, while there is no such limit on them... Under PMFBY, farmers pay 2 per cent of the sum insured as their share of premium for kharif crops, 1.5 per cent for rabi crops and 5 per cent for horticulture and commercial crops... Bihar was the first state to opt-out of PMFBY, followed by West Bengal. Thereafter, Andhra Pradesh, Telangana and Jharkhand also moved out of the scheme. Punjab has never been part of PMFBY, while Gujarat has become the latest not to join the scheme. Madhya Pradesh, which is again a major state governed by the ruling party is also reportedly having second thoughts about the scheme.

Further, like with health insurance, crop insurance too suffers from all the classic problems of escalating premiums as the numbers of farmers shrink and their diversity narrows. And in this case, the consequences will have to be borne by the state governments as the residual payer of actuarial premiums, 

Once PMFBY has been made voluntary for loanee farmers as well, the actuarial premium for several crops in many areas tend to be on the higher side, which means if states want to participate in the scheme, they will have to fork out more in terms of their share of subsidy. At present, the actuarial premium in most crops is around 15-20 per cent, which insurance company officials said will easily go up to 25-30 per cent once fewer numbers of farmers participate in the scheme... Suppose the actuarial premium of a crop comes to 40 per cent in unirrigated areas. In this, the farmers share is capped at 2 per cent, while in the old format the balance 38 per cent subsidy is shared equally between Centre and states in the ratio of 50:50. However, from this kharif season (2020), while farmers share will remain at 2 per cent, Centre on its part will bear the subsidy only upto 30 per cent, which means 15 per cent in the 50:50 ratio. The balance, which in this case comes to around 23 per cent, will have to be borne by the concerned states, if it wants to implement the scheme.

This is the latest evidence on the limitations of crop-insurance approach to supporting agriculture. The PMFBY is likely to turn out to be only the latest in the long series of crop insurance programs that have struggled to realise its impact. 

Increasing productivity and supporting farmer incomes is a deeply complex issue (see also this). There has to be three legs to any meaningful initiative in this regard - investments in agriculture infrastructure, especially irrigation and storage; enabling reforms to ease frictions on backward and forward linkages for farmers; and a risk mitigation mechanism for farmers against the vagaries of both weather and markets.

Fortunately the government has recognised their importance and initiated measures on all the three fronts. The first two are now about implementation. On both sides, there are several precedents of failure to learn from and improve the effectiveness of implementation. And that's not going to be easy. I have blogged here and here respectively about them.

As regards the third leg, the government had chosen to go with crop-insurance. It may not have been the wisest choice. It may be time to acknowledge that, as NITI Aayog member Ramesh Chand has expressed on multiple occasions, plain simple direct transfers are the least distortionary and least expensive way forward on agriculture risk mitigation. Even with their implementation challenges, especially involving targeting to tenant farmers, they are superior to alternatives. But the design of their implementation should be left to states.

Update 1 (28.08.2020)

The evolution of agriculture market policies in Indian in recent years.

Update 2 (21.01.2021)

The problems with PMFBY.

Update 3 (18.02.2022)

Business Standard oped on PMFBY

The risks involved are too high, thanks to farming being a wholly outdoor activity, open to all kinds of natural hazards and attacks by diseases, pests, and stray animals. Claims are generally far higher than the premium collected by insurance companies. Besides, the compensation computed by insurers is often disputed by the beneficiaries. The farmers, too, are not keen to take insurance cover for their crops because they do not deem it financially rewarding. The claims sought by them are most often rejected by the insurers and, if accepted, the payment is usually too meagre and inordinately delayed... Farm insurance has, indeed, been beset with problems ever since it was first introduced in 1972. None of the dozen-odd schemes and insurance models tried and tested till now has proved successful. The PMFBY is no exception. It underwent a thorough revamp in 2020, when it was made voluntary for the farmers, instead of being mandatory for those taking bank loans. Trust deficit has been the biggest issue affecting the credibility of insurance as a means of hedging production risks in agriculture. This, in turn, is attributable to lack of transparency and a time lag in undertaking crop-cutting experiments to assess crop damage, the inadequacy of site-specific past data on crop yields to serve as a benchmark for computing losses, delays in paying states’ share of premium subsidy to the insurance companies, and procedural complications. Unsurprisingly, therefore, the area covered under the PMFBY has seldom exceeded 30 per cent of the total cropland, against the government’s target of extending it to a 50 per cent area.

