Weekend reading links

1. Scott Galloway has a stunning stat

Amazon generated more ad revenue in 2021 ($31 bn) than the entire newspaper industry did globally ($30 bn)!

2. Martin Sandbu points to an interesting set of facts about investment in infrastructure in G-7 countries - it declined throughout the last two decades, despite the ultra-low interest rates. 

Between 1970 and 1989, the share of gross domestic product devoted to investment by six of the world’s seven biggest economies averaged from 22.6 per cent for the US to 24.8 per cent for Germany. The seventh, Japan, was an outlier with 35 per cent... France and the US have invested nearly two percentage points of GDP less this century than they did in the 1970s and 1980s; Germany and Italy about 4.5 points less; the UK and Japan 6 and 10 percentage points less respectively. These are enormous numbers. The G7 account for about $45tn in annual GDP. Restoring their investment ratios could fill nearly half the global shortfall to the $4tn the International Energy Agency calls for in annual clean technology investment if we are to meet net zero by 2050... In the US, net government investment (after accounting for depreciation of the existing public capital stock) fell by almost two-thirds in the decade to 2014, when it dropped to 0.5 per cent of GDP.

Public investment as a share of GDP fell to slightly more than 0.5% of GDP in US and less than 0.5% of GDP in Europe. 

3. This is not as clear as it appears, but AK Bhattacharya writes that India's corporate tax cuts have achieved the purpose of higher tax revenues realisation. This is a good summary of the trajectory of corporate tax reforms in India,

In 1991, the corporation tax rate was raised from 40 per cent to 45 per cent in Manmohan Singh’s first Budget because of revenue concerns; and in 1994, it was brought back to 40 per cent. The first big reduction came in 1997, when finance minister P Chidambaram brought it down to 35 per cent after abolishing the surcharge as well. But from 2000 onwards, surcharges were back, raising the total tax rate once again to almost 36-38 per cent for the next five years. It was Mr Chidambaram again, who reduced the corporation tax rate to 30 per cent in 2005, although along with the surcharge the actual rate was about 33 per cent... Arun Jaitley’s Budget in 2015-16 promised that the corporation tax rate would be reduced to 25 per cent in a period of four years along with a phase-out of exemptions. The following year, the rate was reduced to 29 per cent (excluding surcharge and cess) for companies with a turnover of less than Rs 5 crore. New manufacturing companies were allowed to pay a tax of only 25 per cent, provided they did not avail themselves of any exemptions.

A year later, Jaitley reduced the tax rate to 25 per cent (excluding surcharge and cess) for all companies with an annual turnover of up to Rs 50 crore, thereby covering almost 96 per cent of Indian companies. In February 2018, Jaitley went a step further by extending the benefit to all companies with an annual turnover of up to Rs 250 crore, covering 99 per cent of all Indian companies. Ms Sitharaman in her first Budget in July 2019 took the next step by extending the 25 per cent tax rate to cover all companies with an annual turnover of up to Rs 400 crore. With that step, almost 99.3 per cent of Indian companies were covered under the lower tax rate. And then followed the tax cut to 22 per cent (plus surcharge and cess) in September 2019.

Its outcomes 

Total corporation tax collections in 2019-20 did decline by about 16 per cent to Rs 5.57 trillion, compared to Rs 6.63 trillion in 2018-19. But the decline was just about Rs 1 trillion and not Rs 1.45 trillion. The tax collection figures for 2020-21 are not relevant because of the Covid impact. The latest provisional unaudited numbers with the Controller General of Accounts show that in 2021-22, corporation tax collections rose to Rs 7.12 trillion, surpassing by a good margin the collections made in 2018-19. In terms of their share in GDP, corporation tax collections in 2021-22 were still at 3 per cent, marginally lower than the 3.5 per cent seen in 2018-19. But it would not be unreasonable to expect corporation tax revenues to breach that ratio soon. The advance tax collections in the first quarter of 2021-22 have continued to show healthy growth. And the dispersion of tax liability spread over a larger number of companies in different income levels, seen in 2019-20, should continue to help overall collections buoyancy.

4. More on the elite capture of the economy. FT reports that BCG ran a summer internship program for the children of its senior executives.

Staff in Boston Consulting Group’s London office have complained about “nepotism” after the children of dozens of top partners flew in from across the world for an exclusive week-long work experience programme. The US-based consultancy ran the programme, consisting of days of workshops, this month for about 30 children of the firm’s managing directors and partners... “They received office tours, dinners and stuff that wouldn’t normally be given to [job] candidates. They basically made it a bit of a holiday for the partners’ kids who came over,” one current BCG employee told the Financial Times. The children were participating in BCG’s “Bruce Henderson Summer Programme”, named after the firm’s founder... Three BCG staff members worked for two months to prepare the programme, work that would cost external clients well more than £1mn, according to the BCG employee.

