Weekend reading links

1. In the context of the new Production Linked Incentive (PLI) scheme of the government, the Business Standard examines the air conditioners market in India. 

This is a good summary of India's manufacturing challenge, the much smaller size of local market than expected,

Currently, in the Rs 18,000-crore local AC market, 70 per cent of the cost material used in assembly are imported. Key parts like compressors, variable speed motors in indoor units, and high quality copper pipes, among others, are imported. But with no incentive for incremental assembly, manufacturers are now hoping that large global component makers set up shop here. Since key components that are being imported require huge investments to manufacture locally, setting up such facilities will not be a viable business proposition for entities in India, clarified companies. To turn such investments profitable, the kind of scale that is required does not exist in the local market. At 6 million units a year, India’s AC market is much smaller, compared to leading global markets like China (50 million units), the US (17 million), and Japan (12 million).

2. On the importance of manufacturing to developed economies, Rana Faroohar writes,

In the US, for example, although manufacturing represents just 11 per cent of gross domestic product and 8 per cent of direct employment, it drives 20 per cent of the country’s capital investment, 30 per cent of productivity growth, 60 per cent of exports and 70 per cent of business R&D, according to figures from the McKinsey Global Institute... A fascinating study by MGI, to be released on April 15, examines 30 main manufacturing sectors in the US. It finds that 16 of them stand out for their economic and strategic value, as measured by their contribution to national productivity and economic growth, job and income creation, innovation and national resilience. Apparel is not on the list. But semiconductors, medical devices, communications equipment, electronics, autos and auto parts, and precision tools are.

And this very interesting snippet about China

Chinese producers exported 71 per cent of finished apparel goods in 2005. By 2018, it was just 29 per cent.

3. I've never understood the case for lowering corporate tax rates in India. This is a good set of graphics.

4. Larry Summers makes a very persuasive critique of the post-Covid fiscal policy in the US,

If you look at the economy at the beginning of this year, prevailing forecasts were that Covid would reduce wages and salaries to American households by $20bn-$30bn a month, with that figure declining over the year. So, that would be a $250bn-$300bn hole in wages and salaries over the course of the year. So, I look at this hole and then I see $900bn of stimulus in the December package, $1.9tn of stimulus in the recently passed package and $2tn in the savings overhang, which is also likely to be spent. I see the Fed with its foot on the accelerator as hard as any Fed has ever done... That could manifest itself, as a much smaller period of excess did during the Vietnam war, in rising inflation and a ratcheting-up of inflation expectations. It could, as has often happened, manifest itself in the Federal Reserve feeling a need for a sharp and surprising increase in interest rates, and the subsequent deceleration of the economy into recession. It could manifest itself in a period of euphoric boom and optimism that leads to unsustainable bubbles, or it could all work out well... 

There’s not much argument that the 2009 stimulus, in retrospect, was too small. It was 4 to 5 per cent of GDP over a couple of years, so it was 2.5 per cent of GDP in the first year, against a gap that was 6 or 7 per cent of GDP and growing, so it was perhaps a third or half of that gap. Today’s stimulus is above 10 per cent of GDP in the face of a gap that is 3 or 4 per cent of GDP. Relative to the gap, this stimulus is already of the order of five or six times as large as in 2009... I could have been comfortable with a headline figure well in excess of $1.9tn if it had been a large-scale, multiyear programme of public investment responding to our deepest societal concerns. But that’s not what this is. It transfers to state and local governments that don’t have any new budget problem, according to the latest figures. It’s paying people, who have been unemployed, more in unemployment insurance than they earned when they were working. It’s giving cheques to families in the 90th percentile of income distribution. It doesn’t seem prudent on resource allocation grounds, as well as being problematic on macroeconomic grounds.

5. Mahesh Vyas points to the informal market distress,

As people lost jobs and jobs became scarce in 2020-21, labour that lost jobs moved from one kind of occupation to another. Large numbers eventually migrated to agriculture, apparently, when all other possible occupations failed. As a result, employment in agriculture in March 2021 was nearly 9 million higher than it was in 2019-20. This implies an eight per cent increase in labour in agriculture. Agricultural output is estimated to have increased by 2-3 per cent in almost each of the four quarters of 2020-21. The 8 per cent increase in labour implies a sharp fall in labour productivity. We believe that this huge influx of labour into agriculture is largely disguised unemployment. It hides the greater employment challenge in March 2021 than the 5.4 million net jobs lost. The biggest loss of employment in 2020-21 was among the salaried employees. As of March 2021, there were 76.2 million salaried employees. This was 9.8 million less than the 85.9 million salaried jobs observed in 2019-20.

