Weekend reading links

1. R Ramkumar raises questions about the claims that India's agriculture has not only survived Covid 19 but has also manage to grow strongly, and can therefore be a driver of recovery. On the higher procurements being used to indicate strong sectoral growth, he writes,

As per official data, only 13.5% of paddy farmers and 16.2% of wheat farmers in India sell their harvest to a procurement agency at an assured Minimum Support Price (MSP). The rest sell their output to private traders at prices lower than MSP. One should, then, be looking not at procurement but market arrivals. I compared total market arrivals of 15 major crops in India between March 15 and June 30 in 2019 and 2020. The market arrivals of all the 15 crops were lower in 2020 than in 2019. It was only in paddy, lentil, tomato and banana that market arrivals in 2020 constituted more than 75% of market arrivals in 2019. In wheat, barley, potato, cauliflower, cabbage and lady’s finger, market arrivals in 2020 were between 50% and 75% of market arrivals in 2019. For gram, pigeon pea, onion, peas and mango, market arrivals in 2020 were less than half of market arrivals in 2019. In wheat, the most important rabi crop, only 61.6% of the arrivals in 2019 was recorded in 2020.

Some of the reforms measures suggested though are questionable.

2. Ananth points to Andrew Sullivan,

In the past, we might have turned to more reliable media for context and perspective. But the journalists and reporters and editors who are supposed to perform this function are human as well. And they are perhaps the ones most trapped in the social media hellscape. You can read them on Twitter, where they live and and posture and rank themselves, or on their Slack channels, where they gang up on and smear any waverers. They’ve created an insulated world where any small dissent from groupthink is professional death. Watch Fox, CNN or MSNBC, and it’s the same story.

Point out missing facts or context, exercise some independence of judgment, push back against the narrative — and you’ll be first subject to ostracism and denunciation by your newsroom peers, and then, if you persist, you’ll be fired. The press could have been the antidote to the social media trap. Instead they chose to become the profitable pusher of the poison. Or worse, perhaps they still haven’t realized that this is what they have become: purist, preening propagandists for their own tribe.

He's spot on with this assessment. Two things. One, when one is part of any grand narrative, one tends to lose objectivity. It's the Gramscian hegemony. Two, in recent times, as polarisation has increased dramatically, people subscribing to different narratives become even greater captives of the hegemony and lose even their limited contacts with the other set of views.

So, ironically enough, never has it been more important and also easier (in the sense that there are two clear polar opposite views on the horizon) than is see what is a balanced view.

He also writes,

My bet on the extinction of liberal democracy in America therefore remains in place, and ahead of schedule. We may even at some point realize that it has already actually happened. We just didn’t see it in our newsfeed.

This assessment on "extinction of liberal democracy in America" appears excessive. We under-estimate the resilience of democratic institutions in the US (especially those on individual rights which have emerged through several iterations). Even all those turnings of Howe/Strauss still happened within certain boundaries of individual rights and free enterprise, which were not breached. Over time, liberal democracy has come to be misinterpreted as excessive individualism and excessive role for markets. 

In reality today, we all know liberal democracy, in terms of rules of the game (in both society and markets) being set by genuine representative democratic forces is long gone in the US (perhaps, started in the eighties and nineties with the economics of Reagan and the social movements of Republican Right by the likes of Newt Gingrich). So the correction, with all its messiness, is due. But to say that liberal democracy itself in the US is going to become "extinct" appears a stretch.

3. This is a very nice summary of the internal security and control threats facing President Xi Jinping in China. It is clear that the increased authoritarianism is facing resistance. 

4. Global renewable energy dependence on China,

China now produces more than 70% of the world’s solar modules. It is home to nearly half its manufacturing capacity for wind turbines. It dominates the supply chain for lithium-ion batteries, according to Bloomberg NEF, controlling 77% of cell capacity and 60% of component manufacturing.

And how China deploys its oil security strategy,

In some instances competition for Chinese demand may be straightforward. When it embarked on a price war with Russia this spring, Saudi Arabia slashed prices on shipments bound for China. The country’s biggest refiners are mulling a plan for a buying consortium to strengthen their negotiating power with the Organisation of the Petroleum Exporting Countries. China will probably also flex its financial muscle as petrostates buckle under debt. It has issued oil-backed loans to crude-rich countries such as Angola and Brazil for more than a decade. 

5. Amidst the search for reasons on China's aggressive border tactics with India, Premvir Das argues that the Chinese are trying to shackle India on the land frontier so as to increase their maritime flexibility in the Indian Ocean Region.

6. Foreign auto manufacturers continue to exit India on the face of the lower than estimated domestic demand, Harley Davidson being only the latest.

India's taxes on vehicles are among the highest in the world.

