Problems with too much competition and efficiency maximisation - natural gas market edition

I have blogged earlier highlighting the problems with excessive competition and efficiency maximisation. This post draws attention to the problems with competition and efficiency maximisation in the natural gas sector.

The recent rise in natural gas prices have roiled utility companies in Western Europe. Seven British energy suppliers with 1.5 million consumers have gone under and more are under deep stress. The situation while a concern is not as bad in the continent.

UK, in particular, has seen intense competition in the energy market, with over 70 suppliers. They compete to outbid each other by offering low prices and attractive terms to consumers. While the suppliers have accused the regulators of unviable price caps at a time of soaring natural gas prices, the government has blamed the suppliers for bad business practices and poor hedging strategies. In any case, the episode once again underscores the perils with unfettered competition in any market. 

Izabella Kaminska (HT: Ananth) has a very good article that highlights the main issues. Liberalisation ushered in competition,

By 2017, such efforts had successfully driven consumer prices down relative to wholesale costs by increasing competition in the UK market from the incumbent Big Six players to as many as 70 organisations. Many of these new providers were happy to gain market share by undercutting rivals and offering below-cost deals to consumers. Many were also asset-light businesses that did not have infrastructure of their own, giving them another big advantage. Others were less attuned to hedging their market-based exposures than more experienced operators.

But competition came with a race to the bottom in prices and created associated systemic costs,

It made investing in critical infrastructure incredibly unappealing for any player still managing legacy assets. It was on the back of such market conditions that one of the UK’s largest natgas suppliers, Centrica, decided to close its Rough natural gas storage facility — the biggest in the country — in 2017. The facility was coming to the natural end of its life anyway, and would have needed a significant investment to modernise and revive it. But also, the chances of ever achieving a return on that investment were becoming increasingly negligible — especially in the context of ESG trends that risked making the underlying asset become stranded in the long term too. As a result, a vital reserve mechanism that had helped the UK stockpile gas in the summer for release in the winter months for many decades — smoothing supply and demand price shocks shocks in the process — was permanently lost. While many worried this could expose the UK to serious systemic shortages in the event of colder-than-expected weather, those defending the decision argued the UK could always turn to wholesale LNG and continental spot markets to ship in additional supplies when needed. Nobody, however, expected that the natgas wholesale markets themselves might get squeezed to the current extent.

Suppliers bet on Management 101 concepts of flexibility and efficiency maximisation, which reduced resilience and generated its own negative externalities and attendant risks on the system,

For the most part, price spikes in the natgas market operate much like the surge pricing dynamics you see balancing the market for taxis on the Uber app. Just how spikey those prices get, however, is directly correlated to how inclined service providers are to hold expensive standby reserves (that might never be needed) directly themselves, or to commit to longer-term supply contracts. Much like with Uber, which benefits from not being tied to long-term employment contracts with its drivers, most of the time there is a market incentive to run as lean a natgas operation as you can. That means avoiding expensive hedges, contracts or storage facilities as best you can -- and taking market-based risks -- so the savings can be passed on to consumers directly.

The problems faced by the natural gas market also points to the problems with excessive pursuit of efficiency,  

Commodity producers like British Gas saw fit to separate their retail operations from their production ones. But while stripping the retail operation to its bare minimum is great for maximising utility and reducing costs, it introduces the same sort of risks that apply to undercapitalised banks, or those that rely excessively on short-term funding to finance their long-term lending operations. If and when the wholesale market seizes up, such operators have no reserve or production of their own to fall back on, and require bailouts to continue operations. This risk runs especially high in wholesale markets that are exposed to structural chokepoints on the supply side — something that differs greatly to the market for taxi drivers, which has much lower barriers to entry and can easily cultivate new supply.

In 2007, when wholesale markets unexpectedly froze up due to the credit crunch, Northern Rock’s over-dependence on short-term funding markets meant there were no reserves at the bank to fall back on. After failing to get third-party investment or a government bailout, the bank was forced into insolvency. This situation is analogous to what the British natgas system is facing now. Except, unlike what happened with funding markets, it’s not something that can be fixed by simply throwing central bank money at the problem. The choke points are a function of real supply issues. Since bailouts can’t magically engineer more natural gas, the only thing they can do is transfer the high cost of sourcing natgas for critical industry to the government balance sheet instead of the private one. Such a transfer, however, inevitably comes at the cost of other national spending commitments.

The consequence of all this is socialisation of private losses, 

The bailouts being discussed for industrial CO2 suppliers in Britain, thus, amount more to the nationalisation of a giant naked short natgas position than anything resembling a resolution. If the crunch were to deepen due to a particularly cold winter, the nation state of Britain would risk being exposed like any other player caught short in a rising market. The regrettable takeaway of the situation is that the low prices consumers experienced as a result of market liberalisation may have been largely illusory. They will have come at the cost of investments capable of making the system more resilient which, it turns out, were worth paying up for when times are good.

And it encompasses many parts of the American version of modern capitalism, 

What the situation further reflects is that we as a society seem to have learned very little from historic crises bearing similar fundamentals, among them the 2008 global financial crisis, the Enron crisis of 2001 and, yes, even the great Egyptian famine of scripture. More worryingly, it indicates that while we were focused on making the financial system more resilient, we were inadvertently inducing fragility elsewhere. Notably, in the world of physical goods and services, through increased dependencies on just-in-time supply chains, wholesale markets and competition.

The pandemic induced shipping disruptions and factory closures have exposed the chinks in the just-in-time management strategies of companies, most famously in the semiconductor chip shortages which have very adversely impacted the automobiles industry. Indian readers would be familiar with the dismal outcomes from unfettered competition in the domestic airline and telecom markets. 

There is a lesson here for infrastructure regulators. Their objective function currently seeks to protect the interests of consumers and producers/suppliers by balancing affordability with cost-recovery and reasonable profits. Into that objective function, it's now required to add a systemic resilience cost which should get distributed across all stakeholders. 

In unbundled industries like utilities, the resilience cost would have to be apportioned across generation, transmission and distribution, supply, and consumers. This questions the rationale behind the idea of completely deregulated market in supply. The ideas of efficiency enhancing supply competition and consumer surplus are just that, illusory ideas. They are not free lunches but leave a cost behind for others to pick up. The inevitable race to the bottom at the consumer side of the market in a regulated business merely transfers costs and risks upstream. When the upstream side is unable to bear those costs, they settle on to the tax payers. Bailouts follow. 

If one borrows the principles of Econ 101, the costs have to be internalised by those generating them. In other words, supply competition and lower prices have to happen within a regulatory framework which internalises the resilience cost. 

As Kaminska's analogy with financial markets show, the resilience cost may be relevant for all consumer facing businesses which involve an upstream production side which houses significant risks. 

Update 1 (08.10.2021)

From The Economist,

The origins of the mess lie in the 1980s and 1990s, when privatisation created an oligopolistic energy market dominated by the “Big Six”, which paid their shareholders juicy dividends and their bosses fat salaries. The government responded to anger over high energy bills with further liberalisation, which created a fragmented market. Some of the new entrants were innovative, such as Bulb, which offers consumption-tracking apps, and Octopus, which discourages consumption when demand is high with dynamic pricing. But most were thinly capitalised and produced no energy, merely buying it on global wholesale markets and selling it on. Some paid little attention to ensuring continuity of supply or hedging against price fluctuations. 

