Weekend reading links

1. A status check on the share of e-commerce in India's retail market,

India has, as of now, nearly 13 million retail grocery stores (or kirana stores), contributing 10 per cent to India’s gross domestic product and accounting for 8 per cent of India’s employment. So-called “modern retail” is just 8,000 outlets, which make up a mere 0.05 per cent of the total and online e-commerce less than 2 per cent of retail sales.

2.  This is purely self-serving,

Praveer Sinha, chief executive officer and MD, Tata Power, had said in an interview in September that in the case of some imported coal-based plants, it was “absolutely unviable” to have a fixed-price agreement.

In case of the UMPP bids, the bidders had the option of quoting fixed tariffs or allowing fuel price pass-through, and Tata and other chose fixed tariffs. And when the Indonesian government changed its regulations by hiking domestic duties, the bidders found their fixed price tariff structure unviable and have been demanding fuel price pass-through.

3. More on India's missing middle class

The percentage of households owning a car, computer, AC, TV, and Fridge increased from just 2% to 3% over the 2014-19 period. 

4. Citing Covid 19, the Adani Group have sought time till December 2021 to take over the three airports of Trivandrum, Guwahati, and Jaipur. For the record, AAI had declared Adani Group the winner of six airports in February 2019. It assumed management control of Lucknow, Ahmedabad and Mangalore airports in November 2020. 

In stark contrast to the delays in assuming control of these airports, the Group has swiftly moved in to assume control of the Mumbai International Airport. 

The Group had bid very aggressively to win the six airports - in contrast to the Rs 85 and 69 per passenger revenue share quoted by GMR, the Group offered Rs 177 and 174 respectively. 

5. On the Chinese power crisis,

Some of those consequences have stemmed from production cuts in provinces struggling to meet strict year-end energy efficiency targets. Plants in other regions have been affected by coal shortages, soaring coal costs and electricity price caps, which mean they can only generate power at a loss. On Monday Chinese coal futures reached record highs after a big coal-producing region was affected by flooding.

6. Disruptions of supply chain and acute lorry driver shortage is leading to pile up of ships in English ports,

Congestion at ports has been widespread across the world since the end of last year when the pandemic wreaked havoc on supply chains by triggering volatile demand for goods, factory closures and restricted operations at ports. As a result, shipping a container between China and Europe costs more than six times as much as a year ago. However, the situation at ports in the UK has been particularly severe because of its acute lorry driver shortage. Felixstowe port said a shortage of drivers meant that it was taking about 10 days before cargo could be taken inland to be unloaded, up from the usual four-and-a-half days... “The pre-Christmas peak, combined with haulage shortages, congested inland terminals, poor vessel schedule reliability and the pandemic, has resulted in a build-up of containers at the port,” the port said.

And this on ships stuck outside ports, 

Globally, there are now 584 container ships stuck outside ports, nearly double the number at the start of the year... The snarl-ups in supply chains are reflected in a surge in shipping costs: the average global price of shipping a 40 foot container is now close to $10,000, three times higher than at the start of 2021 and almost 10 times pre-pandemic levels... Similar logistical problems have hit ports on the west coast of the US. Although the number of ships waiting at sea has fallen from a record 76 in September to 57 now, shortages of port workers and truckers means it takes up to 12 days for ships to drop anchor and unload containers, delaying the delivery of everything from sneakers to tropical fruits and Lego. That is why it takes three times longer compared with pre-pandemic times to clear vessels at Los Angeles and Long Beach.

7. Spain has imposed a windfall tax to plough back some of the large increases in profits of utilities due to the soaring natural gas prices. 

Spain’s big electricity companies — notably Iberdrola, the multinational utility, and Endesa, the subsidiary of Italy’s Enel — are making their first payments under the country’s temporary windfall levy, which rises in tandem with the price of gas. Spain’s leftwing government initially estimated that based on prices last month, the measure would raise €2.6bn during its six months in force, taking funds from utilities that benefit from the impact of gas on the electricity price but which do not have corresponding gas costs of their own. But the continued increase in gas prices means the levy may now cost the companies involved more than €5.5bn, which the groups argue shows that it was disproportionate and ill-conceived.

8.  NYT has an article on the central issue in US-China relations, the issue of Taiwan. A few days back, Xi Jinping said that Taiwan independence "was a grave lurking threat to national rejuvenation" and affirmed his commitment to unite Taiwan with China. 

The biggest destabilising force is the possible breakdown of the belief that US forces could at the least tied down the Chinese military. 

