1. Pranab Bardhan has a very good exposition of social democracy - capitalist means of production but with "substantial reform in the governance of the firm and in the fiscal power of the democratic state to raise taxes to fund a significant expansion of redistributive and infrastructure programs". He argues that social democracy, appropriately designed, can leave in tact capitalism's important mechanisms of productivity growth and innovation.
2. N Jayakumar presents a very interesting idea which can potentially be used to unlock value from public sector units without disinvesting them.
The idea essentially is to issue bonus debentures, similar to the rights issuance of stocks, to meet the government's disinvestment targets,
What’s being proposed is a massive dividend recap of PSUs, through issuance of bonus debentures in a clutch of entities as shown in the table below. Using a sample list of about 13 entities, an amount of about Rs 2.5 trillion can be raised through these entities, for all shareholders combined, with the Government of India getting about Rs 1.45 trillion. The government stands to get an additional Rs 26,300 crore as tax collection, on the non-government portion of bonus debentures... So, without putting further pressure on an already beleaguered PSU space, without disturbing the cash position of some of these companies, without any dilution of government stake at absurdly low levels, the government becomes the recipient of a large basket of diversified, triple A, PSU debentures. That can then be wrapped in a Bharat Bond ETF structure and sold down to everyone from retail individuals to mutual funds, Employees’ Provident Fund Organisation and hugely cash-surplus banks, sitting on about Rs 8 trillion of liquidity parked with the Reserve Bank of India (RBI) at around 3.4 per cent. This PSU basket, carrying a coupon of 6 per cent, should massively galvanise the corporate debt market, a stated objective of the government and the RBI, since the late 1980s!
Bonus debentures capitalises reserves on a balance sheet by issuing debentures for free instead of equity shares. It becomes more appropriate also given the low debt:equity ratios of many large PSUs.
There are so many counts on which this is flawed. All that can be said is that this is only the latest example of financial market interests suggesting attractive short-term solutions without any concern for the long-term consequences. I struggle to understand how this is any different from the government resorting to asset stripping of the private equity kind.
What's the objective of bonus debenture issuance? If it is to help government mobilise capital from public sector units, then is this superior to alternatives like disinvestment, dividend payout, bonus issues etc? If so how? If the objective is to capitalise reserves on the balance sheet, then, how is this superior to something like dividend payouts or even share buybacks (especially if privatisation is on the anvil)? If the objective is to increase the depth of corporate bond markets, what is the likely incremental effect of such an infusion? Would the infusion translate into liquidity of secondary markets? How would this impact the financials of the PSUs in the coming years? Would they be able to generate the cash-flow required to finance the additional repayment burdens? Do they have productive investment opportunities and how confident are we about their ability to realise them? What would be its impact on a future disinvestment of the same PSUs?
Amidst all these uncertainties and deeply questionable benefits, the one certainty is that a lot of financial market intermediaries would have made a lot of money! In these economically depressed times, it would be a stimulus to them.
3. One more to the long list of auditor culpability in corporate scandals is E&Y's role in the case of Wirecard, which crashed into insolvency after admitting that €1.9 bn in cash was missing. It emerges that one of E&Y's own employees flagged potential fraud at Wirecard four years back. E&Y had signed off the company's accounts without reservations for more than a decade.
4. In a very good example of investigative journalism, NYT showed that President Trump paid meagre amounts as income taxes. The issue has naturally become an important matter in election debates. The investigation is laudable and the tax evasion a matter to be condemned. It is one more negative on President Trump's personal balance sheet.
Wonder why NYT does not undertake similar investigations and expose the tax evasions of companies like Amazon or Apple. This, in a nutshell, is an illustration of why Trump arose in the first place and why he retains his support now.
This is a very good article on why Trump, even after the first debate performance, still retains prospects of winning.
It’s no secret that the ruling class in America despises the country class. If you’re one of those people who don’t live in coastal cities and subscribe to the same worldview as the elite aspirants hoping for a job at a billionaire-backed NGO or an internship that might lead to a job at McKinsey then you’re a deplorable, a CHUD, and definitely racist and whatever bad things are happening to you, your family, and your inland town are your just deserts. One of Trump’s main functions and biggest appeals is that he exposes the occupational elites that are credentialed but not expert in much of anything. Everyone knows it. Imposter syndrome is rampant. And Trump preys on their insecurities which is what provokes such outrageous reactions from his enemies. But a lot of Americans who live in interior America and get unglamorous jobs at slowly declining wages, raise their families want nothing more than to be left alone by the credentialed but unaccomplished strivers who hate them. For those people, Trump is their champion. They probably don’t aspire to be like Trump, but they like the fact that he exposes the bankruptcy of the undeserving ruling class.