Such me-too operations were always vulnerable to a demand squeeze. But the risks rose in 2017 with the closure of a big gas-storage facility, which left Britain able to store just 2% of its annual demand. Other big gas importers, by contrast, can store 20-30%. And the risks rose further in 2019, when the government capped consumer prices in response to continued grumbles about high energy bills. The perfect storm came this summer. As pandemic restrictions eased, global demand for energy rose. Gas supply in Russia, a big producer, was disrupted, and unusually calm weather stilled British wind turbines. In August Ofgem, the industry regulator, said that from October the price cap would rise by 12%. But since then the wholesale price of gas paid by British energy firms has risen by more than 70%. The result is that British energy firms are tied into contracts to supply gas to households at far less than they must pay to get it.

This is an explainer in The Economist on rising natural gas prices. 

Bloomberg compares the episode to Evergrande,

The foundations of this extraordinary crisis were a lack of financial resiliency, light-touch regulation and unsustainable pricing practices that left the industry unprepared for its Black Swan moment... This tale of inadequate capital buffers and “moral hazard” will be familiar to students of previous crises. And its resolution will be similar too: a bonfire of the energy suppliers, in which the small fry are consumed by better capitalized entities. Big suppliers will get even bigger. Injecting more competition into a market once dominated by the “Big 6” energy companies like British Gas (owned by Centrica Plc) and EDF Energy (Electricite de France SA) was well intended and achieved some success. The market share of legacy suppliers has dropped to around 70% and new entrants helped spur innovations in clean-power tariffs, online services and smart-meters, aiding energy efficiency and the decarbonization drive. Providers were forced to become more efficient and, at least in some cases, customer service improved. Perhaps there’s such a thing as too much competition.

The new entrants expanded rapidly because it was their best hope of generating cash. As we’ve seen in the airline industry and now with Chinese property developer Evergrande, getting customers to pay in advance is a cheap source of funding. The energy suppliers held up to 1.4 billion pounds ($1.9 billion) of excess customer cash, or around 65 pounds per household, Ofgem estimated in March, and they weren’t required to ringfence that money... Customers aren’t blameless here. Assisted by price comparison websites, they opted for the cheapest tariff, rather than prioritize the supplier’s financial resiliency. Under Britain’s “Supplier of Last resort” system, customer credit balances are protected if the provider collapses. So consumers couldn’t really lose.

Changing behaviours to improve urban transportation

This blog has consistently held that the two biggest challenges facing cities in India and other developing countries are transportation and affordable housing. The situation has reached a stage in many countries where it now threatens their primary engines of growth. It's therefore time to go beyond the traditional measures and introduce new thinking into public debates and policy making to address these two issues. This post will explore the case of urban transportation.

From an informative MGI report on what 25 global cities are doing to improve mobility in their cities,

The top-scoring cities... improved their road infrastructure, increased the number of bicycle lanes and pedestrian streets, and invested heavily in shared-transport schemes such as rental-bike and ride-sharing services... The Asian cities of Seoul, Shenzhen, and Singapore, for example, top the rankings for public-transport affordability, and to offset the environmental and societal costs of personal car use, these cities actively make car ownership a more expensive choice... Public-transport systems in Buenos Aires, Mexico City, and Shanghai are also becoming much more affordable because of government policies stimulating economic competition and technology. Cars registered outside Shanghai are barred from certain districts... Commuters enjoy the benefit of lower fares, the result of competition among multiple ride-share providers. The widespread implementation of paid parking systems in Buenos Aires and Mexico City is making private-car ownership more expensive... 

Moscow's transport system has low underground waiting times, high speeds during rush hour, and a significantly above-average proportion of dedicated bus lanes. Shenzhen, too, has a high share of dedicated bus lanes, which helps with rush-hour predictability. Singapore’s electronic road-pricing system is powered by a digital device that automatically charges the driver the road toll when the car passes through a gantry, enabling frictionless road travel for both private and public vehicles, even during peak times... Istanbul has risen in the convenience rankings with a significantly improved ticketing system using QR-code payments. The city has also introduced the Ulasim Asistani app, which helps travelers plan journeys across multiple forms of transport, leading to a considerable improvement in satisfaction ratings among its citizens.

The report uses five metrics - availability, affordability, efficiency, convenience, and safety and sustainability - with sub-indicators for each metric to benchmark the 25 cities. The full report is here.

Here is the ranking of cities based on public transport usage

The absence of US cities and the presence of Moscow is interesting. Moscow's rise should come as no surprise since it has invested heavily in improving transportation in recent years. 

In sharp contrast, American cities dominate in ease of personal transport use.

The report has an interesting ranking citizen's perceptions of various aspects of urban transportation.

These perception rankings are important for public policy. Obviously the rankings will be different for developing country cities. It's likely that affordability, public transport efficiency, and road network would occupy the top slots, followed by those like physical safety and intermodality.

The report like most MGI reports is very informative. The sections on measures undertaken by some cities to keep urban mobility going during the pandemic, new projects, and the detailed profiles of the 25 cities are very useful. Unfortunate that New Delhi does not figure in the list. It would useful for the Ministry of Housing and Urban Affairs to just borrow the same indicators and do a benchmarking of the major Indian cities. 

India and its cities have a lot of catching up to do in adopting urban transportation reforms. Public debates, citizen demand, and policies remain stuck on issues like adding roads, fly-overs, buses, and metro-railways. All these require large financial investments and there are hard fiscal limits. Even where we have gone beyond, it's been confined to digital technologies like ticketing and information sharing Apps. Instead, there is a large universe of non-financial behaviour change and regulatory interventions which have remained unexplored. 

As I've written and blogged earlier (here too), apart from adequate infrastructure and good public transport systems, sustainable urban transportation require measures that discourage vehicle ownership and usage and encourage walking and shared transportation options (car pools and shared bikes). Measures like higher motor vehicle taxes, license plate auctions, congestion charges, electronic road pricing, limiting private vehicle lanes, dedicated bus lanes, making parking expensive, and car-pooling are hardly discussed. The idea of transit-oriented development while discussed often, is hardly implemented in its true spirit anywhere. 

It's time for the Ministry of Housing and Urban Affairs, perhaps as part of the Smart Cities Mission, to prioritise urban transportation and incentivize cities for these hard reforms. How about indicator(s) which ranks cities on these measures and incentivise them with funding under Smart Cities Mission? 

Critics and sceptics will argue that Indian cities, unlike the western ones, are still on the phase of growing their vehicle ownership and infrastructure, and also these measures are impossible without good public transport. But given the near-crisis nature of urban mobility problems across cities, this sequential thinking is not appropriate. Besides, there are several examples from other similarly placed cities elsewhere which have adopted these measures. Latin America is a very good example. We're already well past the time to introduce these measures. 