In war games since at least 2018, American “blue” teams have repeatedly lost against a “red” team representing a hypothetical Chinese force — in part by design, since the exercises are intended to test officers and war planners. In a game simulating a war around 2030, reported earlier by Defense News, the “blue” team struggled even when given new advanced fighter planes and other weapons still on the Pentagon’s drawing board. The classified game culminated with China launching missile strikes against American bases and warships in the region, and then staging an air and amphibious assault on Taiwan, according to a Defense Department official. The officials concluded that Taiwan, backed by the United States, could hold out for maybe two or three days before its defenses crumbled. The Pentagon’s annual assessments of China’s military have since 2000 chronicled its evolution from a large but ineffective force into a potential rival. Its latest report said Chinese capabilities have already surpassed the American military in some areas, including shipbuilding, conventional ballistic and cruise missiles, and integrated air defense systems. All three would be essential in any conflict over Taiwan...

“This really is the grimmest time I’ve seen in my more than 40 years working in the military,” Taiwan’s minister of defense, Chiu Kuo-cheng, told lawmakers on Wednesday. China already had the means to invade Taiwan, though still at a high price, he said. “By 2025, the cost and attrition will be squeezed lowest, and so then it could be said to have ‘full capability’.”

The point is about what's going on in the minds of the top leadership about Taiwan. Do they think that they've enough strength to overwhelm US and annexe Taiwan? Do they think that the Americans would find the damage of a direct confrontation unacceptably high as to not back Taiwan the full hog in case of a war? Do they think that the Biden administration's increasing level of diplomatic and military support will embolden Taiwan and increase the resolve of pro-democracy forces in Taiwan.

9. Latest in the (un)ease of doing business in China, chinfrom the travails of Microsoft's LinkedIn,

Microsoft Corp.’s LinkedIn is shuttering a localized version of its professional networking platform in China, becoming the last major U.S. social media provider to pull out of the country and marking the demise of a rare U.S. tech success there. LinkedIn said it made the decision in light of “a significantly more challenging operating environment and greater compliance requirements in China.” ... In exchange for being allowed to operate, the company agreed to restrict some content to adhere to state censorship rules. The service had about 52 million users on mainland China. Other U.S.-based social media platforms such as Twitter Inc. and Facebook Inc. have long been banned.

Signs of turbulence for Microsoft emerged in March. LinkedIn said then that it had paused sign-ups for new members in China while it worked to ensure compliance with local laws. Earlier that month, China’s internet regulator reprimanded LinkedIn executives for failing to control political content, according to the New York Times.In May, a prominent critic of China based in the U.K. said LinkedIn froze his account and removed content criticizing the country’s government, the latest in a series of allegations that the networking website had censored users — even outside of the Asian nation — to appease authorities in Beijing.

10. New Yorker has a fascinating profile of CORE (Curriculum Open-Access Resources in Economics), an initiative anchored by a free online introductory text book The Economy, created by a team led by Samuel Bowles and Wendy Carlin, and which seeks to "teach economics as if the last thirty years had happened", 

Compared with other textbooks, “The Economy” sometimes seems to reverse foreground and background. “Principles of Economics,” written by the Harvard economist N. Gregory Mankiw, declares that “markets are usually a good way to organize economic activity”; “Macroeconomics,” by Paul Krugman and Robin Wells, tells students that “markets move toward equilibrium.” Bowles and Carlin, in contrast, present market failure as far more pervasive, and not as a rare deviation from a generally efficient and desirable status quo. Most economics textbooks, they argue, in a recent paper on economics pedagogy, lead students to “reasonably conclude that the economy is about interactions in competitive markets (a positive statement) that function pretty well (a normative one) and in which governments ought not to meddle.” core provides reasons and evidence to challenge all three positions. 

Recently, Bowles and Carlin published a statistical analysis, comparing the relative frequency of topics in core’s “The Economy” with other textbooks. Some of the words that appear more commonly in “The Economy” are “Gini” (a measure of inequality), “bargaining,” “environment,” “global,” and “democracy.” Their analysis also shows that core offers greater coverage of economic history and thought, game theory, behavioral economics, and comparative international development. It’s not that the other textbooks omit these topics entirely but that core foregrounds them. Bowles told me about an informal rule among publishers that no more than fifteen per cent of the material in a new textbook should deviate from the dominant ones. He estimates that the figure for core is closer to seventy per cent.

11. The returns generated by US University endowments,

The Massachusetts Institute of Technology reported that its endowment had gained 56 percent in its most recent fiscal year, which ended in June. Yale also published its latest returns Thursday, with its endowment up 40 percent over the same period, its third-highest annual return since 1970. Dartmouth posted a return of nearly 47 percent. Duke reported a 56 percent return. Harvard, which runs the biggest endowment (worth $53 billion), said Thursday that its fiscal-year return lagged many of its rivals, rising a mere 34 percent... A big reason for the gains is investments with private equity firms, which in some years have received more in fees than endowments have paid out in tuition help. Harvard’s private equity investments, worth a third of its total portfolio, returned 77 percent in its latest fiscal year. Venture capital funds are also recording huge returns: The University of North Carolina logged a 142 percent return from that portion of its $10 billion endowment.