5. John Cochrane points to an interesting study by Mitchell Langbert which highlights the overwhelming dominance of liberals (Democrat supporters) within the US academic establishment. The study uses data on the proportion of Democratic party sympathisers and donors within the American Economic Association (AEA). Sample this graphic
Cochrane quotes from Mitchell,
There is no selection in mere membership apart from self-selection. Anyone can join, and some Republican voters do join. The players, however, are elevated in one way or another by the organization. The player categories are officers, editors, authors, book reviewers, and acknowledgees (those thanked in published acknowledgments)....The players are largely devoid of Republicans.
6. Andy Mukherjee peers ahead at the possibility of a Reliance-Tata duopoly in India's e-commerce market. This comes on the back of news that Tata are talking to Walmart to bring them in as a strategic investor. Tata are also in the process of finding resources to buyout Shapoorji Pallonji's 18.4% stake in the holding company.
The 152-year-old Tata Group is talking to Walmart Inc. for a $25 billion investment in a “super-app,” a multipurpose online platform combining fashion, lifestyle and electronics retail, food and grocery, insurance and financial services, as well as digital content and education, the Mint newspaper reported... The conglomerate, which owns Tetley tea and Jaguar Land Rover car brands, has its tentacles in more than 100 businesses, all with their supply chains. If Tata can provide a portal to its vendors to sell their wares, host data and discount bills, expansion into business-to-consumer or consumer-to-consumer websites — like Alibaba’s Tmall or Taobao — shouldn’t be too hard. Besides, if Walmart comes on board, Tata may get access to both the U.S. retailer’s India e-ecommerce website Flipkart, which it bought for $16 billion, as well as PhonePe, a payment service. Tata has a stronger pedigree than Ambani in running consumer businesses, though some of its ventures — like the world’s cheapest car — have flopped.
7. The bid design for the next round of airport privatisation may be an example of a well intentioned policy which can have bad consequences. In response to the possibility of private developers skimming off all the commercially viable airports and leaving the government and AAI with all the unviable ones, the new bid design bundles on commercially viable airport with a non-viable one. Business Standard writes,
... a decision to club one non-viable airport — such as Kushinagar near Ayodhya — with a viable airport — such as Lucknow and bid out the bundle. This may seem to the government like a convenient and easy way to get some non-viable airports off its hands. But it is short-sighted. One of the elementary rules of public finance is that subsidies should be as transparent as possible so they can be properly evaluated by auditors, legislators, and voters. In this case, the subsidy to the non-viable airports will be hidden in the higher costs paid by travellers at the viable airports. This is fundamentally unfair, reminiscent of the policy of lumping north-eastern air routes with the trunk routes. The responsibility for making an airport viable, or for subsidising an unviable one if it is considered vital in the public interest, belongs to the government alone. It requires a comprehensive regional growth plan, not shifting the burden on to the private sector.
8. Ajay Shah makes the case for restructuring through debt write-downs by creditors and equity infusions by shareholders instead of indiscriminate reference to bankruptcy proceedings,
If the incumbent shareholders don’t believe in the company, the IBC is the best answer. If they believe they can make it work, they should prove their commitment by doing a rights issue. The lenders should accept a write-down. The two moves (debt reduction plus equity infusion) will add up to a healthier firm and a fresh start for the company as a going concern. This negotiation avoids the legal complexities of the IBC but it can take place only under its shadow. In some sense, the very purpose of the IBC is to create the threat through which the shareholders are brought to the table for such a negotiation... In a sensible arrangement, most stressed lenders should go into restructuring, and the role of the IBC is to create conditions for the negotiation and to mop up the cases where the negotiation fails.
9. Prosenjit Datta cautions against policies that have excessively unrealistic expectations about the full commercialisation of electric vehicles, which may have the impact of hurting investments in internal combustion engine vehicle industry. The latter forms the core of Indian manufacturing,
In 2018-19, the auto industry constituted 7.1 per cent of the country’s gross domestic product (GDP), 27 per cent of India’s industrial GDP, and 49 per cent of its manufacturing GDP, and provided jobs to 37 million people, directly and indirectly... According to the Automobile Components Manufacturers Association of India, in FY18-19, the industry accounted for 2.3 per cent of India’s GDP and 4 per cent of the country’s exports and employed over five million people.
10. Neelkanth Mishra's assessment of what the economy may require,
Thus, the segments that may need help the most (and we believe the socialisation of whose losses would be in the collective interest of all) are the urban poor, informal sector workers and smaller informal enterprises. In our view, the challenge for policymakers will be in devising schemes that target these segments, as suitable plumbing does not exist yet to direct funds there without leakage or misdirection.