'Markets going crazy' graphics for the day

Much has been written about the ongoing equity market bubble, which defies all explanations. It is the time under the sun for the likes of David Portnoy. When the history of now is written, this video will figure prominently.

Here are a few graphics, mostly courtesy this excellent compilation from The Gold Standard and other links from Ananth's blog, that capture the strange times in equity markets.

Jesse Felder describes this decoupling of Wall Street and the Main Street as the "craziest" thing he has seen in his stock market career.

From Liz Ann Sonders, the graphic shows that the share of the top five shares in the total market capitalisation of S&P 500 is reaching record highs. It is more than a quarter of the market, the first time in over 50 years.

Even as the markets have boomed, its beneficiaries have mostly been the richest. The Fed estimates show that the top 10% of population by wealth own 87% of all US shares outstanding, with the bottom half's ownership share being negligible.

Interestingly, even as the stock markets have boomed and the stock-owning rich have seen their wealth rise sharply, pension funds appear not to be benefiting. An index which tracks the 100 largest US defined benefit pension plans shows that unfunded liabilities risen unabated even as the markets have boomed, since the bond returns have continued to decline. The funded ratio has declined from 89.8% at the beginning of the year to 81.1% by end-July 2020, and bond rates have fallen nearly a percentage point from 3.2% to 2.26% over the same period.

The share of zombie companies being propped by the overdose of cheap debt has grown explosively in the US,

In the US, the generous stimulus threatens to keep alive "zombie jobs". The story is the same everywhere, and these companies can be a big drag on productivity.

It is to borne in mind that these are not new trends, though the scale and duration of the present episode is perhaps unprecedented. In fact, for many years now, the markets have become an area of increasing speculation than efficient financial intermediation. As a signature, the average holding period of stocks at the NYSE has been declining for a long time.

This parody love letter to the Fed says it all,

A rental car company was trying to sell new shares while in bankruptcy court, because its stock price was on a tear? Let me repeat that: Hertz. Sold. Shares. While. In. Bankruptcy. I can’t even!

And also this from The Economist,

The S&P 500, a share-price index of America’s biggest public companies, reached an all-time high on August 18th in the middle of perhaps the sharpest ever economic downturn... Tesla, a carmaker that is undertaking a stock split at the end of August, has quadrupled in value so far this year. It is now worth $354 bn, more than Ford, Toyota and Volkswagen combined. Nikola, an electric-truck firm (that has yet to make any lorries), has tripled in value since May. Even more perplexing was investors’ fondness for Hertz, a car-rental firm. Its share price rose tenfold after it declared bankruptcy (though this bubble has since popped). 

Final word to Aswath Damodaran (see blog here),

"... the notion that stock markets and economies are closely tied together is deeply held, simply because it appeals to intuition”. However, US data going back to 1960 shows, “there is almost no correlation between stock returns and real GDP growth . . . In short, there is almost nothing of use to investors from poring over current macroeconomic data, which is one reason why markets have started ignoring them.”

This decoupling is also evident elsewhere. Even as public debts soar, bond market yields have been declining.

A nice graphic which captures the surge in US federal Government debt, which at $20.53 trillion at end of June 2020, touched 106% of GDP. This 26 percentage points surge since January, which is not yet over, represents the steepest rise ever.

Yet, this surge has been accompanied by a decline in the US Treasury yields. The 10 year Treasuries have slid down to 0.7%, far below the 2% it was a year ago. 

This explanation about expectations is important,

Investors see almost no chance that the United States, which has one of the best track records of any borrower on earth, will stiff them by defaulting. One big reason: As during World War II, much of the money the government has borrowed is coming from an arm of the government itself, the Federal Reserve. The central bank has increased its holdings of Treasury securities by more than $1.8 trillion since March, effectively creating all the new money it needed to buy them. For many years, such arrangements were viewed as something that was done in wobbly emerging market economies. But since the financial crisis of 2008 and the deep recession that followed, central banks in the richest nations in the world — the Fed, as well as the Bank of Japan, the Bank of England and the European Central Bank — have printed large amounts of money to buy government bonds and spur economic growth by lowering long-term interest rates.

Update 1 (28.08.2020)

More fuel to the already frothing market comes from stock splits. While there is no theoretical benefit from stock splits, there are uncertain psychological effects which could attract more retail investors into the shares.

