Weekend reading links

1. John Thornhill points to this paper by Hendrik Bessembinder which questions the conventional wisdom on stock market returns,

While the overall US stock market has handily outperformed Treasury bills in the long run, most individual common stocks have not. Of the nearly 26,000 common stocks that have appeared on CRSP from 1926 to 2016, less than half generated a positive lifetime buy-and-hold return (inclusive of reinvested dividends) and only 42.6% have a lifetime buy-and-hold return greater than the one-month Treasury bill over the same time interval. The positive performance of the overall market is attributable to large returns generated by relatively few stocks... When stated in terms of lifetime dollar wealth creation to shareholders in aggregate, approximately one-third of 1% of the firms that issued common stocks contained in the CRSP database account for half of the net stock market gains, and slightly more than 4% of the firms account for all of the net stock market gains. The other 96% of firms that issued stock collectively matched one-month Treasury bill returns over their lifetimes.

Further, as Thornhill writes pointing to James Anderson of Baille Gifford,

All the excess returns in world markets since 1990 have come from just 1.3 per cent of companies.

2. It is reported that six out of the top 10 infrastructure companies in India are struggling on the back of high debt and persistent economic weakness.

3. Amidst all the hype around technology and cash transfers, the two saviours of India during the ongoing Pandemic have been good old food distribution and local public works in the form of Public Distribution System (PDS) and NREGS respectively.

As a counterfactual, if India had a UBI which either disbanded all other welfare programs or even marginalised them, we would have seen massive starvation deaths and hunger during the pandemic.

Since acknowledging their failures and learning from evidence is rare among development economists, it is no surprise that none of the UBI supporters have acknowledged this reality.

4. This is a very good article about mental health challenges in India in the context of Covid 19. One of the biggest failings so has been the near complete lack of efforts to de-stigmatise and reassure people about the disease. Surprising since one would think this would have been good politics.

5. The RBI's revisions to the priority sector lending guidelines have evoked some concern. The decision to include start-ups in PSL is superfluous,

It betrays a lack of understanding of how the start-up — and the venture finance — sector works. This is a sector in which the mortality rate is abnormally high. It needs to be funded by risk capital, not by banks. What processes can a bank put in place to lend to a sector where collateral is usually unavailable? In fact, bank debt would drag a start-up down and reduce the efficiency of the sector overall — and perhaps have the counter-productive effect of increasing the mortality rate.

We've had earlier policies too like tax exemptions for start-ups which too betrayed lack of knowledge about startups.

The other reform in the PSL guidelines is the attempt to deal with regional disparities,

The RBI has ranked districts depending on per capita priority sector credit, and to dis-incentivise priority sector lending to the better-performing districts. This will not just cause progress in the areas that are serving as engines of growth in the country to stall, but it will raise questions about federalism once again — almost every district in Tamil Nadu, for example, will see lending “dis-incentivised”. If the broader concern is that agricultural credit in particular is being taken up by larger borrowers in semi-urban areas, that is one thing. But if some areas, for example, are seeing a better performance by renewable energy or infrastructure or other priorities, then it is a bad idea to dis-incentivise them.

6. As the loans repayment moratorium ends, good analysis of the likely problems of the banking sector from Tamal Bandopadhyay. Shankar Acharya points to a painful road ahead, with medium-term growth projections in the 3-5% range.

7. As the GST compensation controversy boils, Thomas Issac, Finance Minister of Kerala, makes the case for states here. Indira Rajaraman makes the wise point that the centre should make a lumps transfer to states as a disaster relief grant. The Secretary Expenditure's interview here clarified several things.

8. This new study from Kenya about Covid 19 fatalities being far less than feared,

Policy makers in Africa need robust estimates of the current and future spread of SARS-CoV-2. Data suitable for this purpose are scant. We used national surveillance PCR test, serological survey and mobility data to develop and fit a county-specific transmission model for Kenya. We estimate that the SARS-CoV-2 pandemic peaked before the end of July 2020 in the major urban counties, with 34 - 41% of residents infected, and will peak elsewhere in the country within 2-3 months. Despite this penetration, reported severe cases and deaths are low. Our analysis suggests the COVID-19 disease burden in Kenya may be far less than initially feared. A similar scenario across sub-Saharan Africa would have implications for balancing the consequences of restrictions with those of COVID-19.

9. Two part data series in Mint about RBI and government relationship and on the impact of inflation targeting on growth. One graph in particular stood out for me, in the backdrop of claims that inflation targeting was responsible for taming inflation in India.

Inflation was on a low plateau well before the MPC was constituted. And the RBI appears to have systematically over-estimated inflation, thereby biasing it towards keeping the policy tighter than perhaps should have been the case.

Andy Mukherjee argues that the central bank kept interest rates higher than they should have been. There is simply no evidence to confidently claim that inflation targeting has worked in India or anywhere.

