Weekend reading links

1. WSJ has a story on the rise of neo-Brandesian anti-trust activism in the US. It's essentially a battle between two conflicting schools of thought on market regulation - maximise consumer welfare or promotion of competition. It pitted the views of Louis Brandies against those of Robert Bork, with the former winning the first half and the latter the second half. 

The new framework is more rooted in social and political goals than economic ones; more focused on the size of companies per se, less on trying to assess whether that size is good or bad for the economy; and more sympathetic to suppliers, small business and workers, even at the expense of consumers... Louis Brandeis laid out two core themes of antitrust. First, the purpose is more about preserving democracy than fostering growth. As Brandeis wrote in a broadside against the big banks, “Even more important than efficiency are industrial and political liberty.” Second, as he argued in his 1934 book, “The Curse of Bigness,” big business is suspicious in itself, whether economic harm can be proven or not. Brandeis’s antipathy to size was also aimed at government, a nuance often overlooked by his current followers. 

His most famous antitrust ruling, in the 1918 case of Chicago Board of Trade v. United States, gave courts wide latitude to police any business conduct suspected of attempting to “suppress or even destroy competition.” Brandeis repeatedly sided with small businesses, from ice sellers to lumber mills, even when they tried to band together and collude, as long as they claimed to be preserving a more diversified marketplace against bigger rivals...

“The only legitimate goal of American antitrust law,” Bork declared, “is the maximization of consumer welfare.” Bork insisted that a singular focus on consumer welfare was the original intent of Congress and the courts—that is, in his telling, until Brandeis perverted it. Bork labeled Brandeis’s Chicago Board of Trade ruling “deviant”... Bork’s basic view was that antitrust should focus on economics and shed political and social aims. He coupled that framework with a belief in the superior wisdom of the private sector over the public. Attempts by business to gain damaging monopoly power would inevitably be corrected by free markets, he argued, while government intervention to fix perceived problems would cause lasting harm... 

He dismissed the idea that vertical integration could undermine competition. He derided the concept of “predatory pricing”... Bork felt that antitrust should largely be restricted to challenging the biggest horizontal mergers—combinations of direct competitors—and the most egregious anticompetitive practices, such as explicit price fixing.

2. Indian Express has a fantastic story on a Rs 18 Cr steel plant established with share capital from 207 Gulf returnees in Kozhikode district in Kerala. The shareholders in GTF Steel Pipes and Tubes LLP are ordinary villagers from Thikkodi village and its surrounding villages, who were part of a social media group Global Thikkodiyans Forum (GTF) that was formed in 2015. 

This is the first such attempt in the state where expatriates, and returnees, of a village have come together and mobilised capital for a business enterprise of this kind. The total investment of Rs 18 crore was raised from 207 people. Of these, 147 invested only Rs 1 lakh each. The price of a share was fixed at Rs 50,000, and an individual had to invest in at least two shares. There was a cap on the maximum investment as well – Rs 40 lakh per person. “The major highlight of the venture is that a large section of investors are ordinary people who have some small savings, a few lakh rupees, after years of toil in the Gulf. But for an initiative of this type, they would not have been able to be a part of a professional business venture,” said GTF Steels Chairman Mohammed Basheer Nadammal. “Most of these returnees invest in trade or hotel industry, and then back out after incurring huge losses. Our concern was to make such people a part of a business venture,’’ he said... the monthly demand of GI pipes and tubes in Kerala was 40,000 metric tonnes during pre-Covid. It would be down to 25,000 metric tonnes now. However, the production in Kerala is only 4,000 metric tonnes per month. Our monthly production capacity is 3,000 metric tonnes... None of the partners work in the factory. The recruitment was done in a professional manner, with only qualified, trained workers being selected... We have 2,000-odd members in the GTF. Only those interested in investing in the steel industry were selected as partners.

Social media helped bring together the group, some of whose members self-selected to establish the venture, and they choose a commercially viable manufacturing venture. 

3. The Major Port Authorities Act 2021 allows major ports the power to set prices based on market conditions, freeing them from the regulatory control of TAMP. Therefore, given the virtual monopoly nature of most ports, is there a need for tariff regulation before these assets get monetised as part of the National Monetisation Pipeline?

