Substack

Saturday, August 1, 2020

Weekend reading links

1. MS Sriram has a very disturbing picture of India's banking sector. He argues that policy makers should allow banks to focus on clearing the NPAs and getting more loans out, rather than hobbling them with reforms.

Andy Mukherjee points to the stress facing Indian banks. It's acute.
The sheer scale of numbers here is staggering and means that something has to give. And it may have to go much beyond even recapitalisations.

More importantly, given the state of affairs, banks will be loath to open up their credit taps, and that means growth will remain constrained.

2. NYT has an investigation of Global Anti-Trust Institute (GAI), part of the Antonin Scalia Law School at George Mason University. The Institute is bankrolled by the likes of Amazon, Google and Qualcomm and organises conferences and workshops for regulators from across the world and within the US, where they advocate that the best way to foster competition is to maintain a hands-off approach to anti-trust law. Besides, the institute's leaders have longstanding tech company ties to help them fend off anti-trust action.

The article chronicles how the Institute has worked to establish the hegemony of a particular approach to anti-trust across the world. It also describes how the GAI has infiltrated and captured the judges at the Brazilian anti-trust regulator, the Administrative Council for Economic Defense (CADE) by hosting its judges in swanky conferences with all expenses paid business class trips.

As the India pursues similar actions against tech companies, it is important to safeguard against such attempts to capture important regulators. The systematic nature of capture of CADE is disturbing. 

3. Goldman Sachs and the Malaysian government agreed on a settlement on the 1MDB scandal, with the former paying $3.9 bn. Malaysian prosecutors had charged several Goldman units for their role in helping raise billions of dollars for the sovereign wealth fund, which was later found to have been used as a personal piggy bank, involving the then Prime Minister, Najib Razak. The settlement closes all the criminal charges against Goldman and its executives.

Goldman executives are accused of conspiring to circumvent its internal controls to bribe Malaysian officials and secure the lucrative bond work. But the settlement absolves Goldman executives, including its current Chief Executive, of culpability in Malaysia of activities which include criminal conduct. However, it still faces action brought by investigators and regulators in the US, though that too is likely to end up in the form of a similar settlement with large fines.

The settlement decision has naturally raised hackles,
Goldman will fork out $2.5bn, instead of the $7.5bn the finance minster had originally demanded, and the Malaysian government agreed to drop criminal charges against the bank and cease legal proceedings against 17 current and former Goldman directors... In the aftermath of the 2008 financial crisis, Goldman was pilloried for its sales of mortgage-backed securities and derivatives. But, unlike virtually all of its competitors, neither Goldman’s bank holding company nor its subsidiaries ever pleaded guilty to criminal charges. It is now trying to emerge from the 1MDB scandal with that record intact. With Malaysia out of the way, the last big hurdle is the US Department of Justice... “If the DoJ does less, it will once again show that Wall Street’s biggest, wealthiest, most politically connected banks are still too big to jail, no matter how many crimes they commit, how many laws they break, how many victims there are or how much damage they inflict,” said Dennis Kelleher, president of Better Markets.
4. Interesting research paper which shows that industries with less business concentration is more innovative,
Using New Product Announcements as a measure of innovation, we find that industries dominated by small firms prove consistently and significantly more innovative than industries where large firms dominate. Taking account of industries’ structural and dynamic levels of competition, we find that high existing and increasing levels of new firms entering an industry, exercising what Schumpeter called the ‘entrepreneurial function’, actually decrease industry innovativeness. We conclude that the contribution of small firms in terms of industry innovativeness is different from that of large as well as new firms.
5. Auto manufacturers in India have been lobbying the government to allow import of components from China.
Last year, auto components worth around $17 billion were imported into In­dia, of which 26 per cent, or $4.5-billion-worth parts, ca­me from China. The balance came from South Korea (13 per cent), Germany (12), Japan (9), USA (4), Thailand (6), Singapore (5) and Italy (3), according to data from the Auto Component Ma­nufacturers’ Association of India (ACMA). The Indian auto components sector is worth about $57 billion. The industry estimates nearly 2 per cent of the components in a passenger car are from China and without those parts — from engine, transmission, suspension, braking, cooling and steering systems to electronic and electrical items — cars will not be rolled out from the manufacturing lines as the automotive value chain is a highly complex, integrated and interdependent one.