Weekend reading links

1. More on the share buybacks by Wall Street giants, especially the technology firms.

Microsoft’s share count has fallen by almost a third since the tech bubble two decades ago — even after taking account of all the new shares handed to employees or used in acquisitions... Apple has spent nearly $450bn since it began the repurchases in 2013. Its shareholders may one day look back and regret that it did not risk a slice of that money on some entirely new market, like automaking, but few currently question its level of investment in a broad range of technologies... IBM, Oracle, Intel and Cisco have each reduced their outstanding share count by between 40 and 50 per cent since the tech bubble... Oracle’s enterprise value may have crept up by only a quarter since the start of the millennium but, thanks to the falling share count, its stock price has almost doubled... IBM has bought back about half of its stock since the peak of the tech bubble, but its share price is roughly the same level it started the millennium at. Failing to invest enough at the dawn of the cloud computing era has left it well behind the leaders, and catching up looks a stretch. IBM’s capital spending dropped to $2.6bn last year.

2. Mahesh Vyas points to a very striking data point about India's formal sector

In a country of over a billion adults, there are less than 80 million salaried jobs.

3. India middle class fact of the day, 

India sells 3.2 million new cars a year, about the same in used cars and about 21 million two-wheelers a year. The average new car is $10,000, which is just one fourth of the US car price. The average used car price is $4,000. For scooters it is $1,000-1,500. Harley Davidson models in India start at Rs 10 lakh and go up to ₹50.3 lakh. “This is what Indians can afford. There are only 120-odd million households with an income between $7,700 and $15,400 and this is the real pool,” says Ravi Bhatia, director and president at Jato Dynamics, an automotive business intelligence firm.

Even the 120 million households number is questionable. 

4. Aswath Damodaran goes to the heart of the problem with the claim that ESG investing will enhance returns,

The notion that adding an ESG constraint to investing increases expected returns is counter intuitive. After all, a constrained optimum can, at best, match an unconstrained one, and most of the time, the constraint will create a cost.

And this on why ESG investing is a gravy train that has entrenched its rent-seeking ecosystem.

5. The controversy surrounding the World Bank's Ease of Doing Business rankings and its decision to end the survey is only the latest example of how high stakes rankings distort incentives. It will invariably trigger efforts to both game the data that feeds into the rankings and also pressure the rankers. 

This has important lessons for India which uses various rankings to foster competition among states. It's important that NITI Aayog be cognisant of similar efforts by all concerned. This also underlines the importance of keeping ranking parameters simple and easily observable. 

6. Fascinating account in the Times about the Israeli assassination of Mohsen Fakhrizadeh, who was leading the Iranian nuclear bomb program. Isreali agents had been chasing him for at least 14 years. The assassination story is, as the article describes, straight-out-of-science-fiction-story and involved a pre-positioned remote controlled machine gun. 

The operation’s success was the result of many factors: serious security failures by Iran’s Revolutionary Guards, extensive planning and surveillance by the Mossad, and an insouciance bordering on fatalism on the part of Mr. Fakhrizadeh. But it was also the debut test of a high-tech, computerized sharpshooter kitted out with artificial intelligence and multiple-camera eyes, operated via satellite and capable of firing 600 rounds a minute. The souped-up, remote-controlled machine gun now joins the combat drone in the arsenal of high-tech weapons for remote targeted killing. But unlike a drone, the robotic machine gun draws no attention in the sky, where a drone could be shot down, and can be situated anywhere, qualities likely to reshape the worlds of security and espionage...

Israel chose a special model of a Belgian-made FN MAG machine gun attached to an advanced robotic apparatus, according to an intelligence official familiar with the plot... But the machine gun, the robot, its components and accessories together weigh about a ton. So the equipment was broken down into its smallest possible parts and smuggled into the country piece by piece, in various ways, routes and times, then secretly reassembled in Iran. The robot was built to fit in the bed of a Zamyad pickup, a common model in Iran. Cameras pointing in multiple directions were mounted on the truck to give the command room a full picture not just of the target and his security detail, but of the surrounding environment. Finally, the truck was packed with explosives so it could be blown to bits after the kill, destroying all evidence. 

There were further complications in firing the weapon. A machine gun mounted on a truck, even a parked one, will shake after each shot’s recoil, changing the trajectory of subsequent bullets. Also, even though the computer communicated with the control room via satellite, sending data at the speed of light, there would be a slight delay: What the operator saw on the screen was already a moment old, and adjusting the aim to compensate would take another moment, all while Mr. Fakhrizadeh’s car was in motion. The time it took for the camera images to reach the sniper and for the sniper’s response to reach the machine gun, not including his reaction time, was estimated to be 1.6 seconds, enough of a lag for the best-aimed shot to go astray. The A.I. was programmed to compensate for the delay, the shake and the car’s speed. 

This follows the killing of Maj Gen Qassim Suleimani, the leader of the Iranian elite troops, Al Quds, in January 2020 in a US drone strike with help of Israeli intelligence. 

7. Graphical summary of the 16 year Merkel era in FT. While there is no doubt that her reign was associated with a dramatic resurgence in the country's economic fortunes, this about immigration will remain one of her most contested legacies - Germany absorbed more than 1 million of the refugees fleeing war in Afghanistan, Iraq, and Syria. 

8. The rising influence of China in the Gulf. Sample this,

Riyadh’s decision to use Huawei 5G in Neom, Crown Prince Mohammed bin Salman’s $500bn flagship development project to include a futuristic city, even though the “Americans were dead set against it”. The tech firm is already building its biggest overseas retail outlet in the kingdom as China cements its position as Saudi Arabia’s biggest trading partner. Over the past two decades, trade between the two has soared from less than $4bn in 2001 to $60bn in 2020, nearly half of which was Chinese imports... China has influence with [Saudi Arabia’s rival] Iran. It’s virtually Iran’s only valuable ally, so exceedingly important to Saudi Arabia... the US refusal to sell armed drones to Gulf states that has caused both Riyadh and Abu Dhabi to procure the weapons from China instead... US concerns that the sale of F-35 fighter jets to the UAE risks China gaining access to some of America’s latest military technology... And from a Gulf perspective, China offers something the US and other western powers cannot — an autocratic, state-led development model that resonates with the Gulf’s dynastical rulers.

9. Global housing prices (HT: Ananth) are at levels that has priced out the vast majority from home ownership, thereby triggering discontent across nations and scramble for all kinds of ideas to bring down prices. 

10. Akash Prakash points to the rise of shareholder activism and improved corporate governance in the Boards of listed Indian companies. Over the last fifteen years, the share of institutional investors in the equity of BSE 500 has risen from 25 to 35%, and abstentions in institutional votes has fallen precipitously from 90% to 10% in a decade. This is perhaps a good example of how progressive regulations released over the years have all started to finally show results. 

11. Tamal Bandopadhyay points to an existential crisis facing banking sector due to the twin headwinds on capital raising and technology. On the former, the glut of liquidity is making it easier for both customers and competitors like NBFCs to raise capital and cheaply at that. On the latter, the fin techs are disrupting and threaten to displace a significant share of bank's customers. 

Consider the capital deluge,

In the financial year 2021, corporations raised Rs 14.87 trillion from the market through bonds — 40 per cent higher than what they had raised in the previous year. Money raised through equity was Rs 5.91 trillion in 2021... Both the streams — corporate bond issuances and the equity issues — have gained further momentum in the current year.