4. The challenges with infrastructure asset monetisation,

In case of national highways, as against a target of Rs 20,815 crore, it has only garnered Rs 14,692 crore, that too because the first auction fetched a 50 per cent premium. Now the government plans to raise nearly Rs 40,000 crore each year from roads. Its track record in the Railways is no different. The Railways has not been able to monetise its existing assets. Sundry earnings for the national carrier have been falling since 2016-17. Last year, the Railways had aimed to collect Rs 30,000 crore via privatisation of some routes, but it only received bids from two companies worth Rs 7,200 crore and had to cancel the auction. Asset monetisation for BSNL and MTNL has remained a pipe dream since 2017.

5. Debashis Basu writes that the final mudra of Mudra loans may well be one of failure.

A few days ago, Dinesh Khara, chairman of State Bank of India (SBI), told a publication that 20 per cent in its loan portfolio ofRs 26,000 crore under the Pradhan Mantri Mudra Yojana (PMMY) scheme had turned bad... In FY21, Rs 3.21 trillion of Mudra loans were sanctioned to around 51 million borrowers and Rs 3.11 trillion was disbursed. SBI has also notched up 9.22 per cent (Rs 26,203 crore) bad loans on its MSME books of Rs 2.84 trillion... From 4.35 per cent of Mudra advances in 2016-17, bad loans shot up to 9.3 per cent in FY19... In January 2019, the RBI cautioned the PMMY generated Rs 11,000 crore of NPAs and could upset the credit market severely. In July 2019, the RBI blamed the poor credit-appraisal system of banks for rising bad debts. The biggest bad loans (12.39 per cent) were in the smallest loan category (under Rs 50,000).

6. Tamal Bandopadhyay writes about how the banking system is awash with liquidity stashed up in low-yielding government securities with the attendance pressure on their margins and profitability.

The banking system’s holding of government securities was to the tune of Rs 46.12 trillion in mid-August — around 30 per cent of deposits (Rs 155.7 trillion), a loose proxy of the so-called net demand and time liabilities, against regulatory requirement of 18 per cent. Apart from the dated securities, banks invest in treasury bills on which their earning is, at best, on average 3.5 per cent now... Overall, at least 10 per cent resources of the banking system are generating a return between 3.35 per cent and 4.2 per cent. For many banks, this is far lower than their cost of funds. In banking parlance, such investments are offering them a “negative carry”. 

The cost of funds for most large private banks and many public sector banks that have a handsome portfolio of the low-cost current and savings accounts, popularly known as CASA, could be 3.75-4 per cent. For others, it’s 4.5-5 per cent. Many banks in the second group, too, have a large CASA base but they offer much higher interest rates on savings bank accounts in contrast to large banks, which pay just 2.75 per cent. If we compare the return from reverse repo and treasury bills with the banks’ marginal cost of funds based lending rate (MCLR), below which no bank can give loan, the negative carry is far higher. This rate factors in the marginal cost of funds, tenure premium, operational cost and the negative carry on account of cash reserve ratio (CRR). The banks don’t earn any interest on the 4 per cent of deposits kept with the RBI as CRR. The overnight and one-month MCLR of State Bank are the same — 6.65 per cent. The comparable rate for ICICI Bank is 7 per cent and IDFC Bank 7.9 per cent. The MCLR is fixed every month.

7. A new amendment to the IBC 2016 provides for a pre-packaged insolvency resolution process (PIRP) for MSMEs, which envisages a hybrid mechanism of negotiated debt restructuring which on approval by NCLT becomes binding on all stakeholders. 

Aimed at causing minimal disruption to business and to ensure job preservation, the PIRP allows the existing management of the MSME to retain control of the firm during the PIRP, unlike the corporate insolvency resolution process (CIRP). However, certain fundamental decisions have to be approved by the Committee of Creditors (CoC) and the PIRP is monitored by a resolution professional (RP). If the existing management grossly mismanages the affairs of the MSME or commits any fraud, then, subject to approvals of the CoC and the NCLT, the management can be handed over to the RP. The option to initiate a PIRP lies solely with the MSME itself. It is also the MSME that prepares and submits a base resolution plan for consideration, although such resolution plan may be subject to a Swiss-challenge from potential investors if it hampers the interests of operational creditors. The PIRP is tailored to be cost-efficient and provides for a strict timeline (90 days for approval of the resolution plan by the CoC and 30 days for approval by the NCLT) to complete the process.