Salaried jobs are mostly in urban India. Urban India accounted for 58 per cent of all salaried jobs in 2019-20. But it accounted for only 38 per cent of the 9.8 million salaried jobs lost. Over 6 million salaried jobs were lost in rural India. Most of these are likely to have migrated to farming. Rural India also saw nearly 3 million business persons being rendered unemployed. These could also have migrated to farming. Farming saw an increase of 9 million jobs in rural India. So, the churn in rural India seems to have been people losing salaried jobs and losing their business and these unemployed people moving into agriculture for unproductive employment. The increase in agricultural jobs in March 2021 was essentially a migration of people who lost non-farm jobs in rural India into farming. This was not an urban to rural migration.

6. More disturbing news, which points to outright fraud, about Sanjeev Gupta's business activities,

Last week the FT reported that several loans to Liberty Commodities, part of GFG, were based on suspect invoices and that Credit Suisse executives were becoming increasingly concerned that their clients were victims of fraud. Several European metals businesses told the FT last week that they had not carried out any business with Gupta’s groups, despite invoices linked to them being repackaged as notes by Greensill and sold to Credit Suisse investors.

7. The Government of India has approved the Russian vaccine Sputnik V for use in India. It has also accepted a recommendation by the National Expert Group that vaccines approved by health regulators in the EU, US, Japan, and the UK and by WHO should be granted emergency-use approval in India. Till now India had insisted that these vaccines had to still conduct additional 'bridging' trials in India before use.

This decision, which ought to have been taken much earlier and is now precipitated by the acute shortage of vaccine stocks, is a precedent for several other areas. Regulators in other sectors could explore the possibility of using the regulatory approvals in other countries to allow use in India. 

8. Interesting contrast between the employee attrition rates of TCS and Infosys. The rates for the last quarter of 2020-21 was 7.2% and 15.2% respectively for the two companies, both being all-time lows and highs. Is there something about their respective business models which explains this big differential? Or does it tell us something about work cultures in the two companies?

9. Noushad Forbes points to an interesting fact,

In January 2021, India approved its first vaccines for use. The Ken Nutgraf tells us that between July 2020 (before any vaccines had passed testing) and January 2021, the US ordered (and paid for) over 600 million doses. That’s for a total population of 300 million. In the same period, India ordered 11 million doses, for a country of 1,300 million.

Indian Express has an article which points to how India did not put forward at-risk capital (or advance market commitment to purchase vaccines) to promote vaccine manufacturing. 

From all available accounts, India did not invest “at-risk” in SII and its first commercial agreement on vaccine offtake only came in mid-January 2021. And the pricing of Covishield is a factor in SII’s struggles to keep up with demand as the private, unlisted firm has committed to deliveries under AZ’s deals and through multilateral arrangements such as COVAX. SII has now sought “roughly” Rs 3,000 crore from the government to expand its “very stressed” capacity, SII CEO Adar Poonawalla told NDTV. “The globe needs this vaccine and we are prioritizing the needs of India…we’re still short of being able to supply to every Indian that needs it,” he said. “At the moment, the price (Rs 150 per dose) that is set is profitable. However, it is not profitable enough to re-invest substantially in building capacity, innovating new vaccines — including the new variants that we may need to develop and make and go into clinical trials and other things,” he added.

10. Ed Luce on tax avoidance by US companies,

Last year, 55 of America’s largest companies, including Nike and FedEx, paid nothing in corporate taxes in spite of collectively making about $40bn in profits. The headline US corporate income tax rate is 21 per cent, which Biden wants to lift to 28 per cent. However, the official rate is not the point. The effective US corporate tax rate is just 11.2 per cent, which is below that of Ireland. The US Chamber of Commerce and the Business Round Table complain that the nation’s corporate taxes are higher than the western average. In practice, they end up close to the lowest. US tax collections amount to 1 per cent of gross domestic product, compared with a 3.1 per cent OECD average. All such avoidance is entirely legal.

11. As Covid relapses and schools start to shut down, a good report on where India stands with respect to schooling.

Learning and future prospects of a cohort of children may be the biggest long-term casualty from Covid 19 lockdowns.

12. Interesting change in the IBC, for MSMEs, which now allows promoters to remain in control during the restructuring negotiations with creditors.It may be an appropriate response for the Covid 19 induced business stress, but given India's business environment, it remains to be seen how this will work out. 

13. Progress in a graphic