10. The pandemic has opened a window of opportunity for education technology firms. See this from India,

With the sector booming, investors have pumped in $795 million in the first half of 2020 compared with $108 million in the previous year, and the trend is set to continue. Over 50 new edtech companies were evaluated by Bengaluru-based Orios Venture alone over the past six months, and currently, there are 4,450 edtech companies in the country, according to DataLabs, a resource centre for start-ups.

It's difficult to believe that apart from bridging a gap due to school closures, and that among the small share of those who can afford this, this is unlikely to have any effect on learning outcomes. After all, the learning outcomes from regular classrooms was limited, and to expect online instruction, with all its problems, to deliver learning outcomes is a bit of stretch.

11. A partial explanation for the rise of stock market in India despite the economic problems,

The number of individual investor accounts rose 20 per cent from the start of the year to 24m in July, according to Indian securities depository CDSL, which tracks Asia’s fourth-biggest stock market by capitalisation after mainland China, Hong Kong and Japan.

12. Unintended consequences of agriculture market deregulation,

Off-market transactions between farmers and traders which are going unrecorded could be fueling food inflation as traders engage in speculation and hoarding, experts said... The sharp fall in crop arrivals was expected since trade inside regulated wholesale markets or agriculture produce market committees (APMCs) attract 2-5% taxes levied by states. In June, the Centre brought in a new set of ordinances which allowed tax-free trade outside mandis and free movement of produce across states. It also amended the Essential Commodities Act and removed stock limits on traders. It remains unclear whether farmers benefitted from this liberal trade regime in agriculture; but as higher volumes of trade shift outside mandis, the government is set to lose track of transactions between farmers and traders. All aspect of trade inside mandis—such as the price farmers are receiving for a particular grade of produce and quantities sold— are recorded, but there is currently no mechanism to record prices and trade volumes for transactions outside mandis.

13. Power sector balance sheet in the backdrop of a new scheme to reduce losses and improve discom health,

The new scheme proposes to release grants under the DDUGJY and IPDS, the funds for which have already been sanctioned, in proportion to the discoms achieving mutually agreed efficiency targets — a reduction in AT&C (aggregate technical and commercial) losses (a rubric that covers everything from power theft to the provision of mandated subsidised power) to 15 per cent and bringing the ratio of the average cost of supply and revenue realisation (ACS-ARR) to one —both to be achieved by 2024-25. But none of these targets was met under the UDAY scheme. For instance, AT&C losses under UDAY were to be brought down to 15 per cent (from 26 per cent in 2015) and the ACS-ARR ratio to one by 2020, the final year of the scheme. Today, AT&C losses stand at 23.9 per cent and the ACS-ARR ratio at 0.53. The cumulative losses of discoms in FY20 of Rs 18,000 crore remain a potent pointer to the failure to achieve meaningful efficiencies.

14. This article advocating consolidation of agriculture land holdings by the Secretary Rural Development, Government of India, is baffling. This is the rationale,

Given its benefit in terms of enabling more investment, reducing litigation, facilitating the setting up of new institutions and enterprises, the country must make consolidation an important part of development and factor reforms agenda.

For systems which has not even been able to undertake serious land reforms, struggles to identify tenant farmers, and even map and maintain land records, how is this, much more challenging task, going to be achieved?

15. Viral Acharya goes beyond regulatory capital and finds that the capital shortfalls of Indian banks may be in the range of $75 billion. He writes,

Since the global financial crisis, my colleagues and I have been estimating measures of capital shortfall of financial firms on a daily basis were such a stress scenario to materialise. We estimate downside exposure of a financial firm’s equity returns to aggregate stock market declines, using state-of-the-art econometric methods that capture the notion that volatility and correlations both rise during stress (“the risk that risk will change”). Next, using the knowledge of balance-sheet data on non-equity liabilities (retail and wholesale deposits, commercial paper, bonds, etc.), we assess which firms will have an equity capital shortfall under stress relative to a requirement of maintaining it at a minimum of 8 per cent of the balance sheet... The aggregate capital shortfall of the financial sector under stress is then the sum of the capital shortfalls for all deficient firms. The graph above plots this statistic for the Indian financial sector from September 5, 2006 to September 5, 2020; at present, the estimated capital shortfall is around $75 billion, relative to being virtually zero at the end of 2007.