8. Good story on the steel sector in India which is experiencing a health return to profitability and also concentration,

The share of the top two players — Tata Steel and JSW Steel — in flat products stood at 51 per cent in FY2021, up from 48 per cent in FY2018. In the fragmented long products segment, the share of top five producers (which include Tata Steel, JSW Steel, JSPL, SAIL and RINL), has increased from 38 per cent to 53 per cent in the same period. The industry is changing in fa­vour of the big boys with deep pockets.

This graphic on the recovery rates for the different steel plants which went into bankruptcy

The recovery rates were not too bad, at an aggregate of 59% for the five largest accounts. The IBC resolution also ensured consolidation of the steel industry with the emergence of Tata Steel, JSW, and ArcelorMittal/Nippon Steel as the three biggest manufacturers. 

9. Good history of the evolution of telecoms market in India in terms of operator ARPUs over the last fifteen years. This was then,

Going 15 years back to the April-June quarter of 2006, the all-India ARPU for wireless services stood at Rs 346.59, with Delhi topping at Rs 465.51 and Mumbai next at Rs 430.97. In the Delhi circle, the differential between the three players was remarkable—Bharti Airtel’s ARPU was at Rs 524.17, followed by Hutch (which later became Vodafone’s business after a mega deal) at Rs 442.99 and Idea Cellular at Rs 374.05. In Mumbai — other important telecom market—Hutch led with an ARPU of Rs 527.48, followed by Bharti at Rs 422.29 and the third player, BPL Mobile, at a much lower Rs 288.51.

And now,

The latest composition of ARPU is something like this. On average, a subscriber spends 39 paise towards rental in a month, Rs 17.84 on calls, 31 paise on SMS and Rs 89.81 on data, besides the remaining in value-added services, out of a total of Rs 103.58. So calls, which have been the bread and butter for any operator, make up for only 15.6 per cent of revenue from subscribers, while data usage yields a bulky 78.7 per cent.

10. Indian Express points to a large increase in gold loans, a likely indicator of the extent of household distress,

Retail or personal loans — which account for 26 per cent of total bank credit — jumped 11.2 per cent over 12 months till July 2021 compared with 9 per cent over the previous 12 months. Within retail loans, the gold loan outstanding soared by 77.4 per cent, or Rs 27,223 crore, to Rs 62,412 crore by July 2021 on a year-on-year basis. SBI, the largest bank, reported a 338.76 per cent growth in gold loans as of June 2021.

11. FT story on the exiting German Chancellor,

When Merkel came to power, the iPhone had yet to be launched and the oil major ExxonMobil was still the US’s most valuable company (it would be six years before it was supplanted by Apple). The wider world looked very different too. George W Bush was in the White House and Tony Blair in 10 Downing Street...

“She became the Mother Teresa of world politics,” says Josef Janning, a senior associate fellow at the German Council on Foreign Relations. “As someone who was all about negotiating, listening closely to her interlocutor and accommodating his or her views, she was the antithesis of Trump.”... Rufus Franzen, a 17-year-old student who is part of the Berlin pupil council, a representative body for local school children... says, always seemed like “this wise lady who always knew exactly when to act, was rarely impulsive and never put a foot wrong”. But today people crave more “assertiveness... A lot of people feel Merkel isn’t drastic enough in her policies and want someone with more resolve, especially when it comes to climate.”

12. Finally, The Economist on wokeness in US,

... a loose constellation of ideas that is changing the way that mostly white, educated, left-leaning Americans view the world. This credo still lacks a definitive name: it is variously known as left-liberal identity politics, social-justice activism or, simply, wokeness. But it has a clear common thread: a belief that any disparities between racial groups are evidence of structural racism; that the norms of free speech, individualism and universalism which pretend to be progressive are really camouflage for this discrimination; and that injustice will persist until systems of language and privilege are dismantled.