Weekend reading links

1. Tamal Bandopadhyay argues that the best way for the RBI to manage the bond markets is to gradually allow them to find their real levels, instead of imposing hard demands.

Some facts about the market,

In the current financial year, the central government is borrowing Rs 12.8 trillion. Add to that, around Rs 8.25 trillion of state development loans and another Rs 1.1 trillion borrowing by the central government to take care of the shortfall in the GST collection of the states. This pegs the total borrowing at Rs 22.15 trillion. There will be little respite in the next year when the collective borrowing of the Centre and the states will be at least Rs 20 trillion. We can get a sense of how abnormal the size of the borrowing is if we look at the size of the Centre’s borrowing in the recent past. In 2020, it borrowed Rs 7 trillion and in 2019, Rs 5.96 trillion. A decade back, in 2010, it was Rs 4.2 trillion. 

Who buys the government bonds? Going by the September 2020 data, the share of banks, including their primary dealer arms, in this market is a little over 40 per cent, followed by insurance companies (25.33 per cent), provident funds (4.77 per cent) and mutual funds (2.42 per cent). The primary dealers, which are not owned by banks, hold less than half a per cent of the total bond portfolio even as the RBI’s share is 15 per cent. The combined share of foreign institutional investors and portfolio investors is less than 3.5 per cent. In fact, in fiscal year 2020, this set of investors had pared its government bond portfolio by Rs 35,111 crore; by the last week of February, their holding has shrunk further.

2. The Union Budget announced the expansion of Operation Green program beyond tomato, onion, and potato (TOP) to cover 22 perishable commodities. The scheme objectives were to limit the wide price volatility (through NAFED intervention), build efficient farmgate to fork value chains and thereby increase farmer share of the consumer price, and reduce post-harvest losses by building modern warehouses and cold storages. 

Ashok Gulati has a nice graphic of the current share of farmers in the final consumer price.

It's clear that farmers get only a quarter to a third of the price. The point to be discussed is how much of the value chain can be squeezed out for the farmers, given the large distance from farmgate to the consumer, the fragmented nature of retailing, and the poor quality of post-harvest infrastructure and logistics. In fact, a comparison with the share of price going to farmers from the US shows that Indian farmers are better off than US farmers - the latter gets only 29% and 16% respectively for tomatoes and potatoes respectively, compared to 32% and 26% for the former. (HT: Shoumitro Chatterjee)

He's misleading on the issue of increasing farmer share of the value chain by making the direct comparison to milk and referring to the 75-80% share of consumer price of milk going to milk producers.

3. Ruchir Sharma has some factoids about the monetary stimulus that has been flowing in,

Nearly 20 per cent of all dollars in circulation were printed in 2020 alone. Major central banks followed the Fed, and governments topped that up with stimulus spending. US disposable incomes rose at the fastest rate in decades, but much of that went unspent. Americans saved at the highest rate since the second world war, putting away an additional $1.7tn, or more than 16 per cent of their 2020 income. With more money in the bank, and more time on their hands because of lockdowns, many workers turned to punting in the markets. Of 49m online brokerage accounts in the US, 13m opened in 2020, according to calculations by Scott Rubner of Goldman Sachs.

4. On a related note from India, Neelkanth Mishra writes on some aspects about retail equity owners in India,

Retail investors collectively held about 14 per cent of the BSE500 at the end of December 2020, almost unchanged from the level seen at the end of March, and the lowest in at least two decades, having fallen from 21 per cent in 2005. This decline is despite making net purchases during the period. How can retail share of holding decline despite buying more shares than they sold during the period? The reason is underperformance, that is, the collective stock portfolio of retail investors has gone up less than the BSE500 during this period... Why the underperformance?... Not only do individual investors pay higher transaction fees (this may have changed a bit), but also trade more frequently (they own 26 per cent of the BSE500 free-float, but account for 70 per cent of trading). There can be two broad reasons: Either poor market timing (measured at an index level), or poor stock selection... At least since 2005, total retail buying rose when markets plummeted, like in 2009, early 2011 and 2017. That leaves only poor stock-selection as a reason, and indeed, data for prior periods confirms this view. Not only is their ownership of better-performing stocks lower than average, in all periods we studied, retail investors net bought very few of the shares that outperformed the BSE500. They either net sold the ones that did well, or bought those that did not. The list of stocks with market capitalisation greater than $5 billion dollars, where the retail share of ownership is at a record low, is a literal who’s who of blue-chip names that have consistently delivered strong returns over this period... 