Here is the challenge. On the one hand, the country has a very low direct tax base, which makes it locked into a regime of high share of indirect taxes. And within indirect taxes too, the tendency has been to maximise taxes on goods and services which are not mass consumption. In fact, in the Indian context, "luxury" category starts much earlier - after all, if Toyota's SUV's are 'luxury', then what do you categorise the real luxury brands?

On the other hand, there is the negative effect of high taxes, in so far as it depresses consumption. Further, automobiles, especially the mid and upper market segments, are an important source of manufacturing strength, both in terms of job creation as well as providing a strong foundation for manufacturing value-chain in general. 

In this context, Devangshu Dutta raises concerns about the health of automobile manufacturing sector in India in light of the pandemic,

The automobile value-chain contributes about 40 per cent to India’s manufacturing. Every vehicle has many different parts, all of which are manufactured by different units, and assembled in the factory. It is the only industry with a value chain present across the entire economy. At the primary level, it contributes to the off-take of industrial metals, which means it’s a driver for mining. It also absorbs high-end electronics, leather, rubber, paints and glass. At the tertiary level, in services, it’s a huge contributor to the finance industry. Auto financing is the commonest unit in retail financing deals and every commercial vehicle is financed. It’s also a major contributor to other services segments, including marketing and advertising, as well as creating steady demand in maintenance and repair. And of course, it’s a big driver for fuels and lubricants. When the auto industry is not doing well, it’s a clear sign that the economy is not doing well. It’s also a “bootstrap sector”: A strongly performing auto industry leads to higher overall economic growth and stronger consumption demand because the industry is a major employment generator.

8. Does the constant tinkering with import duties to provide 'level playing field' to domestic producers serve any purpose at all? The government raised duties on 46 items in February 2018, 37 items in July 2019, and 16 more in February 2020. AK Bhattacharya writes,

In spite of that, however, imports of these 46 items have not seen any collapse in the two years since the increase in the Customs duty. Quite to the contrary, imports of footwear, watches and clocks, food processing items (mainly fruit juice) and perfumes & toiletry preparations have increased in the last two years over what these were in 2017-18... It is possible to argue that the impact of the duty hike on imports would be seen over a longer period of time and the trend in the last two years is not a reliable indicator. But the larger question is whether domestic manufacturers have been offering indigenous substitutes for the items, whose imports have now become costlier. Or whether imports are continuing to take place, though at a slower pace, but with the added cost of imports being passed on to the consumer, making Indian manufacturing even more uncompetitive in terms of costs and efficiency.

From Ajit Ranade,

In the last three months, India’s import duty on masur dal has been cut from 30% to 10%, raised back to 30%, and then decreased again to 10%.

9. Harish Damodaran sums up the crux of the agriculture market controversy,

For farmers, arhatiyas (many of them bigger farmers) and labourers in the mandis, the gains from “freedom” are theoretical. The losses from APMCs being rendered unviable — which can happen if trade moves outside and the government stops buying gradually — are practical and real. What if the neighbouring mandi does not earn enough market fee and turns into a BSNL vis-a-vis a Jio or Airtel?... Will the dismantling of APMC monopoly actually lead to their becoming redundant? Secondly, would they result in corporate agri-businesses establishing direct connection with farmers and eliminating market intermediaries?

He appears to reject both questions, based on experience from Bihar and elsewhere, and from the example of the market for milk.

Good primers in Business Standard and Indian Express on the agriculture reforms.

10. A good article by Tanya Thomas on the likely problems for solar projects with land acquisition. This is most certain to become a contentious area in the years ahead as the development of the large volumes of recently awarded projects starts. Two issues in particular:

One, a significant part of what governments have in their land banks as vacant governments lands are actually not vacant. They are cultivated or used by people, either occasionally or fully. Two, given the massive share of SECI projects awarded to Adani, it is most likely to become controversial in the months and years ahead as contentious land acquisition cases come to a boil.

11. The SEBI circular on multi-cap funds has become controversial. As this article highlights, it appears ill conceived and pushed through without adequate discussion and thought. SEBI's concern was that multi-cap funds with an AUM of Rs 1.5 trillion, which by definition are about dynamic asset allocation by fund managers and for which the SEBI had accordingly not fixed any allocation rule, were found to be essentially large cap funds. SEBI reacted by issuing a circular mandating their asset allocation to be 25% each in small and mid-cap stocks.

This benchmark rule abruptly changes the rules of the game. Besides, it is also impractical to undertake such asset reallocations given the narrow capitalisation and profits as well as limited liquidity of the stocks of the companies in the small and mid-cap segments.

The industry’s response is that there is no existing benchmark which has a 50% weight to mid- and small-cap stocks. “The profit of small-cap companies ranges between 7-11%, and 15-22% for mid-caps and the rest from large-caps. Our submission is that Sebi should definitely go for a minimum allocation to large- mid- and small-cap stocks, but it should be linked to the profit pool of the BSE or Nifty 500 companies," said the CEO of a large fund house. Within the top 500 stocks, the proportion of large-, mid- and small- stocks is roughly 77%, 16% and 7% respectively. With a 50% weight in mid- and small-cap stocks, multi-cap funds will find it difficult to beat broad market indices such as the Nifty 500.