Update 2 (06.09.2020)

Tesla facts of the day,

Tesla is currently valued at about $379bn, one and a quarter times more than Toyota and Volkswagen combined...For comparison, Toyota and Volkswagen jointly produced 21.8m cars and generated $15.6bn of free cash flow in 2019, according to JPMorgan. That same year, Tesla made 366,000 cars and $1.1bn of cash. Looked at another way, the stock market “values” every car Tesla sold last year at over $1m apiece. You can buy a Tesla Model 3 for $35,000.

It has also been discovered that the main cause for the August rally in US tech stocks has been equity derivatives trading worth nearly $4 billion by Softbank. The Japanese investor has been buying up options in tech stocks in huge quantities, fuelling the lattes ever trading volumes in contracts linked to individual companies. 

The surge in purchases of call options — derivatives that give the user the right to buy a stock at a pre-agreed price — has been the talk of Wall Street, as the sheer size of the trades appears to have exacerbated a “melt-up” in many big technology stocks over the past few months. In August alone, Tesla’s share price shot up 74 per cent, while Apple gained 21 per cent, Google’s parent Alphabet rose 10 per cent and Amazon 9 per cent. 

See also this. 

Update 3 (05.12.2020)

Tesla's valuation in perspective, from GMO

Update 4 (17.12.2020)

From John Mauldin, a stunning table of how historically overvalued is the S&P 500 on a host of valuation metrics.

Agenda for the New Right - reining in markets and cultural progressivism gone too far?

Gladden Pappin (HT: Ananth) has a very good essay which examines the forces facing American Right today, especially in the context of the rise of populist right-wing ideologies.

He points to an interesting feature of modern democracy,

In his 2006 book A World be­yond Politics?, Pierre Manent distinguishes “several broad categories of separation” that characterize modern democracy: “separation of professions, or, division of labor; separation of powers; separation of church and state; separation of civil society and the state; separation between represented and representative; separation of facts and val­ues, or science and life.”These separations have been the engine on which liberal democracy runs, economically, politically, and so­cially. By its own admission, liberalism sought to separate matters that had historically been combined. The division of labor would allow for the maximization of profit. The separation of powers would allow modern states to retain power while not succumbing to tyranny. The separation of church and state would free churches to preach the Gospel while allowing the state to focus on civil goals. Civil society would flourish without the state’s interference. Representative gov­ernment would secure the benefits of democracy without the need for direct democracy. And finally, a science free to pursue knowledge as it understands it would be wholly beneficial to mankind.

He argues that western democracies are facing a reaction against these separations, or more specifically "excessive separations".

Many economic enterprises have become unmoored from their countries of origin, and have become global behe­moths beholden to no one. The separation of professions has led beyond the optimization provided by the division of labor to phe­nomena like those noted in small print on the back of the iPhone: “Designed by Apple in California. Assembled in China.” The vul­nerability of pharmaceutical supply chains under globalization has now been made painfully clear in the reaction to the coronavirus out­break. In the United States, the separation of powers often seems to have led to administrative inefficiencies and political deadlock. The separation of church and state has steadily pushed churches out of public life, to a degree that would have surprised Americans of the nineteenth through even the mid-twentieth century. Meanwhile, the marvels pro­duced by science and engineering in the twentieth century seem destined to be overshadowed by the monstrosities of a new bio­political tyranny coming, like eugenics the last time, in the guise of humanitarianism. Finally, the separation of represented and representa­tive seems to have grown, as representatives become captured by financial interests and corporate pressure.

The conventional wisdom on right and left, even liberals and conservatives cannot explain these trends. For example, as Lee Drutman found,

What propelled Trump to victory was his three-to-one win over Clinton among populist vot­ers—those liberal (i.e., Left) on economic issues and con­servative on social questions and matters of identity. Most strikingly, populists made up 28.9 percent of the American electorate in 2016, whereas libertarian voters—those conservative on economics and Left or lib­eral on social questions—were only 3.8 percent of the electorate.

This about the emergence of modern conservativism in the US,

The American Right incorporated economic neoliberalism on socially conservative terms, by appealing to the American tradition of self-reliance and independence—what Alexis de Tocqueville called “the doctrine of self-interest well understood”- albeit under the banner of “fusionism” ... By the presi­dency of Ronald Reagan, that movement was consolidated, and the Republican Party had become the socially con­servative, economically neoliberal party... Tocqueville was correct when he observed that America was a society full of associations, with citizens constantly forming new groups to push for political and social changes of every variety. Over the second half of the twentieth century, however, many of these associations changed from organic expressions of citi­zen concern to large foundations which advanced the agendas of their donors. On the right, this change meant that conservative think tanks, activist groups, and the like adopted an almost universally libertarian viewpoint—as the donors endowing these foundations held libertarian views on economics...