Barring a few short-lived periods of improvement, the financial sector’s capital shortfall has remained at an elevated level during 2014-2020; it has simply not reverted to the healthy pre-GFC phase, i.e., the financial sector is not yet on a definite path of recovery. This stagnant phase coincides with the “silent crisis” in which credit growth for the economy has been anaemic due to zombie lending and lazy lending, notably by public sector banks (PSBs). The post-demonetisation boom-bust cycle of NBFC lending has only accentuated this problem. Digging into estimates for individual firms, the top 15 capital-deficient entities (out of the 45 entities we track) are all in the public sector (12 PSBs, two power finance companies, and one housing finance company), whose capital shortfall together constitutes more than 90 per cent of the aggregate shortfall. At the other end, the top 15 capital-surplus entities are all in the private sector; collectively, their capital surplus is greater than the deficiency of the rest of the system. This is consistent with their higher profit margins and market-to-book ratios, and persistently lower ratios of non-performing loans to assets. Interestingly, in spite of being surplus, these are the firms that have raised equity capital to guard against Covid-19-induced losses.

16. Sample this direct personal threat (HT: Ananth) by the Chinese Foreign Minister Wang Yi on the Czech Senate Speaker, Milos Vystrcil, who's currently leading a delegation to Taiwan,

“The Chinese government and Chinese people won’t take a laissez-faire attitude or sit idly by, and will make him (Vystrcil) pay a heavy price for his short-sighted behaviour and political opportunism."

Such undignified "wolf warrior" rattles on an insignificant official, and that too by the Foreign Minister, is one reason why China is not going to win too many friends as it rises.

17. The news around Reliance Industries points to the reality of foreign firms throwing in the towel in trying to break into the Indian market on their own. This is also a good example of how national policy has unwittingly or otherwise helps a conglomerate. However, it goes to the credit of Mukesh Ambani that it has completely capitalised on all the opportunities that have opened up. The appetite to assume massive risks and such extraordinary ambitions are not for even the largest businesses. 

It has also helped that by both design and chance, the company has accumulated over time the critical  ingredients of brick and mortar warehousing and retail footprints and last mile optical fibre network. The opportunity that this combination presents is not available for anyone else, and also if Reliance then decides to exhibit the ambition and business nous to capitalise on these assets, then it's also impossible for any competitor to take them on. Add in India's regulatory environment and political connectedness, and the die is cast. 

This about how foreign tech companies, all behemoths globally, may have realised that it is better to piggyback on Reliance. This about how two $2 per customer revenue businesses (ARPU from digital and revenue per square feet per day from retail footprint) form the backbone of Reliance's business model. This about the financial engineering behind the stake sales.

In fact, the Reliance stock rise has created problems in even the mutual funds industry,

The run up has increased the company’s weighting in the S&P BSE Sensex to 17.4 per cent, from 11 per cent at the end of 2019. Money managers have hit a regulatory wall because of the surge. They can’t buy more of India’s most valuable company as actively-run plans aren’t allowed to own more than 10 per cent of a single stock. This means funds can’t add rising stocks, such as Reliance, and therefore risk trailing the market.

18. Finally, a fascinating briefing in the Economist on the impact of Covid 19 on future of the work place. This about how much inertia dictates prevailing practices and how mutations like Covid can be useful,

Before covid-19 the world may have been stuck in a “bad equilibrium” in which home-work was less prevalent than it should have been. The pandemic represents an enormous shock which is putting the world into a new, better equilibrium. Brent Neiman of the University of Chicago suggests three factors which prevented the growth of home-working before now. The first relates to information. Bosses simply did not know whether clustering in an office was essential or not. The past six months have let them find out. The second relates to co-ordination: it may have been difficult for a single firm unilaterally to move to home-working, perhaps because its suppliers or clients would have found it strange. The pandemic, however, forced all firms who could do so to shift to home-working all at once. Amid this mass migration, people were less likely to look askance at companies which did so.

The third factor is to do with investment. The large fixed costs associated with moving from office- to home-based work may have dissuaded firms from trying it out. Evidence from surveys suggests that firms have in recent months spent big on equipment such as laptops to enable staff to work from home; this is one reason why global trade has held up better than expected since the pandemic began. Such investments are made at the household level too. In many rich countries the market for single-family houses is stronger than for apartments. This suggests that people are looking for extra space, possibly for a dedicated home office.

And this about how many of entrenched narratives may be false, 

... a study in 2017 by Matthew Claudel of the Massachusetts Institute of Technology (MIT) and his colleagues. Their study looked at papers and patents produced by MIT researchers and the geographical distribution of those researchers. In doing so, they found a positive relationship between proximity and collaboration. But when they looked at the buildings of MIT, they found little statistical evidence for the hypothesis that “centrally positioned, densely populated and multi-disciplinary spaces would be active hotspots of collaboration”. In other words, proximity can help people come up with new ideas, but they do not necessarily need to be in an office to do so... Not much evidence exists that serendipity is useful for innovation, even though it is accepted by many as a self-evident truth. “A lot of people made a lot of money selling this watercooler idea,” says Mr Claudel of MIT, referring to the growth in recent decades of open-plan offices, co-working spaces and trendy “innovation districts”.