11. Mahesh Vyas points to a disturbing trend with the labour force participation and employment rates, advocates some form of targeting of the employment rate,
The labour participation rate has been falling systematically since 2016-17 when it was 46.1 per cent. In 2017-18, the year that showed the full impact of the November 2016 demonetisation and the July 2018 introduction of GST, the LPR fell by 256 basis points. Then it slid by 77 basis points in 2018-19 and then again by 14 basis points in 2019-20. The two shocks of demonetisation and GST delivered within 8 months of each other had a lasting impact on the LPR. The lockdown, it looks like, could deliver a similar blow to it. The LPR tells us how many of the working age population are willing to be employed... The employment rate has been falling in line with the fall in the labour participation rate. It fell from 42.7 per cent in 2016-17 to 41.6 per cent in 2017-18 and then even more sharply to 40.1 per cent in 2018-19 and then to 39.4 per cent in 2019-20. Between 2016-17 and 2019-20, the employment rate fell by 329 basis points. In September 2020, the employment rate stood at 38 per cent. It was 144 basis points lower than it was in 2019-20.
For reference, according to modelled ILO estimates globally, 57.2 per cent of the working age population is employed. By the same model India’s employment rate was 47 per cent and South Asia was 48 per cent. Pakistan was at 50 per cent, Sri Lanka at 51 per cent and Bangladesh at 57 per cent. India has a long way to go to catch up with global standards and also with its immediate neighbours. China is way ahead at 65 per cent. For long, the debate in India has been around its handsome but jobless growth. India’s GDP kept rising handsomely till recently but its employment did not rise. Real GDP grew at over 6 per cent per annum between 2016-17 and 2019-20. But, employment fell from 407 million in 2016-17 to 403 million in 2019-20. By September 2020, it was down to 398 million.
12. Pratik Datta has a good article on the value of asset reconstruction companies (ARCs) in resolving the pile of bad assets with the banks. Given the presence of the IBC,
If ARCs could hold more equity instead of debt in the resolved company, they would also have a stronger incentive to take strategic control to ensure successful turn around. The law should therefore enable ARCs to invest in a distressed company’s equity, whether by infusing fresh capital or by converting debt into equity. Effectively, an ARC should act more like a private equity fund... This in turn would make the market for corporate control under IBC deeper and more liquid, improving ex-ante recovery rates for banks.
To appreciate how this market could work, consider the role played by hedge funds in the American distressed debt market. In the 1980s and early 1990s, market dynamics coupled with deregulation fuelled an active market for trading claims in companies undergoing resolution under Chapter 11 of the US Bankruptcy Code. This market provided better opportunities than equity markets for acquiring control of distressed businesses. Consequently, it attracted hedge funds. Hedge funds hired entrepreneurs with industry expertise who could play a more active role in turning around distressed companies. Over time, these hedge funds had a salutary impact on turnarounds under Chapter 11.
Distressed debt investors could similarly turnaround failing Indian businesses under the aegis of the IBC. Currently, investors could potentially use three kinds of domestic investment vehicles — Alternative Investment Funds, Non-Banking Finance Companies and ARCs — to invest in companies undergoing IBC resolution. While AIFs can invest in debt as well as equity subject to certain limitations, they don’t enjoy enforcement rights under SARFAESI Act, 2002. NBFCs enjoy the enforcement rights but are subject to provisioning norms for NPAs they purchase from banks. None of these limitations applies to ARCs. If only ARCs are allowed to directly participate in IBC resolutions by infusing equity, they could emerge as the most efficient vehicle for turning around distressed Indian businesses.
13. Mariana Mazzucato makes the case for governments to benefit from the bailouts being given to companies as part of Covid 19 by taking equity stakes in return for the bailout. She quotes some European examples,
When Denmark offered to pay 75 percent of firms’ payroll costs at the start of the pandemic, it did so on the condition that firms could not make layoffs for economic reasons. The Danish government also refused to bail out companies that were registered in tax havens and barred the use of relief funds for dividends and share buybacks. In Austria and France, airlines were saved on the condition that they reduce their carbon footprint.
As an illustration, sample this about Pharma,
In the United States, the National Institutes of Health (NIH) invests some $40 billion a year on medical research and has been a key funder of the research and development of COVID-19 treatments and vaccines. But pharmaceutical companies are under no obligation to make the final products affordable to Americans, whose tax money is subsidizing them in the first place. The California-based company Gilead developed its COVID-19 drug, remdesivir, with $70.5 million in support from the federal government. In June, the company announced the price it would charge Americans for a treatment course: $3,120. It was a typical move for Big Pharma. One study looked at the 210 drugs approved by the U.S. Food and Drug Administration from 2010 to 2016 and found that “NIH funding contributed to every one.”