This is at the heart of the problem,

Banks are allowed to raise deposits from the public and hence their cost of money is cheaper than the non-banking financial companies (NBFCs). Since they raise cheap money, they must have an exposure to the weaker section of society or the “priority sector” up to at least 40 per cent of the loans they give. Besides, they also need to keep 4 per cent of their deposits with the regulator in the form of cash reserve ratio (CRR), on which they don’t earn any interest, and buy government bonds to the extent of at least 18 per cent of deposits. That’s the Grand Bargain. The deluge of liquidity has changed all equations. It’s advantage well-run NBFCs now. How? The cost of money for the best-managed banks is between 4 and 4.5 per cent. Add to this at least 2 percentage points fixed cost (for branches, technology, wage bill and others). This makes the cost 6-6.5 per cent. In contrast, the best-rated NBFCs have around half a per cent fixed cost, and they have been raising one-year money at around 4.2 per cent. Indeed, banks can do many things which NBFCs cannot do, but when it comes to lending, banks today have clearly a 1.5-2 per cent disadvantage on cost of money vis-à-vis the best NBFCs. This is excluding the cost of reserve requirements. If you are running a sweetmeat shop, will you manage a dairy for milk supply or buy milk from the market? Banks are running a dairy (which has its cost for processing milk), while NBFCs are buying milk from the market.

12. On oil prices in India

India’s retail price for petrol is currently among the highest in the world in terms of US dollar per litre. Care Ratings has an interesting take on how to realistically gauge comparative petrol prices across different countries. The rating agency believes that a comparison with the price of a staple item such as milk is more appropriate. This comparison shows that, in India, the ratio of petrol price to milk ($ per litre for both) is the highest in the world—1.91.

13. Tax paid by technology companies in the US against those paid by the others

14. Livemint has some interesting data on the evolution of India's automobile market.

The market is concentrated in the largest two players - Maruti and Hyundai who have 68% combined share.

15. On household debt from the All India Debt and Investment Survey (AIDIS) released by the National Sample Survey Office (NSSO),

The average debt of rural households increased between 2012 and 2018. It grew by 84 per cent to almost Rs 60,000, and for urban households the equivalent increase was 42 per cent off a higher base, ending at over Rs 1.20 lakh. Debt, however, grew fastest for the urban self-employed in a period that included the twin shocks to the informal sector of demonetisation and the introduction of goods and services tax. Economists at the State Bank of India project that it has further doubled in the three years since the AIDIS data was collected in 2018, given the exigencies of the pandemic and the need to borrow to supplement sharply falling income in several areas. The debt-to-assets ratio has also deteriorated sharply between 2012 and 2018, indicating a greater fragility to the household balance sheet.

This has implications for the household consumption engine of India's economic growth,

Since the downturn in private investment in the 2011-12 period, it is clear that private consumption had become the main driver of the India story. Yet this consumption was essentially insecure, driven by the build-up of household debt. But even in this period, the growth rate of private consumption expenditure was slower than what it was between 2004-05 and 2011-12, and losing momentum throughout that period. Since then, there have been additional blows to this engine of growth. For one, the crisis in non-banking financial companies closed one major conduit for credit to households. The RBI’s consumer confidence surveys, meanwhile, indicated that perceptions of urban current income went into a decline from 2011-12 onwards. Growth momentum, which depends upon households diminishing savings and running up debt, is inherently unsustainable. It appears likely that the pandemic has pushed India to the moment of truth where this household debt-fuelled growth can no longer move forward. Research suggests that scarring from the pandemic will have affected those at the lower levels of the income distribution much more than those at the top, reducing the overall demand stimulus since it is that section that consumes more of its income. Without expectations from consumer demand, there is unlikely to be a revival in private investment either.

16. The Nikkei Asian Review has a feature pointing to the emerging new normal in demographics, declining global population or a baby bust,

The population growth rate reached a peak of 2.09% in the late 1960s, but it will fall below 1% in 2023, according to a study by the University of Washington, published last year. In 2017, the growth rate of people aged 15 to 64 -- the working-age population -- fell below 1%. The working-age population has already begun to drop in about a quarter of countries around the world. By 2050, 151 of the world's 195 countries and regions will experience depopulation. Ultimately, the study forecasts that the global population will peak at 9.7 billion in 2064 and then start declining... The University of Washington predicts that China's population will begin to drop from next year, and that by 2100 it will plummet to 730 million from the current 1.41 billion. By that same year, 23 countries, including Japan, will see their populations shrink to half their current levels or less... South Korea had about 272,400 births in 2020, and its total fertility rate was only 0.84 that year, the lowest in the world. If a country's TFR stays under 1.5 for a long time, it becomes almost impossible to raise it.

A long period of sustained decline, the first time ever, beckons. And its consequences are profound,

The new reality will create new dynamics -- already visible in some cases -- in areas from monetary policy to pension systems to real estate prices, to the structure of capitalism as a whole. As global population approaches its peak, many governments are increasingly under pressure to rethink their policies, which have so far relied mostly on demographic expansion for their economic growth and geopolitical power... Global population growth has slowed to 1%, and economic growth and inflation have both slowed to between 2% and 3%. Interest rates have fallen to historic lows, casting doubts over the sustainability of pension systems... Even with low-interest rates, capital investment will not increase if companies do not expect the economy to grow. The government can increase public investment, but this will only lead to an increase in government debt if the investments are not put to use. Continued stimulus measures probably won't make up for the effects of a declining population.

It raises the importance of immigration,

Without immigration, many advanced economies already cannot sustain their labor pool. In the U.K. after Brexit, the combination of immigration restrictions and the pandemic has led to a severe labor shortage. Before the pandemic, 12% of heavy truck drivers were from the European Union. However, drivers can no longer be hired from outside the country under the U.K.'s new standards. According to the British Road Haulage Association, the country faces a shortage of more than 100,000 commercial heavy truck drivers. Logistics companies are becoming desperate, raising hourly wages by 30%.

17. KP Krishnan points to the challenges with attracting and retaining talent with professional competence in financial market statutory regulatory authorities (SRAs),

The General Financial Rules (GFR) of the government mandate that organisations that receive more than 50 per cent of their recurring expenditure in the form of grants-in-aid should formulate terms and conditions of service of their employees in a way that they are not higher than those applicable to similar categories of employees in government. In exceptional cases relaxation may be made in consultation with the Ministry of Finance. Another rule of the GFR requires that all proposals for creation of positions in such bodies shall be submitted to the sanctioning authority.

Given the weight of history and the general risk aversion of civil servants, notwithstanding explicit provisions in a parliamentary legislation, in practice the executive instructions contained in GFR triumph over the provisions of statute. Sebi escapes this tyranny today as it is not a grant-in-aid institution and generates its own resources in accordance with the law establishing it... SRAs are a category that need autonomy in the area of human resources for ensuring both capability and integrity required to avoid capture. The Financial Sector Regulatory Reforms Commission recommendations in this context, fully empowering the board of the SRA on these matters, along with appropriate changes in the GFR is the way forward.

This applies just as much to certain public sector organisations too.

Supply chain disruption fact of the day

The pandemic has exposed the vulnerabilities of the globalised manufacturing supply chain. The most discussed example is the shortage of microchips used in automobile manufacturing.

