Weekend reading links

1. Debashis Basu has some suggestions to reform the role of stock brokers in India's securities market,

Until Sebi was set up, stockbrokers were the only market intermediaries and they performed multiple functions. Then specialised intermediaries were licensed, such as portfolio managers, depositories, custodians, investment advisors, and research analysts; each is covered by specific Sebi regulations. So, there is no reason to allow brokers to perform any of these functions any more. Advisors and research analysts can offer stock advice; banks, depositories, and custodians can handle transacted assets; and portfolio managers can manage investment. Stockbrokers can be limited to executing trades ¯ like a toll operator. Investors suffer because brokers continue to don the hats of advisor, custodian, and portfolio manager, doing each of these badly. Interestingly, some new-age brokers like Zerodha have a business model like a toll operator and, not surprisingly, are yet to be accused of malfeasance or acting in bad faith. This should obviously be the standard model if Sebi wants to make the market safer.

2. As part of its Atmanirbhar campaign, the Government of India has started placing import restrictions on various goods, including consumer electronics like Televisions. While this goes against economic orthodoxy, carefully planned import substitution policies can be beneficial and have historically underpinned the economic growth of every major economy. The challenge is its execution.

It is accordingly important that the government follow-up such restrictions with a policies that prioritise export competition and value-chain up gradation. All the various fiscal and other concessions give to each industry must be revised to promote competition in both exports and maintenance of quality.

In its absence, this warning from a Business Standard editorial is a very real concern,

In today’s world, where complex and disparate inputs and processes go into manufacturing, the consequence of controlling end products such as televisions will not even shift enough value added to manufacturing in India. After all, the most value added in TVs is from the production of screens, as in mobile phones from the chipset and screens. These are in any case being imported in most cases, even among those that are technically made in India. India will go back to being a country where manufacturing means the ability to lobby for protection against imports, hogging capital from state-owned banks, and building “turn-a-screwdriver” plants that have low marginal product, low skills, and low wages, and yet can claim to “Make in India”... It not just reduces the pressure to be competitive and efficient and extracts consumer surplus from the great mass of the Indian people to transfer to inefficient producers, but also provides ample opportunity for corruption. Lobbying for placing some goods and not others on the restricted list will become a priority. 

3. Apple plans to move 10% of its production of 150 million phones to India. China currently forms 95% of the production. Apple's contract manufacturers Foxconn and Wistron are already ramping up facilities and another Pegatron is setting up a facility in India.

4. The biggest worry for the Indian economy as it fights to recover from the pandemic is the banking sector. Globally, among the major economies, the Indian banking sector is the weakest,

Though the recognition of all stressed assets had peaked, the sector went into the pandemic in a very weak state with non-performing assets (NPAs) at 8.5%, the highest among major economies. Besides, the credit markets had yet to recover from the credit squeeze to NBFCs.

The pandemic has surely added several percentage points to the NPAs, whose recognition is only postponed by the moratorium on loan repayments. Once the reckoning arrives, it is most likely to go beyond even the RBI's "severely stressed" scenario of 14.7% by March 2021. In fact, it is very likely that NPAs would cross breach the level of 15.9% touched in 1999. At 14.7%, the RBI's Financial Stability Report points to the capital-to-risk-weighted assets ratio of banks to drop from 14.6% in March 2020 to 11.8%, leaving five banks under the minimum capital reserve level, thereby demanding large recapitalisations.

In this context, the RBI has announced the creation of a Committee to suggest guidelines for a one-time restructuring of corporate and personal loans. This is a welcome step which acknowledges the reality. The challenge though will be in coming up with guidelines that does the job with the least distortions and most effectiveness in the quickest time.  

5. One of the biggest problems with fintechs is that their growth rate quickly outstrips their ability to put in place the required internal controls and systems. Wirecard is only the latest example of audit and regulatory failures.

In this context, the Bank of England's Prudential Regulatory Authority has tightened various prudential norms, including capital requirements, on fast growing UK retail banks like Monzo and Starling. The BoE has made easing restrictions on the growth of fintech dependent on higher regulatory compliance standards. Its concerns are understandable,

It warned that some new lenders had “underestimated the development required to become a successful, established bank”, and called for more effective planning, stronger governance and clearer paths to profitability... The BoE has been concerned by standards in challenger banks for more than a year, after stress tests showed many new lenders cutting corners in an aggressive pursuit of growth... Monzo’s latest annual report, released last week, showed auditors raised concerns by some of the same issues. EY noted that “the pace of improvement [in governance and controls] is not keeping up with the pace of growth in the business and the accompanying risks”.

This is relevant to financial market regulators everywhere, including India.

6. In countries like the US, the pandemic and its stimulus measures, far from reducing inequality may actually have exacerbated it. Gillian Tett points to New York Fed study which

... suggests that the attrition rate for white and Asian-owned businesses has been 17 per cent and 26 per cent respectively. The rate for Latino and black businesses, however, was 32 per cent and 41 per cent.