Retail is more exposed to the small- and mid-cap stocks, and thus more affected by their relative performance. Retail holds 24 per cent of the outstanding shares of firms with market capitalisation less than $1 billion, but only 13 per cent of the larger stocks. The sub-1 billion stocks account for only around 10 per cent of the combined retail portfolio, but given the significant over-ownership, their relative performance has a bearing on portfolio returns... retail owns 54 per cent of the free-float of small- and mid-caps... The concept of over- and under-performance is a zero-sum game by definition... If retail beats the benchmark, institutional investors would end up underperforming.

5. A related story in WSJ from Germany where banks have started to pass on negative interest rates to depositors.  

According to price-comparison portal Verivox, 237 banks in Germany currently charge negative interest rates to private customers, up from 57 before the pandemic hit in March of last year. Charges range between 0.4% and 0.6% for deposits beginning anywhere from €25,000 to €100,000... The ECB’s deposit rate, which it charges banks, is minus 0.5%. The central bank has signaled it is unlikely to change that level anytime soon. Government bond yields, against which borrowing costs are measured, are negative despite a recent uptick. German 10-year bunds yield minus 0.3%. Similar U.S. bonds yield 1.5%... In Denmark, where interest rates were cut to below zero two years before the eurozone, banks have gone from charging wealthier clients to smaller ones over the past year. The Danish central bank estimates about a quarter of the country’s depositors are currently being affected.

6. Times report on Chinese cyber attacks on India's electricity grid, which led to partial outage in Mumbai. It was intended as a signal to India during the Galwan Valley standoff.

7. Andy Mukherjee on Udaan, a B2B e-commerce startup which in five years has taken up 80% of the market, delivering goods from 200 warehouses to more than 1.7 million retail stores in 900 cities daily. 

8. Adani Ports reaches a baker's dozen in port ownership, taking a minority stake in Gangavaram port for Rs 1954 Cr. It is negotiating with the owners to take over its full ownership. This takes the Group's share of the market to 30%.

9. Business Standard argues that the telecoms spectrum auctions, which resulted in just a fifth of the spectrum being sold, may be a case of revenue maximisation based auction design trumping other objectives.

10. Wars and pandemic are generally considered wealth destroyers and lower inequality. Not Covid 19. The massive stimulus programs, especially overweighted towards backstopping the markets, and the booming stock markets are important reasons. One of the first indicators of this is the graphic below from Emmauel Saez and Gabriel Zucman about wealth concentration in the US which ballooned during the pandemic as never before. 

The Forbes real-time billionaire data show that billionaire wealth now stands at $4.2 trillion (as of January 24, 2021) 40 percent higher than before the COVID crisis (it was only $3.0 trillion in March 2019).

Saez and Zucman analyse the graduated wealth tax proposed by Elizabeth Warren and others through the Ultra-Millionaire Tax Act of 2021 which imposes a tax of 2% on the net worth of households with more than $50 million with an additional 1% tax on those above a billion.  

Tax payments would start in 2023 based on wealth as of end of 2022. We estimate that about 100,000 American families (less than 1 out of 1000 families) would be liable for the wealth tax in 2023 and that the tax would raise around $3.0 trillion over the ten-year budget window 2023-2032, of which $0.4 trillion would come from the billionaire 1% surtax. The wealth tax would raise approximately 1.0% of GDP per year ($250 billion relative to a $24.3 trillion GDP in 2023). If the billionaire surtax increases to 4%, total revenue over the 10-year window raises to $3.9 trillion (up from $3.0 trillion).