The Times has an excellent article which highlights the problem,

Catrike has 500 of its three-wheeled bikes sitting in its workshop in Orlando, Fla., nearly ready to be sent to expectant dealers. The recumbent trikes have been waiting for months for rear derailleurs, a small but crucial part that is built in Taiwan. “We’re sitting on $2 million in inventory for one $30 part,” said Mark Egeland, the company’s general manager... The time it takes for parts from one of Catrike’s suppliers to arrive by sea in North America from a factory in Indonesia has jumped to three months, and sometimes it takes four — double what it took before.

The unexpectedly swift and strong rebound in the developed economies led by the United States has exacerbated the supply constraints. 

The logistics market is reflecting the strains,

Container costs have rocketed up. Earlier this month, container shipping rates from China and East Asia to the United States’ East Coast climbed above $20,000, compared with about $4,000 a year ago, according to data from the freight-tracking firm Freightos. Those attractive high prices are encouraging ships to abandon other routes, causing the problem to spread. And shipping issues have been exacerbated by related imbalances: Boats are backing up at ports, and as demand for goods booms in the United States, empty shipping containers haven’t been able to get back to China fast enough.

There are signs that this experience could upend the conventional wisdom on supply chain management,

Mr. Egeland thinks it could take 12 to 18 months to sort out issues across Catrike’s suppliers, he said, and he doesn’t think the firm will ever return to the kind of lean manufacturing process — carrying limited inventory — that it used to use. “It’ll be a hybrid until we get comfortable,” he said. “This is probably the new normal.”

More on the exorbitant logistics cost,

The cost of sending a container from Asia to Europe is about 10 times higher than in May 2020, while the cost from Shanghai to Los Angeles has grown more than sixfold, according to the Drewry World Container Index.

Update 1 (02.10.2021)

From a WaPo feature on supply-chain problems,

This month, the median cost of shipping a standard rectangular metal container from China to the West Coast of the United States hit a record $20,586, almost twice what it cost in July, which was twice what it cost in January, according to the Freightos index... On Sept. 1, 40 container ships belonging to companies such as Hyundai, NYK Line and Evergreen were anchored off California, waiting for a berth. (Less than three weeks later, the number reached 73.) Some vessels sit for two weeks or more, effectively cutting capacity on trans-Pacific shipping lanes and driving up costs.

And it has boosted profitability of shipping companies,

The seven largest publicly traded ocean carriers — including companies such as Maersk, COSCO and Hapag-Lloyd — reported more than $23 billion in profits in the first half of this year, compared with just $1 billion in the same period last year.

Update 2 (29.10.2021)

Supply chain disruption graphics from FT which point to the impact being felt across all sectors. Manufacturing delivery times in developed economies have been worst hit

Sample this response from European manufacturers

And from US retailers

All of which is reflected in container freight rates

Update 3 (16.12.2021)

Some snippets on the health of the global shipping industry. Sample this,

In the decade before the financial crisis demand grew by around 10% a year. The order book swelled to the equivalent of 60% of the entire fleet when Lehman Brothers collapsed in 2008. An armada of new ships, which take at least two years from order to launch, arrived just as growth slowed. In the 2010s the fleet expanded by 100% while demand grew by just 50%... The excess capacity ruined returns for years afterwards. McKinsey, a consultancy, reckons that between 2012 and 2016 container-shipping destroyed $84bn of shareholder value... After years of consolidation the top seven firms now claim three-quarters of the global fleet, up from 55% in 2016, according to Jefferies. On top of that, 2017 saw the birth of three global alliances that now control 85% of capacity across the Pacific and almost all capacity between Asia and Europe.

And this

Simon Heaney of Drewry, a consultancy, says that profits could reach $200bn in 2021 and $150bn in 2022, an unimaginable bonanza beside the cumulative total of around $110bn for the previous 20 years.

Planned obsolescence and repairs

I have blogged several times earlier on disturbing features of the variant of capitalism that's pursued in the United States, which is also the ideological vanguard for global capitalism. This post will draw attention to the issues of declining product durability and emerging barriers to product repairs. 

Not long ago when people purchased goods, they prioritised durability as one of the important considerations. Similarly repairs of goods was a commonly accepted practice, one which supported a significant share of the informal market. But things have changed in the last 10-15 years in two important ways. 

1. Previously goods were renowned for durability. So people choose electronic and other goods (a refrigerator or a phone or a cloth) based on their durability. Brands were marked out for their durability. Now businesses have come to adopt the idea of "planned obsolescence" which intend to deliberately shorten the life of the product so as to encourage repeat purchases which will maximise the company's sales. The marketing departments of brands have been successful in relegating durability to the sidelines. 

Apple is the most famous example of a company pursuing "planned obsolescence" - by reducing battery life, operating system upgrades which slows down the phone or even becomes unavailable for older versions etc. 

I could not find out a paper or statistics about how the average durability of top brands have changed over the years. I am inclined to believe that the average durability of the top 10 global brands in different market segments has declined. 

France is a leader in regulating planned obsolescence, making it an offence punishable by up to €300,000 ($354,000) or up to 5% of the maker’s average annual French sales, whichever is higher. Manufacturers must also tell buyers how long their products are likely to last. 

2. As an economic activity repairing was as important as the purchase of goods themselves. It was largely the preserve of the informal economy. There were millions of self-operated private repair shops which repaired every electrical and other equipment, of all brands. While I've not come across any reliable statistics, it could be argued that the repair economy was perhaps one of the three or five biggest economic segments.

Like durability, as the modern economy has advanced, repairing too has shrunk. Slowly, in recent times, brands have put in place several measures to discourage and drive out repairing - brands started to not accept complaints on products which had been repaired outside; they said they started to offer their own higher cost authorised repairing services; the goods themselves were getting produced in a manner not easily repairable (instead of parts being screwed together, they were now either cast or glued together); the replacement parts of the goods became scarce or difficult to find, and so on. 

Apple, again, is a good example. I recently replaced one ear pod (paying about exactly half the cost of a pair). But the Apple store insisted that I hand over the old one back, presumably also because its parts should not become available for repair shops. Sample this example,

Corporate consolidation even affects farmers’ ability to repair their own equipment or to use independent repair shops. Powerful equipment manufacturers—such as tractor manufacturers—use proprietary repair tools, software, and diagnostics to prevent third-parties from performing repairs. For example, when certain tractors detect a failure, they cease to operate until a dealer unlocks them. That forcers farmers to pay dealer rates for repairs that they could have made themselves, or that an independent repair shop could have done more cheaply.

These have made fixing an equipment much more inconvenient, time consuming, and expensive than buying a new one. It does not help that technology too has contributed to this trend - less parts or fixtures, miniaturisation, large number of sensors, increased use of software etc. 

These trends have invariably elicited pushback. A "right to repair" movement, that demands firms provide consumers and independent repair shops with the same service documentation, tools and spare parts that they make available to authorised service providers, has emerged,

In America the movement has already managed to get relevant bills on the agenda of legislatures in a dozen states, including Nebraska. Across the Atlantic, the European Parliament recently passed a motion calling for regulation to force manufacturers to make their products more easily repairable.

The big breakthrough may be in the recent decision by the US Government,

Joe Biden signed an executive order in July giving owners the “right to repair” their own vehicles without voiding warranties. The UK introduced rules that legally require manufacturers to make spare parts available, while the European parliament has called for similar regulations to govern the sales of smartphones and laptops.