As American conservatives drew on nineteenth-century for­mula­tions of English liberalism, they became ever more hostile to and skeptical of the state. In a stereotypical rendering of history according to this viewpoint, the United States was a libertarian paradise till the presidency of Franklin D. Roosevelt (or perhaps Woodrow Wilson), whose dramatic expansion of the federal government destroyed tra­ditional American liberties and accordingly set back American eco­nomic progress. The reality is rather different, as the United States adopted a model of state-led industrialization very early in the nine­teenth cen­tury, in keeping with the ideas of Alexander Hamilton. Yet as the importance of military-industrial competition with the Soviet Union faded, conservative think tanks’ commitment to libertarian economics only grew stronger. The end of the Cold War and the success of Bill Clinton’s neo­liberal presidency—during which he incorporated welfare reform, free trade, and stricter criminal justice policies into the Democratic platform—convinced libertarians and neoliberals on the right and left that their moment was at hand. The Republican Party came to power in the U.S. Congress in the 1994 elections on a mission to slash government spending and welfare benefits... During this period, the United States conceived of a future economy that would combine the mone­tization of internet technology and a transition from heavy manufacturing employment to a service-sector economy (hospitality, etc.). With a few exceptions, American conservatives had little or nothing to say about this change, even as the manufacturing core of the American economy was hollowed out. Fusionist conservatives had outsourced the economic portion of their thinking to libertarians.

This has had its consequences,

In the absence of an economic policy that would help middle- and working-class Americans, however, conservatives’ insistence on con­serving traditional family structures became hollow and moralistic. Many otherwise socially conservative black and Hispanic voters have avoided the Republican Party for precisely this reason. But socially conservative white voters, even those whom Republican economic policies do not help, have stayed with the party in the hopes that Republican presidents would appoint socially conservative judges to the U.S. Supreme Court and other federal courts... The situation that Trump entered in 2015 and 2016, then, was one in which the Republican Party was largely stuck on the playbook it had fashioned in the 1970s and 1980s—a narra­tive of entrepreneurial risk and triumph that bore little resemblance to the highly financialized cap­italism of the twenty-first century, now driven by the relentless mini­mizing of domestic labor costs and the substitution of an internet-based, financial, and service-sector economy for the old manufacturing economy.

While the conservatives have traditionally been anti-statist, with deep scepticism of the federal government in particular, the liberals have viewed the state as a keeper of peace and preserver of individual liberties.

Pappin talks about a new right, which is "morally right-wing and economically statist",

A correction in the direction of the state is needed... According to a major March 2019 survey of U.S. adults, pluralities of respondents favor increased federal spending in almost every category: education, veterans bene­fits, rebuilding highways and bridges, Medicare, environmental pro­tection, health care, scientific re­search, Social Security, assistance to the needy, domestic anti-terror­ism, military defense, and assistance to the needy in the world... Trump’s victory additionally suggests that there is a majori­ty of Americans who favor increased state intervention to align eco­nomic production with the national interest, and who favor an end to the increasingly punitive and destabilizing form of cultural pro­gres­sivism domi­nant at present, and a correction in favor of the family...

Twentieth-century conservatives’ devotion to unregulated markets and liber­tarianism has now contributed to a series of financial crises, the loss of U.S. manu­facturing, and a completely demor­alized society... For years, the Right has had no guiding ideology, while the Left had Marxism and the center has had liberal capitalism. When the Right thinks of itself only within the existing frameworks of conservatism, it merely de­fends the neoliberal economic system whose distortions are now being exposed.