Also, the issue of mis-labelling by consistently keeping large-caps unreasonably high appears to have been confined to a few funds. So instead of issuing a blanket circular, the errant ones could then have been taken to task and the rules on multi-cap enforced accordingly,

Data from Value Research shows that three-fourths of the funds in the multi-cap category have a higher allocation to mid- and small-cap stocks than the 23% weight they have in the top 500 stocks in the market. Among the eight remaining funds, the data shows that only four funds have consistently had a weight of over 77% in large-cap stocks in the past three years. As such, in a category with 35 funds, a circular is being issued to address a problem seen primarily in four funds, and to some degree in a few other funds. Enforcement would be a far better solution, provided wrongdoing is found.

12. Sailesh Dobhal points to the growing importance of ESG investing and how it could make businesses more responsible.

I am not as optimistic. I'm inclined to think that the rot inside capitalism, specifically the big corporates and their capture of the establishment, is too deep and with very high stakes to be disturbed by marginal tinkering. In fact, such tinkering, like the Business Roundtable and Larry Fink's platitudinous articles, is precisely the preferred strategy for these businesses. ESG is a good catch-all safety valve to keep discontent within the container.

13. It's a sign of the desperate search for yields that alternatives assets and their trading platforms have been blooming. One trend has been the rise of the financial market in fractional ownership of highly valued assets like paintings, antiques, memorabilia and various types of collectors items, and so on. Start-ups incorporate themselves, acquire the assets in auctions etc or take minority stakes in an asset belonging to a private owner or gallery, and then sell shares on the assets. Following regulatory easing on mini-IPOs, there have been a few such issuances. Sample one,

Masterworks, founded in 2017, has sold 15 artworks with valuations of at least $1m during the pandemic, says Scott Lynn, its founder. That includes $1.5m-worth of shares sold in a company formed around a single artwork by Brian Donnelly, a former street artist known as Kaws. The price per share was only $20 but the risk factors in the IPO offer document were 15 pages long. The company has no history and expects no revenues, and the painting may be sold at a loss, it warned. Other mini-IPOs have been of works by Andy Warhol and Banksy.

Or sample this

Rally Rd turns alternative assets into SEC-registered securities, like mini-IPOs, which in turn enable investors to buy small stakes, sometimes as little as $5, in collectible assets like trading cards, art, shoes, watches, and more.

More financialisation.

14. As the Covid 19 medical and economic casualties mount, Economist has two stock taking articles, one global and another on poorer countries. This assumes significance for India,

From 1990 until last year the number of extremely poor people fell from 2bn, or 36% of the world’s population, to 630m, or just 8%. Most of those left in poverty were in sub-Saharan Africa (see map) and in countries riven by conflict. By contrast, almost half the newly destitute will be in South Asia.

It is hard not to come to the conclusion that India is the worst performing developing country in Covid 19 response on both economic and medical terms. In fact, Debraj Ray, Minu Philip and Samant Subramanian even question the performance on the case fatality rates (CFRs). They compare the performance of India with 17 other countries by adjusting for demographic differences, and find that India's performance is among the worst.

It's safe to say that but for NREGS and PDS (and the various national social assistance programs involving pensions to different categories of population), India would have been savaged by Covid 19.

This on the differences between developed and developing countries on the economic response is striking,

Poor countries on average have spent just $4 a head on programmes to help the poor during the covid-19 crisis, compared with an average of $695 per head of the population in rich countries such as Britain, France and America, according to World Bank estimates.

15. Ananth points to this article on a speech by a senior Chinese official on recent decision to integrate the Communist Party more into the functioning of private businesses.

First, he calls for ‘a working mechanism for the Party to lead the human resources department and giving full play to the leading role of Party organizations in selecting and employing personnel.’.. The new Party-led HR should be able to prevent ‘the appointment and dismissal of the enterprise’s personnel by the professional managers’... ‘Private enterprises may establish a monitoring and auditing department under the leadership of the Party organization, which is responsible for supervising the implementation of enterprise compliance and the enterprise management system’... the Party-led union should ‘advocate enterprises to invest more of the production proceeds into employee motivation, employee training, improving the labor environment and enhancing humane care’.

The existing de facto subordination of private businesses to the Party has now become de jure.

16. Finally, John Mauldin puts scary numbers into the US debt and deficit scenarios. He estimates  government debt to reach $50 trillion or even $60 trillion by 2040, and deficits to be $2 trillion even in good years.

Since almost all major countries in the world will be experiencing a synchronised debt overhang, it will be interesting to see what will be its aggregate impact.