This is what the US executive order had to say,

In the Order, the President encourages the FTC to establish rules barring unfair methods of competition on internet marketplaces. Cell phone manufacturers and others blocking out independent repair shops: Tech and other companies impose restrictions on self and third-party repairs, making repairs more costly and time-consuming, such as by restricting the distribution of parts, diagnostics, and repair tools.

In the Order, the President encourages the FTC to issue rules against anticompetitive restrictions on using independent repair shops or doing DIY repairs of your own devices and equipment.

At the micro-level, there are innovative business models like the electronic waste recycling entity named Repair Cafes. An FT article writes,

Started in 2009 by Martine Postma, a Dutch journalist and environmentalist who “wanted to change people’s behaviour”, repair cafés are events held by an informal network of volunteers around the globe who give their time to mend devices that would otherwise end up on the scrapheap. The service is free and, depending on the expertise of the volunteers, attendees can bring items from computers and household appliances, to sweaters and socks that need darning... Their success rate, they say, hovers around 60 per cent. There are now more than 1,500 such “cafés” around the world.

The barriers on the repair economy may also be part of a much more disturbing trend of dilution of ownership rights themselves,

The global assault on repairability highlights a bigger problem, says Jason Schultz of New York University: what it means to own things in the digital age. Together with Aaron Perzanowski of Case Western Reserve University, he has written a book, “The End of Ownership”, which describes the many ways in which firms now limit what people can do with the stuff they buy, in particularly the digital sort. “Owners” are often not allowed to resell it, transfer it to another devices or mash it up with other digital goods. Companies have even started to limit what buyers can do with physical goods. Tesla, for example, does not allow its self-driving cars to be used to make money with ride-sharing services such as Uber and Lyft (apparently because the firm plans soon to launch its own such service, called “Tesla Network”). It will be interesting to see what happens if Tesla takes steps to enforce this anti-Uber rule.

The durability and repair movements are especially important for developing countries. As mentioned earlier, repairs are one of the largest employers in the informal economy. Smart phone repairs alone employ millions. For emerging consumers, durability is effectively an additional income that helps them expand their consumption basket. A reversal of this trend is another of the several corrections required in modern capitalism. 

China property market facts of the day - Evergrande edition

From an FT long read on Evergrande

There is enough empty property in China to house over 90m people, says Logan Wright, a Hong Kong-based director at Rhodium Group, a consultancy. To put that into perspective: there are 5 G7 countries — France, Germany, Italy, the UK and Canada — who could fit their entire populations into those empty Chinese apartments with room to spare.

This factual summary of Evergrande,

Around 29 per cent of China’s gross domestic product is related to real estate. Evergrande has a total debt exposure (including trade payables) of over $300 billion, which includes $19 billion in offshore US dollar-denominated bonds... Evergrande’s balance sheet shows 128 banks and 120 other institutions with direct exposures. This includes global investors... The company has been unable to complete many of its 1,300 ongoing projects. Apart from financial debt, Evergrande is said to have over 667 billion Chinese yuan (about $103 billion) in outstanding trade payables. It will have another 240 billion yuan ($37.16 billion) of trade payables to settle in the next 12 months, if it remains a going concern. The cash crunch has led to over $1 trillion worth of Evergrande projects being unfinished... Some estimates indicate unsold inventories of 60-65 million units across the People’s Republic of China. Mortgage lenders could therefore be in trouble as well. China’s real estate has debts of over $4.5 trillion, of which $209 billion is parked in offshore bonds.

See also this.

Any property market crash can have a large impact on the wider economy. Apart from the fact that real estate makes up 29% of the GDP, it's the major source of financing for local governments. And this is a very big concern,

An even more consequential trend for China’s political economy is the collapse in land sales by local governments, which fell 90 per cent year on year in the first 12 days of September, official figures show. Such land sales generate about one-third of local government revenues, which in turn are used to help pay the principal and interest on some $8.4tn in debt issued by several thousand local government financing vehicles. LGFVs act as an often unseen dynamo for the broader economy; they raise capital through bond issuance that is then used to fund vast infrastructure projects... This dwindling ability of local governments to raise finance to spend on infrastructure has the potential to depress Chinese growth considerably. Fixed asset investment, which last year totalled Rmb51.9tn ($8tn), constitutes 43 per cent of GDP.

After rating downgrades over threat of defaults, trading on Evergrande's yuan debt has been halted. Chinese debt assets and global equity markets have been spooked and metal and fuel prices have crashed. 

The woes of Evergrande owe significantly to Beijing's restrictions on the property market, best exemplified by its "three red lines" laid down in November last year to reduce debt and oversupply in residential real estate. It involved keeping the ratios of liabilities to assets below 70%, net debt to equity below 100%, and cash to short-term debt to be at least 100%. 

All this raises the question of how much pain is too much for Chinese regulators? James Kynge captures the delicate balancing act China is performing with Evergrande,

It needs to inflict enough pain to show it is serious but not so much that it renders one of the most important engines of economic growth moribund.

It's also a measure of the importance of China that it's perhaps the only country outside of US whose corporate default could have this kind of ripple effect on the world economy and global equity markets.

Update 1 (24.09.2021)

Adam Tooze refutes the Lehman analogy with Evergrande and argues that it's a deliberately brought about crisis, a "controlled demolition" to deflate the property bubble.

In terms of scale of investment, the Chinese real estate and construction sector is at least twice the size of its US counterpart and three times as important in relation to GDP. In cities it accounts for c. 17 percent of employment. Its share in local public revenue stands at about 1/3. Real estate accounts for c. 80 percent of household wealth in China, versus a share of around 30 percent in the US. The campaign to rein in this gigantic growth machine began in earnest in October 2017 when Xi gave his speech to the 19th Party Congress with the famous line: “houses are for living in, not for speculation”.

Update 2 (25.09.2021)

Atif Mian traces the origins of China's property market bubble to the post-GFC actions to stimulate the economy as global trade and its exports declined sharply. Property market, already an important driver of economic growth, assumed even greater relevance. 

The government opened the credit tap and a property market bubble ensued. In fact, domestic credit as a share of GDP rose by over 80% since 2008!

He argues that more than a financial crisis, such credit explosions which finance consumption and property market have historically been followed by growth slowdowns. Accordingly, while the Chinese government may have instruments to ward off a financial crisis, it remains to be seen whether it can find out alternative engines of growth which will have to kick in as the household sector cuts back on consumption to cut their losses in the property market. 