He points to two areas of ideological focus for the new right,

If we consider the policy areas that can and should drive political change in the United States, two areas stand out for the new American Right: family policy and industrial policy. On the first, merely speaking about the cultural pressures that families face, as American conservatives have typically done, is not enough. Too many families cannot afford children, and all the factors hindering the choice to raise children are only becoming exacerbated in the post-Covid-19 world... In the fall 2019 American Affairs, I outlined what a FamilyPay proposal should look like in the United States, cen­tered on an annual $6,500 benefit for married couples with one child, $11,500 for two, and so on... Related to the goal of supporting the family, consider the question of decency laws that could restrict the distribution of pornography... The second area of advance in conservative thinking concerns industrial policy. In the United States, industrial policy largely dis­appeared from public discourse after the end of the Cold War and the worldwide trend toward liberalization. During that time, though, the United States arguably implemented a different kind of industrial policy—of moving labor off­shore and transitioning to a digital and service-sector economy... The coronavirus crisis has also highlighted Ameri­can dependence on Chinese-manufactured pharmaceuticals and medical equipment; the pressing need for an American industrial policy can no longer be ignored.

... majority or potentially majority constituencies across the West want their nations to be integral wholes: to have con­trol over their borders, an economy put in the service of the com­mon good, the ability to raise successful families, and the capacity to main­tain their strategic advantage in the face of rising adversaries... At some point along the way, an enterprising right-wing party realizes that liberalism has become an exhausted ideology—exhausted because it is incapable of clearly articulating what the common good is, and incapable of inspiring the loyalty and shared sacrifice that nation-states require to function... Everywhere that the Right is successful, it is shifting toward a postliberal political stance to reintegrate society, economy, and the state. To do so, it must begin with a base of socially conservative vot­ers, since voters split more strongly on social issues than on economic ones. Instead of trying to turn these voters into economic liberals, the Right should give them what they want: an economy oriented toward the nation by employing the means of state, and a society that is supportive of family life.

... politics and the state must reassert themselves against the attempt to dissolve them into markets and a borderless globalism. That will require the Right to become more corporatist in its approach to directing busi­ness activity in the na­tional interests, and more integralist in its view of the link between government and the common good... Whatever word we use to label it, the policies of the next Right are already in evidence: it will use the power of the state to coordinate business and industrial enterprises toward the common goods of peace and strength, while pursuing macroeconomic policies that shore up the cultural base required for any functioning polity.

He points out that the same coalition or perspective underpins the support for populists in Europe, including the Brexit. 

Weekend reading links

1. Interesting paper (HT: Marginal Revolution) on the origins, research focus, and destinations of the most sought after junior economists (or 'stars', as reflected in the numbers of job flouts received) by US universities. The results,

We construct a data set of job flyouts for junior economists between 2013 and 2018 to investigate three aspects of the market for “stars.” First, what is the background of students who become stars? Second, what type of research does the top of the market demand? Third, where do these students take jobs? Among other results, we show that stars are more likely to be international and male than PhDs overall, that theoretical and semi-theoretical approaches remain dominant, that American programs both produce the most stars and hire even more, that almost none are hired by the private sector, and that there is a strong shift toward having pre-PhD full-time academic research jobs.

Interesting that Indians don't figure closer to the top of origin countries. Surprising that Germany is second, Argentina, Chile and Iran figure very high.

Interesting also that history and political economy are among the least preferred areas of research.

2. Harley Davidson appears set to pull the plug and exit India. The brand sold less than 2500 bikes in India last year. Someone should do a story on how the foreign luxury brands are doing in India. It would be a good proxy for the size of the Indian upper income class. 

3. Ruchir Sharma writes about the growing importance of multimedia gaming industry, which is a $160 bn market and is bigger than books, music, and movies. This is an interesting snippet,

The Chinese tech giant Tencent, for instance, holds a stake in the companies behind seven of the 10 top-grossing games since 2008, including Epic.

4. As the RBI initiates its latest Covid induced bank loan restructuring program, Tamal Bandopadhyay has a good summary of all such efforts since 2001. The summary of the latest plan, involving a Committee of five headed by Mr KV Kamath,

Those accounts, which had been in default for not more than 30 days as on March 1, 2020, can be restructured if the borrowers are unable to service them because of their businesses being affected by the Covid-19 pandemic. The loans can be restructured, among others, by funding interest, converting part of debt into equity and giving the borrowers more time to pay up. The banks must disclose such recast and set aside 10 per cent of the exposure to make provision for the restructured loans. In June 2019, the RBI had framed norms for loan restructuring, making it mandatory for banks to treat restructured, stressed loans as sub-standard unless there was a change in ownership of the borrowing company. Now, the banks can treat the restructured loans for Covid-19-affected companies as a standard asset even if there is no change in ownership.

He suggests that the guidelines evolved by the Committee may have to be dynamic, evolving over time in response to emergent economic situation.