This may be a good idea to do in India too, where inequality levels have grown rapidly in recent years and has one of the highest inequality among large countries. 

11. Production-linked incentives (PLIs) are the flavour of the times. The scheme has a Rs 1.94 trillion outlay over the coming five years, till 2025-26. 

Several companies in smartphones, telecoms equipment, IT hardware, and pharmaceuticals have already received approval under the schema. 

Business Standard has two articles analysing the Production Linked Incentive (PLI) scheme. The problem with the targets is the absence of a sense of realism. Consider this on telecommunications exports,

For telecom equipment, the government says it is targeting incremental sales of Rs 2.4 trillion in four years, but expects 80 per cent of these sales to be earmarked for exports. The scheme has not spelt out the level of value addition, but based on talk with stakeholders the “expectation” is that it should be around 25 per cent. Consider these requirements against the current position. India buys $10 billion worth of telecom equipment annually, of which only a third is made in India, and even in that domestic production has a value addition of just 10-15 per cent. And the total value of exports of the PLI-linked telecom gear is Rs 5,000 crore. “A 20-fold increase in exports in five years is not possible, unless there is some magical large investment being planned by someone for exports, which we do not know. Also, the mandatory minimum investment you need to make for all players together is Rs 600 crore only to get PLI,” said a senior executive of a global telecom equipment maker.

Then there is the issue of lack of co-ordination within the government itself on policies,

The latest Budget imposed higher duties on a range of components as a result of which the cost of end-user equipment such as radios, microwaves and basebands have gone up by 5 to 6 per cent. On the other hand, the government has made imports of these products through countries with which India has signed Free Trade Agreements (FTAs), such as Vietnam, more attractive. Simply put, that means that for many of the key finished products the advantage of the incentive scheme has been neutralised. “Many telecom gear makers are rethinking whether to make them in India at all or import them from countries like Vietnam through FTAs and pay zero duty,” said a senior executive of a telecom gear maker.

Another article about PLIs in laptops,

The government expects 75 per cent of the incremental production of Rs 3.26 trillion of laptops and tablets to be earmarked for exports. The scheme is for manufacturers of laptops with an invoice value of Rs 30,000 and tablets of over Rs 15,000. Yet the collective additional investment requirement by companies that just want to qualify for the PLI programme is mere Rs 2,600 crore. And the value addition “suggested” by government is to be around 30-35 per cent... Indian manufacturing in this sector is negligible. A study by the India Cellular and Electronics Association (ICEA) shows that in 2019-20, India’s laptop market was pegged at $4.85 billion, of which $4.21 billion was imported. China accounted for 87 per cent of imports by value. The story is the same for tablets; in a market of $0.5 billion, 82 per cent is imported with China dominating. So any increase in domestic production will mean a reduction in the import bill, and many see the PLI scheme in that perspective. “It’s merely an import substitution incentive policy (for mid- and high-end laptop over Rs 30,000) and not one that encourages exports,” said a global PC maker... He points out that the incentive scheme of one to four per cent of incremental manufacturing value won’t meet even half the cost disadvantage with China, which is between 17 and 19 per cent.

And about mobile phones too,

The government has targeted incremental sales of Rs 10.5 trillion of mobile phones in five years, of which over 60 per cent will be exported. This means, mobile phone makers have to increase exports 25 times by the fifth year of the scheme.

Besides, boosting exports also necessitate much higher imports and policies that facilitate intermediate inputs instead of those which indiscriminately raise all import duties,

Mobile device players also point out that unlike India, China focused on exports rather than import substitution or value addition, Beijing’s economic planners assuming that these things would automatically follow. So even now while China imported $496 billion worth of electronic components in 2019-20, it exported $671 billion worth of electronic exports. Value addition after 20 years in mobile devices is 40-50 per cent. To be sure, a vibrant component ecosystem is not that easy to create — it took the Indian auto industry a decade to create one. China has over 30 suppliers of mobile device components with revenues of over $1 billion. And the top 15 have already invested $96 billion to set up large global-sized plants in that country.