Also, sample this from 2015,

Last year, Yale paid about $480 million to private equity fund managers as compensation — about $137 million in annual management fees, and another $343 million in performance fees, also known as carried interest — to manage about $8 billion, one-third of Yale’s endowment. In contrast, of the $1 billion the endowment contributed to the university’s operating budget, only $170 million was earmarked for tuition assistance, fellowships and prizes. Private equity fund managers also received more than students at four other endowments I researched: Harvard, the University of Texas, Stanford and Princeton.

12. Finally, India's market regulator appears to be doing what should already have been done in scrutinising and penalising the actions of credit rating agencies (CRAs). World over, the CRAs have largely got a free pass despite egregious failings and culpability in many incidents, including the global financial crisis. 

Markets regulator Securities and Exchanges Board of India (Sebi) has decided to cancel the license of one CRA—Brickwork Rating—and ban from the markets two former senior officials of another—CARE Ratings... At Brickwork Ratings, the regulator found egregious violations on two counts—lack of independence of the rating committee and lapses in following procedures while rating instruments. CARE Ltd’s two former senior officers—former managing director Rajesh Mokashi and former chairman S.B. Mainak—will be barred from the securities markets owing to the lack of independence and checks while they rated the debt instruments issued by IL&FS group or its subsidiaries... In the case of Brickwork, there is a case of repeated lapses and lack of independence... 

There are seven registered credit ratings agencies in India—CRISIL, CARE, Acuité Ratings & Research Limited, Brickwork Rating, India Rating and Research and Infomerics Valuation and Rating. The global biggies—S&P, Moody’s and Fitch—don’t rate Indian corporate bonds. CRISIL is majority owned by S&P. Such severe action on a credit rating agency is rare globally. The only big example is a 2013 ban by US Securities and Exchange Commission on Egan-Jones Ratings Company and its president for 18 months. Even then the bar was for omissions in statements while seeking registration and not for lapses in the ratings process.  

This about the relationship between Brickwork and Essel Group is at the heart of SEBI's ire,

The Sebi investigation report in the matter, which will form part of the impending order, cites issues in ratings of papers issued by companies such as Diamond Power, Great Eastern Energy Corp. and firms that are part of the Essel group—namely Essel Corporate Resources and Zee Entertainment Enterprises Ltd. The issues ranged from delay in downgrading to not assigning any rating while the ratings were withdrawn due to so-called non-cooperation by the company... It again goes back to the controversial agreement between mutual funds and Zee promoters in January 2019. Seven mutual fund houses who held Essel group papers in their various debt schemes came to an agreement that although the companies were unable to stick to the repayment schedules of the debt papers, they will be given a lifeline. The funds would not invoke the underlying shares and dump them into open market. They instead extended the maturity dates of the papers from these companies. 

The market regulator has been particularly angry at this. Kotak Mahindra Mutual Fund and HDFC Mutual Fund have both faced regulatory orders over this. While HDFC MF settled the matter, Kotak Mahindra MF was slapped with a ₹50 lakh fine and a ban on launching fixed maturity plans for six months. The regulator in its investigation report has noted that the rating agency downgraded the two instruments only by one notch when ordinarily such breach of obligations should result in a multi-notch downgrade or default.

Also this about Brickwork,

In a previous order on Brickwork in August 2018, Sebi had found a flagrant conflict of interest. It found that D. Ravi Shankar, founder director at Brickwork, was both involved in rating as well as in approving the fee charged for this service—a practice deemed a complete no-no in the ratings industry. This practice happened in 71 cases involving a rated amount of around ₹86,842 crore. 

Another stunning instance involved the rating of debt instruments issued by Cox and Kings. On 24 June 2019, both CARE and Brickwork reaffirmed their highest rating of A1+ for Cox and Kings’ commercial paper (CP) issue. Brickworks even highlighted high receivables. Both CRAs also gave a ‘Stable’ outlook, which indicates a low possibility of rating change over the medium term. Yet a mere 3 days later, on 27 June 2019, Cox & Kings defaulted on ₹150 crore of payments on CP. It was only after the default that ratings were downgraded by several notches to default.

This about CARE merited cancellation of its license too,

In the case of CARE, some of the conflicts were first highlighted by a July 2019 audit report by Grant Thornton. As per CARE’s shareholding pattern between 2007 and 2013, IL&FS Ltd and ILFS Financial Services (IFIN) were equity shareholders and held a 5-9% stake. During the same period, CARE was rating instruments of IFIN, IL&FS and IL&FS Transportation Networks Ltd. “It appears that the rating agencies were potentially aware of the issues in the IL&FS group. However, the various strategies deployed by the then key officials of IL&FS group and certain favours/gifts provided to rating agency officials suggest the possible reasons for consistent good ratings provided to IL&FS group during the period June 2012 to June 2018," said Grant Thornton in the audit report.

This is all excellent work. It's also worth pondering whether any financial market professional could have had the courage to undertake such actions. So kudos to the SEBI leadership for cracking down on CRAs.