5. Harish Damodaran makes all the right points about the problems facing the Indian economy. The need of the hour is demand creation, on both the household and business sides.  

6. Ashok Gulati makes very good suggestions about the implementation of the newly announced Rs 1 lakh Crore Agriculture Infrastructure Fund (AIF). The details of the Fund, 

This fund will be used to build post-harvest storage and processing facilities, largely anchored at the Farmer Producer Organisations (FPOs), but can also be availed by individual entrepreneurs. The fund will also be used to provide loans, at concessional rates, to FPOs and other entrepreneurs through primary agriculture credit societies (PACs). NABARD will steer this initiative in association with the Ministry of Agriculture and Farmers Welfare. The implication of this for the Central government budget is not going to be more than Rs 5,000 crore over four years in terms of interest subvention subsidy.

This complements the direction to NABARD to create 10,000 FPOs. He makes this point about enablers to make the storage construction viable for FPOs and its use so for farmers,

But small farmers cannot hold stocks for long as they have urgent cash needs to meet family expenditures. Therefore, the value of the storage facilities at the FPO level could be enhanced by a negotiable warehouse receipt system: FPOs can give an advance to farmers, say 75-80 per cent of the value of their produce at the current market price. But FPOs will need large working capital to give advances to farmers against their produce as collateral. Unless NABARD ensures that FPOs get their working capital at interest rates of 4 to 7 per cent — like farmers get for crop loans — the mere creation of storage facilities will not be enough to benefit farmers. Currently, most FPOs get a large chunk of their loans for working capital from microfinance institutions at rates ranging from 18-22 per cent per annum. At such rates, stocking is not economically viable unless the off-season prices are substantially higher than the prices at harvest time.

Finally, he offers three suggestions to catalyse market in agriculture futures so as to link the storage with the markets and minimise the risks faced by FPOs sitting on large storage volumes, effectively securitising them,

First, as NABARD forms 10,000 FPOs and creates basic storage facilities through the AIF, it should devise a compulsory module that trains FPOs to use the negotiable warehouse receipt system and navigate the realm of agri-futures to hedge their market risks. Second, government agencies dabbling in commodity markets — the Food Corporation of India (FCI), National Agricultural Cooperative Marketing Federation of India (NAFED), State Trading Corporation (STC) — should increase their participation in agri-futures. That is how China deepened its agri-futures markets. Third, the banks that give loans to FPOs and traders should also participate in commodity futures as “re-insurers” of sorts for the healthy growth of agri-markets. Finally, government policy has to be more stable and market friendly. In the past, it has been too restrictive and unpredictable. A rise in agri-prices would often result in the banning of agri-futures. Most Indian policymakers look at agri-future markets as dens of speculators.

7. Shuli Ren points to the secret to investing in Chinese stocks - look for those which enjoy state support, in particular ones which are being promoted as part of Xi Jinping's Made in China 2025 and other technology initiatives.

8. The weak recovery of formal sector salaried, mostly urban, jobs appears to be a matter of concern for the Indian economy.

Non-salaried forms of employment have increased from 317.6 million in 2019-20 to 325.6 million in July 2020. This implies a growth of nearly 8 million jobs or an increase of 2.5 per cent in informal employment. However, salaried jobs have declined by 18.9 million by the same comparison. Or, declined by a whopping 22 per cent during the lockdown.

This is a good summary of the Q1 2020-21 economic indicators by AK Bhattacharya.

9. Impact of Covid on inequality in the US,

86 percent of the US jobs that are vulnerable to pay cuts, lost hours, and layoffs are held by workers earning less than $40,000 a year. People of color and less-educated workers disproportionately work in those occupations. In contrast, only 1 percent of jobs paying more than $70,000 and 13 percent of those paying between $40,000 and $70,000 a year are vulnerable to layoffs, furloughs, and reduced hours. Additionally, 40 percent of the revenues of Black-owned businesses are generated in the five most vulnerable sectors, compared with 25 percent of the revenues of all US businesses.