She also makes the very good point about finance financing itself,
Most of the financial sector’s profits are reinvested back into finance—banks, insurance companies, and real estate—rather than put toward productive uses such as infrastructure or innovation. Only ten percent of all British bank lending, for example, supports nonfinancial firms, with the rest going to real estate and financial assets. In advanced economies, real estate lending constituted about 35 percent of all bank lending in 1970; by 2007, it had risen to about 60 percent. The current structure of finance thus fuels a debt-driven system and speculative bubbles, which, when they burst, bring banks and others begging for government bailouts.
More from her here,
The US National Institutes of Health spends more than $40bn a year in health innovation and contributed more than $200bn to research on innovative drugs approved from 2010-2019... Governments and supranational organisations have provided close to $6bn of investment in the R&D and manufacturing of therapeutics, vaccines and diagnostics for Covid-19. At $1.2bn, the UK’s contribution is among the largest. The NIH’s investment in R&D for coronaviruses between 2002, when Sars first emerged, and 2020 led to promising drug candidates including Remdesivir, which was recently prescribed for US President Donald Trump... The 18 listed on the S&P 500 from 2009 to 2018 have spent $335bn on buybacks and $287bn on dividends in that time. Combined, their R&D spend was $544bn over the same period.
14. The US House of Representatives anti-trust Committee has submitted the report of its year long investigations into the big tech firms. The report finds egregious practices of market abuse. Its recommendations include,
First, the subcommittee is calling for the structural separation of business lines by prohibiting any dominant platform from operating in the same market as other competitors dependent on the same platform. Accordingly, it asks for legislation to require either divestment or functional separation inside the companies... Second, the panel wants to implement rules that will prevent preferential or discriminatory treatment on the dominant platforms... The panel calls for restrictions on the use of “superior bargaining power” by the technology companies in dictating terms and negotiating agreements.
15. The production linked incentives scheme to promote investment and exports appears to be paying off in quick time. Early in the week, the government approved the plans of 16 companies to invest Rs 11000 Crore and produce Rs 10.5 trillion worth electronic equipment, including Rs 9 trillion worth mobile phones costing more than Rs 15000, over the coming five years. At least 60% of the production value is expected to come from exports under the scheme, where the companies will receive incentives ranging from 4-6% of their production value if they meet the investment target and the value of phone manufactured target each year. The incentive rate will begin at 6 per cent and go down to 4 per cent over the life of the scheme; the government says it will cost about Rs 41,000 crore over the duration.
16. Gillian Tett writes about the SPAC bubble,
This week it emerged that University of Pennsylvania students have created a so-called “Penn Spac” club to celebrate these new equity vehicles. Known as blank-cheque companies, Spacs raise money from investors, via a public listing, and then merge with a private company, in effect taking it public while avoiding a traditional initial public offering... The current statistics around Spacs are startling: so far this year 133 Spacs have been floated in the US, raising $51.1bn, nearly four times last year’s volume. A further 67 are waiting in the wings, according to Spac Research. The list of Spac managers is swelling so fast that it now includes Billy Beane, the US baseball executive depicted by Brad Pitt in the film Moneyball, and Paul Ryan, former Speaker of the US House of Representatives. Meanwhile, the London Stock Exchange is jumping aboard, as it explores how to lure Spacs to the UK, and a fund that has jokingly been dubbed a “Spac of Spacs” has just emerged. Easterly Alternatives is raising a $100m vehicle to invest in up to 15 other Spacs. Anyone older than a college kid may well hear echoes of the last credit boom. Back then, collateralised debt obligations, backed by tranches of loans, were so hot that financiers started creating CDOs backed by tranches of CDOs, known as CDO squareds.
17. FT writes about the emerging world of two distinct supply chains, one for China which is largely based out of China, and one for the rest of the world which is diversifying away from China.
According to surveys conducted by the American Chamber of Commerce in China over the past two years, about 40 per cent of US companies in China have moved manufacturing facilities out of the country already or are considering doing so. In the chamber’s latest annual survey, published last month, only 28 per cent of member companies said their investment in China would increase this year — down from 48 per cent in 2019, around 60 per cent in the two preceding years, and 81 per cent in 2016.
This is an interesting graphic about China's growing labour and other costs, which undercuts its competitiveness.
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