Update 3 (25.09.2021)

Jahangir Aziz writes that the Chinese actions to not bail out Evergrande is in line with the Communist Party's growth recalibration to address the emergent "principal contradictions", a central theme of the Party since 1981. The "principal contradictions" itself has undergone multiple restatements since,

After the economic destruction resulting from the Cultural Revolution, the 1981 Congress under Deng Xiaoping restated the “principal contradiction” as the tension “between the ever-growing material needs of the people and backward social productivity” instead of the “class struggle between the proletariat and the bourgeoisie” as identified by Mao Zedong. To resolve this contradiction, policies were changed and the economy reformed to deliver and sustain a stunning 10 per cent average growth over the next three decades. But the growth also brought with it extensive collateral damage, ranging from high leverage to severe environmental degradation... To align the objectives of the Party and that of all levels of government, the 2017 Congress restated the principal contradiction as the tension between “unbalanced and inadequate development” and the “peoples’ ever-growing need for a better life”. This radically altered how the Party saw China: No longer a low-income economy needing to generate millions of new jobs every year to maintain social stability, but a rising middle-income nation aspiring for a better quality of life... We view the relatively tight fiscal and monetary policies; the persistent tightening in the housing market; the re-designation of private tutorials as non-profit; the economy-wide push to de-carbonise; and letting corporates with weak balance sheets to default, as elements of the regime change foretold at the 19th Party Congress. In its latest version, the policy changes are couched in terms of the “Common Prosperity” objectives.

The Party does not want to create any more moral hazard through bailouts. And while Evergrande is big, it's not so at a macro-level and given the credit channels and both sides of the credit equation (banks and consumers) are all tightly controlled by the government, the Chinese authorities may be thinking it can take the risk without triggering a market meltdown.

The financial liabilities of the company, while large in absolute terms, make up about 0.65 per cent of China’s corporate and government debt combined (the stock of total social financing) and bank loans per se just 0.25 per cent of total bank credit. Linkages to offshore banks and financial institutions are even smaller... Despite China’s very high debt stock (close to 300 per cent of GDP), the government and central bank still retain sufficient policy space to ensure that such system-wide stress is avoided.

Some thoughts on Kerala's social history

Kerala, till the late nineteenth century was one of the most casteist society ("mad house of castes" as Swami Vivekananda described). As late as the nineteenth century, women were treated very low dignity in Kerala, perhaps worse than anywhere in Madras Presidency. Its matrilineal society stuff that is a staple explanator of the state's development is, I think, inaccurate. The matrilineal succession has less edifying reasons. 

But it cannot also be denied that there was something different about the way women were seen. The state, for example, has the largest number of Devi temples. The presiding deity of most of the tens of thousands of family temples (the larger extended family has a temple associated with them) is Devi. This goes much far back in history.

What changed it was several genuine social reform movements and supported by a few enlightened rulers of Travancore and Cochin. These social reformers, led by Sree Narayana Guru, got lower castes into temples, women's dignity protected, established large numbers of schools, even a Sanskrit College. Given the levels of oppression, the social transformation achieved in about 50 years must count as one of the most impressive ones anywhere in the world (unfortunately very less discussed). What sustained it was the communist governments post-independence, and the role of various caste and religious groupings to focus on education. The Nairs, Ezhavas, and Christians all have associations which run hospital and school/college chains across the state. 

The contrast with West Bengal is interesting - the state had less social divisions to start with, an enlightened leadership class (bhadralok), more widely known social reform movements, and a Communist government. It still could not entrench the level of public institutions and civil society that Kerala did. I guess, the role of those social reformers of Kerala in the late 19th and 20th century is one of the less discussed corners of Indian history. 

Finally, it may also have contributed that all the three-religious groups and the major caste groups were numerically similar, if at least by order of magnitude - there was no one overwhelming majority. Further, unlike WB, the social reform leadership emerged from within the lower castes.

Weekend reading links

1. The big news late last week was the ruling of the US District Judge Yvonne Gonzalez Rogers in the case between Apple and games maker Epic, that directed Apple to give developers in the US bypass the App Store's in-app payment tool by including links or directions to "purchasing mechanisms" outside of the platform. This deprives Apple off the monopoly position in the  very high margin (15-30%) and more than $60 billion of App Store transactions per year. Apple made $6.3 bn last year from in-app purchases and subscriptions. 

Epic Games CEO Tim Sweeny has expressed his disappointment, saying that this is not a victory for either developers or consumers. Apple has proclaimed victory. It will be a relief to Apple that the judge has not inviolated the prevailing anti-trust paradigm by ruling that "Apple is not a monopolist under 'either federal or state antitrust laws'". Besides, the Judge also said that, "Apple provides a safe and trusted user experience on iOS, which encourages both users and developers to transact freely and is mutually beneficial."

The judge also didn’t force Apple to change its fees or let third-party app stores on its platform, which would have been a far larger blow to the company’s revenue. The ruling states that Apple must let developers communicate with customers “through points of contact obtained voluntarily from customers through registration within the app.” Last month, as part of minor concessions designed to settle a class-action lawsuit with app makers in the U.S., Apple had already agreed to allow those direct communications between developers and end users. The ruling in the Epic trial only applies to the U.S., while Apple’s previous App Store changes — relating to communications and reader apps — were designed to be global... The ruling is believed to mean that users would be able to make purchases via the web, rather than having a competing payment system in apps themselves. That means Epic would need to build a website to let users make purchases and include a link to that site in Fortnite in order to comply with the rules. That’s something Sweeney appears to be implying that Epic doesn’t want to do. Epic wants a built-in payment system, not the option to steer to the web.

This is what Epic wanted,

What it really wanted was a frictionless in-app payment mechanism that deprived Apple of its cut, rather than the ability to hyperlink to a payment website outside of the app. Epic also wanted to skirt around the App Store entirely and allow people to download its game to their devices much as they do on a PC. And it wanted the judge to declare Apple an illegal monopoly. It lost both arguments.

2. Andy Mukherjee has a story on the less reported but more important part of India's e-commerce market - the B2B aggregation between brands and wholesalers with the millions of small stores in more than 660,000 villages and over 8000 cities and towns of India. 

The wholesalers rely on their knowledge of (and trust in) retailers in their vicinity. But these relationship-oriented networks are small and expensive. Throwing them wide open with digitization is the big opportunity. Leading the charge is Udaan, a startup that in five years has taken 80% of the business-to-business e-commerce market, delivering goods it stocks in 200 warehouses nationwide to more than 1.7 million retail stores in 900 cities every day. Suppliers receive their cash on time after Udaan takes their products. Retailers get credit they would have otherwise obtained at high interest rates from wholesalers. Everything happens on a smartphone app, which helps small shopkeepers build a history of reliability in payments. Banks and financiers gain the confidence to lend the required working capital, and brands get less convoluted access. From manufacturers and millers to farmers, pharmacists, hotels, restaurants and grocers, the platform has 3 million registered buyers and sellers... (Udaan) isn’t looking to fundamentally alter behavior. (They are) simply removing inefficiencies to speed up the flow of capital. This is crucial for retailers who work on 10% to 12% margins, half of what their peers in the West make. The business-to-consumer side of retail is both deeply political and booby-trapped with regulatory minefields.

This, like Rivigo, is a rare example of a start-up which has identified an important market failure unique to Indian context, figured out a business model, demonstrated value proposition and acquired customers, and scaled up. 

3. Livemint long read on the problems with the Poshan tracker smartphone application being used by the Government of India to monitor the activities of Anganwadi workers (including attendance of themselves and beneficiaries, details of nutrition services rendered, uploading images of activities etc).

Like with other e-governance endeavours this too has struggled with issues of poor connectivity, inadequate smartphones, lack of tech literacy, excessive information upload requirements, trying to capture too much information etc. 