She also writes about a Brookings study of the pay check protection program (PPP) to help small businesses, which distributed $521 bn in loans in April-June to 4.9 m companies,

... the money did not go to the areas of greatest need; instead, since the US Treasury decided to disperse the money via banks, it flowed to companies with the best banking relationships. This produced a perverse result: “cities in which the largest share of small businesses experienced revenue loss had the lowest share of small businesses receiving PPP loans”. Black businesses have much weaker banking ties than white ones, and typically rely far more than white companies on fintech platforms, which were excluded from PPP. So it is perhaps no surprise that the Fed research shows that black areas received few PPP loans. Among the top 30 counties as measured by black business receipts, only 7 per cent of firms in the Bronx, 11.3 per cent in Queens, 11.6 per cent in Wayne County, Michigan and 12.2 per cent in Prince George’s County, Maryland, received PPP loans.

7. The Economist has a very good briefing on Google's parent company Alphabet. It highlights the tensions and challenges being faced by a company as it grapples with maintaining its culture of free-spiritedness and innovation even as its size and complexity demands the organisation and bureaucracy associated with any large entity.

While Alphabet as a whole benefits from the data generated by its various entities, commercially, most of its revenues and profits come from Google and You Tube, mainly through advertisement revenues and 'its online ad stack'.

An interesting point in the article is about the Indians at top positions within Google, and from IITs (IIT Madras). There may be something about the Indian technology professionals and their managerial and leadership attributes. The contrast with the meagre presence of Chinese managers in leadership positions is striking. This is a reversal of the trend in technology entrepreneurship, where Chinese dominate Indians.

This briefing on Amazon too is similarly very good and informative. 

8. Perhaps the least transparent two arms of the broader Indian government where accountability and transparency are least are the judiciary and the armed forces. In case of the Chinese incursions, whichever way it is looked at, it is hard not to come away with the impression of a failure within the national security system and armed forces, including at the highest levels, and from intelligence gathering and assessment to decision-making to physical response.

9. Another good Economist briefing on how parking restrictions are critical for curbing the unsustainable rise of vehicle population, or what it describes as Parkageddon. As car ownership rose in the middle of last century, countries revised their urban planning codes to mandate "parking minimums" across cities. 

In Las Vegas, “sex novelty shops” must have at least three spaces per 1,000 square feet (93 square metres) of floor space but “adult entertainment cabarets” at least ten for the same area. Singapore insists on one space for every 500 niches in a columbarium—a place where funerary urns are stored. Chennai’s city plan calls for one parking space for every 20 square metres of marriage hall.

Over time, the parking minimums had created distortions,

In 2004 London abolished minimum parking requirements. Research by Zhan Guo of New York University shows that the amount of parking in new residential blocks promptly plunged, from an average of 1.1 spaces per flat to 0.6 spaces. The parking minimum had boosted supply far beyond what the market demanded... Free parking represents a subsidy for older people that is paid disproportionately by the young and a subsidy for the wealthy that is paid by the poor.

This was wise and required for those times to encourage vehicle ownership. Now, when controlling vehicle ownership and usage is the priority, these minimums are becoming evident as the biggest stumbling blocks to controlling vehicle population. 

Two contrasting examples, which reflect the respective parking regulations. London's Shard, perhaps the tallest building in W Europe, has 95 stories but just 48 parking spaces. In contrast, Apple's California headquarters has 318,000 square metres of offices and laboratories with a mandated car parking area of 325,000 square metres or 11,000 parking spaces.

10. Advance market commitment (AMC) to Serum Institute of India (SII) for Covid 19 vaccine,

The Bill and Melinda Gates Foundation has decided to provide $150 million in at-risk funds towards helping the Serum Institute of India rapidly manufacture the Covid-19 vaccines developed by the University of Oxford-AstraZeneca and Novavax. As part of this new agreement, SII will be responsible for delivering up to 100 million doses of the vaccines priced at $3 (around Rs 225) a dose for India and low- and middle-income countries. The collaboration, which involves GAVI, The Vaccine Alliance, will provide SII with “upfront capital” through the Foundation’s Strategic Investment Funds. This is expected to help the Pune-headquartered vaccine maker increase its manufacturing capacity to produce either or both vaccines “at scale” for distribution. Once they receive regulatory approvals and WHO prequalification, the doses are expected to be produced “as early as the first half of 2021”, according to SII.

This, if successful, will be an example to demonstrate how such approaches, like AMCs, can be a substitute for patents to incentivise efforts to undertake pharma research and investments.

11. Finally, FT writes that EM central bankers have responded well to the pandemic with their bond purchases,

Poland’s had spent the equivalent of more than 4 per cent of gross domestic product on bond purchases before the end of June, about half of what many analysts expect it to spend on QE overall. Chile, Colombia, Indonesia and Thailand will all spend the equivalent of 3 per cent of GDP or more, according to data compiled by ASR. Others, such as Brazil, India and Korea, will spend much less. Most countries have introduced lending facilities and relaxed reserve requirements and other constraints on banks. Some, including Indonesia, have engaged in outright government financing to support the fiscal response to the crisis.