Clearly the industry is dependent on China. But also, to put this in perspective, the dependence by value is $4.2 bn in the (formal) $118 bn automobile industry, or 3.6%. It would be much lower when the entire industry is taken into account. Besides, a significant proportion of this would continue to get sourced from China, through various kinds of intermediation, even with a ban from the Indian government. The actual impact felt finally will be limited. Given the numbers above, the actual price increases has to be marginal and the consumers will have to bear with that.

If it is a collective/universal problem of the industry, then it should pass through the higher prices. The government should support it with equivalent tariffs to protect against import competition. The industry should go on the over-drive to diversify away their reliance on China, including encouraging local manufacturing. Needless to say, the government's role in this is important.

If it is a problem faced by a handful of the companies, with their excessive dependence on China, then I guess they are paying the price for poor risk management. The government could provide them some preferential treatment for a period of time to diversify away their dependence.

Without in any way underplaying the importance of sourcing of critical components in the manufacturing, given the nature of the situation here and stakes involved, I am inclined to think that this is an issue which, when all is said and done, the industry can and should manage. Or am I missing something entirely?

6. Nothing unusual about Maharashtra reporting an 18.2% increase in 10th class pass percentage to a record 95.3%. And that too in times of Covid 19. It begs the question about why have such examinations? Given universal pass percentages above 90%, matriculation examinations across Indian states must be the costliest way to screen out 5-10% of students!

7. Jamie Metzl (HT: Ananth) who served in the Clinton administration writes about the lack of serious attempts to hold China accountable for the outbreak of the pandemic. He argues that it is more likely that the virus escaped the high safety Wuhan Institute of Virology, where it was being researched.

8. Business Standard discusses the floundering PMFBY crop insurance program.

9. Vijay Gokhale has a very good profile of Xi Jinping,
It is worth recalling that he was chosen as general secretary in November 2012, because the party feared that Bo Xilai, another Red Child of the Revolution, displayed dangerous traits of megalomania and Maoism. Xi had given no hint of such traits. Bo Xilai was handsome, flamboyant and media-friendly; Xi was modest in both dress and demeanour and, in a word, underwhelming. Such comparison is important to comprehend how he rose without being viewed as a “threat”. Those who encountered him before 2012 tended to judge him only by his appearance or outward demeanour. Perhaps for this reason, people misjudge him still.
10. Anirudh Burman cautions that the draft proposal by the Government of India's Committee on Non-personal Data Governance Framework runs the risk of India creating a license-permit raj in data economy,
The draft report proposes an expansive regulatory regime that would mandate data-sharing by anyone collecting data above a certain threshold, and require registration with another new data regulatory body for anyone collecting or deriving benefits from non-personal data. Also, it proposes state “beneficial ownership” of certain categories of non-personal data. For this, the report makes a specious argument — that useful data created by a business should no longer be considered property owned by it: “The term ‘ownership’ holds full meaning only in terms of physical assets.” It says that the government should be the beneficial owner of what it calls “community non-personal data”, which is still data collected and generated by the private sector. Not only does this upend India’s existing regime for intellectual property, it also goes contrary to global property rights protections India has signed up to.
11. Late on the €750 bn EU pandemic stimulus, with €390 bn in grants and €360 bn in concessional loans. As Emmanuel Macron described, at a time when political consensus on anything is proving difficult anywhere, for 27 countries to agree on some thing which involved decisive breaks from the past is impressive. NYT writes,
The deal was notable for its firsts: European countries will raise large sums by selling bonds collectively, rather than individually; and much of that money will be handed out to member nations hit hardest by the pandemic as grants that do not have to be repaid, and not as loans that would swell their national debts.
And this from Bloomberg,
The recovery package would be financed by joint EU debt issuance, marking a major step toward further economic integration in the bloc. The money will need to be repaid by the end of 2058 and will come out of the EU’s budget, meaning countries that contribute more, like Germany, will be shouldering more of the financial burden. In order to defray the cost of the program, the bloc will increase the amount of revenue it can collect. A new tax on non-recycled plastic waste will be introduced next year, and the European Commission is preparing proposals on a digital tax and a carbon border adjustment mechanism that would take effect in 2023.
The deal involved overcoming stiff resistance from the Frugal Four (Austria, Netherlands, Sweden and Denmark) and within Germany itself. The deal is another feather in the cap of Angela Merkel, as Germany held the rotating Presidency of the EU and worked with Mr Macron to pull this through.

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