4. Is China going to buck the too big to fail (TBTF) theory by allowing its largest property developer Evergrande fail? The developer is faced with more than $300 bn in debt, nearly 800 unfinished residential buildings, angry suppliers who have shut down construction sites, nearly 1.2 million buyers many of whom who have partially paid for their properties have filed lawsuits.

In its glory days a decade ago, Evergrande sold bottled water, owned China’s best professional soccer team and even briefly dabbled in pig farming. It became so big and sprawling that it even has a unit that makes electric cars, though it has delayed mass production... The company, which was founded in 1996, rode China’s epic property boom that urbanized large swathes of the country and resulted in nearly three quarters of household wealth being tied up in housing... 

Evergrande might have been able to keep going if it weren’t for two problems. First, Chinese regulators are cracking down on the reckless borrowing habits of property developers. This has forced Evergrande to start selling off some of its sprawling business empire... Second, China’s property market is slowing and there is less demand for new apartments.

Investors and institutions financed companies like Evergrande because they believed that Beijing would step in to rescue if things got shaky. But that now looks likely to be upended as the government has shown greater willingness to let companies fail and have talked tough on Evergrande. 

But this can be dangerous, especially in a country where three-fourth of household wealth is locked up in housing and where property market is critical to sustain activity in several sectors of the economy. 

5. Denmark becomes perhaps the first country to lift all Covid related restrictions as it returns to complete normalcy after more than 75% of its population has been vaccinated twice. 

6. Washington Post has a nice set of graphics on the US pandemic stimulus plans. 

7. Livemint points to a study by Anarock Property Consultants about the property market in 2020-21,

Among the top seven cities, Bengaluru, Hyderabad, and Chennai saw their combined share of office leasing increase to 66% in 2020-21, compared to 47% in 2017-18... The net office absorption in 2020-21 in the top cities was 21.32 million sq. ft and these three southern cities absorbed roughly 14.06 million sq. ft. The Mumbai Metropolitan Region (MMR) and Pune absorbed 4.56 million sq. ft (21%) and the National Capital Region (NCR) took up 2.3 million sq. ft (11%). In 2017-19, 31.15 million sq. ft of office space was leased in the top seven cities. Of this, cities in the southern region accounted for 47% net absorption, the western region 33%, and the northern region 17%. In terms of new office supply too, Bengaluru, Chennai, and Hyderabad have continued to ramp up their share from 40% in FY18 to nearly 63% in FY21. Of the total new office space completion of 40.25 million sq. ft in FY21 across the top seven cities, the southern cities had a 63% share, with about 25.55 million sq. ft. The office supply share of the main western markets shrank to 19% in FY21 from 40% in FY18.

8. Interesting snippet about the composition of stock market in India and China,

As per CLSA, China’s largest firms in most industries are SOEs. Further, 91 of the 124 Chinese companies that are part of the Fortune Global 500 are government-owned enterprises. Over a one-year and two-year time frame, the top SOEs of China have gained 11 per cent and 18 per cent, respectively. The private firms, on the other hand, have soared 42 per cent and 233 per cent. Moreover, the market cap split between SOE and non-SOE in the top 50 is 45 per cent and 55 per cent, highlighting how dominant government undertakings are... To put the number in context, in India, listed SOEs (called public sector undertakings, or PSUs in domestic parlance) account for 10 per cent of India’s market cap, while private firms account for 90 per cent.

9. Latest data from the Periodic Labour Force Survey (PLFS) is disturbing news about the Indian economy,

A close look at the PLFS data is disquieting since the implication of the sectoral trends is that there has been a decline in good-quality employment opportunities since the last PLFS and workers have been forced into less remunerative and less secure jobs. The share of regular salaried workers has been declining for some years, reflecting problems with the much-touted formalisation of the economy. The proportion of the non-agricultural workforce working in the informal sector rose to almost 70 per cent. There has also been a sharp rise of 2.6 percentage points in the proportion of people working in household enterprises who receive no compensation. Women are working more, apparently — but not necessarily out of choice, since most of the increase is as unpaid family workers in agriculture. These facts are worrying enough, but the most problematic data point is surely that there has been a more than three percentage point increase in the share of workers in agriculture — the first time that this has happened in the modern statistical era. By all accounts, therefore, the PLFS indicates that India — far from modernising and formalising its economy — seems to be moving backwards in terms of the employment available.

The data should also be validated to ensure it's right. If true, it's very disturbing.

10. Data summary of the National Infrastructure Pipeline and National Monetisation Pipeline. Public finance is expected to make up 43% with state governments the highest, and with a very small share for private capital. 

Interestingly, hardly any road identified for monetisation may be able to meet the benchmark of Rs 6 Cr per km.

The GoI's roads monetisation benchmark of Rs 6 Cr per km is arrived at based on the Rs 8262 Cr (Rs 6500 Cr upfront and balance over three years) bid for the 140 km Mumbai-Pune corridor over a period of 10 years. 

Assuming there is a benchmark figure indicated formally for monetisation, and this figure is Rs 6 Cr perk km, it's most likely to haunt NHAI and state government agencies as they go about monetising roads. Very few roads are likely to attract traffic that meets anywhere close to this benchmark. The presence of the benchmark would be a big deterrent to officials and agencies to awarding tenders. Many would repeat tenders and time could be wasted. 

This is a good example of how governments pursuing private participation as a means to enhance public revenues could struggle to meet their objectives. 

11. Gurbachan Singh points to an interesting snippet about public finance in India,

In 2020-21, the taxes on oil for the GoI were about Rs 3.4 trillion, the so-called dividend income from the RBI was about Rs 1.33 trillion on an annualised basis, and the taxes on income were about Rs 4.59 trillion, according to the revised estimates. So, the collection for the GoI from the oil tax and the so-called dividend income from the RBI were together more than the entire income tax collection! With so much regressive tax being collected from the public, it is hardly surprising that the consumption has been substantially affected.

Obviously, this says little about the other factors contributing to consumption squeeze. I was initially ambivalent, even favourable, to the use of oil taxation to bridge the deficit. Now, perhaps the degree of taxation and its duration may have gone too much and too long to be starting to hurt. So, is it possible that the fuel taxes may have been a non-trivial contributor to the economic stagnation since the middle of last decade? 

12. Australia, US, and UK announce a new defence agreement AUKUS which will help Australia deploy eight nuclear powered submarines and tomahawk cruise missiles. This marks a definitive departure for Australia in declaring its intent to contain China in the South China Sea. And China may have none but itself to blame for having brought about this turn by Australia, which till three years back had maintained that it would not choose between US and China and would closely with both. 

Some security analysts argued that China’s recent retaliation against Australia over its harder line — slashing imports of coal, wine, beef, lobsters and barley, along with detaining at least two Australian citizens of Chinese descent — appeared to have pushed Australia in the Americans’ direction. In response, China may extend its campaign of economic sanctions. Australia seems to have calculated that Beijing has little interest in improving relations. “I think the fear of doing this would have been much more palpable even three or four years ago, maybe even two years ago,” said Euan Graham, an Asia-Pacific security analyst at the International Institute for Strategic Studies who is based in Singapore. “But once your relationship is all about punishment and flinging of insults, frankly, then that’s already priced in. China doesn’t have the leverage of fear, of being angry, because it’s angry all the time.”