10. Mariaflavia Harari has a very good paper which uses spatial and demographic data from 350 Indian cities over the 1950-2010 period to empirically establish certain well known arguments in urban development,

Bad shape is associated with shorter total length of roads and motorways. A one standard deviation in normalized shape (approximately 360 additional meters) is associated with a 6 percent shorter road network... I consider the clustering of firms within cities and show that disconnected cities do not have more dispersed employment... poor shapes are associated with longer commutes by car and shorter commutes on foot... I show that cities with less compact shapes have overall fewer slum dwellers, both in absolute terms and relative to total population... A one standard deviation increase in FARs (0.6) is associated with an absolute reduction in the shape index of roughly 1 kilometer for each percent increase in projected population. In other words, higher FARs may slow down the deterioration in city shape that fast city growth entails: if growing and topographically constrained cities are allowed to grow vertically, they will not expand horizontally as much and will plausibly remain more compact.

This is perhaps the first detailed and rigorous empirical study on these trends in Indian cities. All the data have been available for a long time. Makes one wonder why no Indian researchers have not explored and published on this.

11. A richly educative interview of Amartya Sen by Angus Deaton and Tim Besley. The interview is a brilliant exposition of the origins and struggles of welfare economics over the last half-century or so. Sen is clearly a brilliant mind, a master who learnt from the masters. The sheer range of engagement - economics, politics, philosophy, and history - is remarkable for a rime when the economics profession elevates purely instrumental field experiments and data analytics to the top of its knowledge hierarchy. Apart from the French economists, hardly any of the major names of this generation have any deep cross-disciplinary understanding of the pursuit of "the business of everyday life". 

12. France is known for the elitism of its higher education institutions and access to the highest levels of government. 

France’s grandes écoles, prestigious public universities... are at the heart of the tensions between the country’s universalist meritocratic ideals and the schools’ creation of a self-perpetuating, predominantly white elite that excludes many students from the provinces and France’s banlieues, suburbs with high concentrations of immigrant communities. France’s grandes écoles are far more powerful than the Ivy League, or even Britain’s Oxford and Cambridge. They were founded as free, publicly funded postgraduate schools designed to train the functionaries who would run France, and for years they have had a solid monopoly on all French systems of power, educating presidents, lawmakers, and the heads of major state institutions and corporations... In theory, access to the grandes écoles is based on an entrance exam for which anyone can apply. In practice, the test is so difficult that most aspiring students spend several years studying for it in special preparatory schools, many of which are private and costly by French standards. As a result, the majority of students who gain entrance come from a handful of the country’s best high schools and preparatory programs. Even the gatekeepers have gatekeepers. The entrance exams themselves are not simply written affairs or multiple-choice tests, but involve oral exams in which a faculty jury asks prospective students to speak with fluency on a range of topics—more like the bar exam than the SAT.

13. Much has been written about the fee gouging in private equity and hedge fund industries. Here comes a new paper which finds that investors collected just 36% of the returns on their invested capital.

We study the long-run outcomes associated with hedge funds' compensation structure. Over a 22-year period, the aggregate effective incentive fee rate is 2.5 times the average contractual rate (i.e., around 50% instead of 20%). Overall, investors collected 36 cents for every dollar earned on their invested capital (over a risk-free hurdle rate and before adjusting for any risk). In the cross-section of funds, there is a substantial disconnect between lifetime performance and incentive fees earned. These poor outcomes stem from the asymmetry of the performance contract, investors' return-chasing behavior, and underwater fund closures.

14. More on the reverse flow of Malayali migrants from Gulf back to home from Nidheesh MK.

15. Finally, Ananth sends me an illuminating set of graphics from EPI that highlight the problems that US pension plans and pensioners will face in the years ahead.

For most age-groups, median retirement savings account balances were lower in 2016 than at the beginning of the millennium.

Almost nine in 10 families in the top income fifth had savings in retirement accounts in 2016, compared with about one in eight families in the bottom income fifth.

The summary,

The trends exhibited in these figures paint a picture of increasingly inadequate retirement savings for successive generations of Americans—and large disparities by income, race, ethnicity, education, and marital status... Decades after the number of active participants in 401(k)-style plans edged out those in traditional pensions, 401(k)s are not delivering substantial income in retirement, and that income is not equally shared. The shift from pensions to account-type savings plans has been a disaster for lower-income, black, Hispanic, non-college-educated, and single workers, who together add up to a majority of the American population... The evidence presented in this chartbook—that the retirement system does not work for most workers—underscores the importance of preserving and expanding Social Security, defending defined benefit pensions for workers who have them, and seeking new solutions for those who do not.

This is one more example of how orthodoxies in economics (shift to market-based pensions for everyone at the cost of social security) have had very bad consequences (here, the consequences will be felt in the years ahead).