5. Fascinating book extract highlighting how motor vehicles had to fight with pedestrians to win the battle to have a greater right over road pavements. This was the case till 1920s,

City people saw the car not just as a menace to life and limb, but also as an aggressor upon their time-honored rights to city streets. “The pedestrian,” explained a Brooklyn man, “as an American citizen, naturally resents any intrusion upon his prior constitutional rights.”  ... Readers’ letters to the St. Louis Star express pedestrians’ indignation at motorists’ intrusion upon their rights. One letter, signed “Pedestrian,” complained that “the pedestrian is forced to submit to the tyranny of the automobilist.”  Other letter writers urged pedestrians to organize to defend their claim to the streets. “It might be necessary to organize an antiautomobile league,” wrote one. “The time is ripe for the common people and the pedestrian to organize,” wrote another. “We must all pull together,” wrote a third, and “insist on our rights to use the streets” until the “auto-hogs . . . wake up to the fact that they cannot do as they please and monopolize the streets.” 

Local police tended to blame motorists for pedestrian traffic casualties... Police and judicial authorities recognized pedestrians’ traditional rights to the streets. “The streets of Chicago belong to the city,” one judge explained, “not to the automobilists.”  Some even defended children’s right to the roadway. Instead of urging parents to keep their children out of the streets, a Philadelphia judge attacked motorists for usurping children’s rights to them. He lectured drivers in his courtroom... Juries tended to favor pedestrians as well... The leading city paper in Syracuse, New York, argued that the burden of safety lay properly with motorists... The New York Times claimed in 1920 that pedestrians’ rights to the streets were so extensive that “as a matter of both law and morals they are under no obligation” to exercise “all possible care.” The greater share of responsibility (moral and legal) lay with the motorist: “drivers justly are held to a greater care than pedestrians,” the paper contended.

It was only by 1930, through public debates, technology changes, and legal mandates that the superior right of the motor vehicle over the roads came to be recognised.  

Urban planning thoughts

If one has to identify the biggest policy failings of India's urbanisation, it'll have to arguably be urban planning. The level of awareness, leave aside internalisation, within urban managers and decision makers in urban local governments about the potential of the instruments of urban planning in shaping the urban form, mobilisation of financial resources, and promoting economic growth is shockingly poor. 

For all practical purposes urban planning in India is about purely transactional activities like building plan approvals and city master plan implementation. Very few, if any, chief city planners and municipal commissioners have a comprehensive understanding of the potential of the various instruments of urban planning. Public awareness about urban planning revolves around tales of harassment and corruption.

In this context, one of the most disappointing facts is the lack of imagination about the integration of the instruments of urban planning into the development or redevelopment of transit stations and networks.

The NYT has a report on the redevelopment of Midtown Manhattan in New York that revolves around the iconic Penn Station,

New York State officials on Thursday approved a sweeping redevelopment of Midtown Manhattan that would transform Pennsylvania Station, the busiest transportation hub in North America, from a run-down transit center into a city centerpiece. The eight-member board of Empire State Development, the state’s economic development agency and the group steering the project, unanimously voted in favor. The plan calls for constructing 10 towers around Penn Station and providing an estimated $1.2 billion in tax breaks to developers. The redevelopment would be among the largest real estate projects in United States history: roughly 18 million square feet of mostly office space, up to 1,800 residential units, retail space and a hotel. At the center would be a renovated Penn Station, which sits below Madison Square Garden and served 650,000 riders each weekday before the pandemic. The board’s approval clears the way for an application for federal funding to help pay for upgrading the station, which is expected to cost about $7 billion. New York expects about half of that sum to come from Washington...

The new towers would be among the tallest in New York City, exceeding 1,000 feet in height, though the final dimensions would be decided later. The project requires the demolition of many existing buildings, potentially including a 150-year-old Roman Catholic church, and would reshape the skyline of Manhattan between the Hudson Yards neighborhood to the west and the Empire State Building to the east... The M.T.A. is leading the $7 billion renovation project at the station but New York expects the federal government, Amtrak and New Jersey to contribute most of the money. An agreement the state reached with New York City allows for payments from developers of the 10 towers to cover part of station renovation costs, all of the costs of the pedestrian and street improvements and half of the costs of the new subway entrances and underground concourses. The payments from the developers would derive from office leases, retail sales, apartment rentals and the hotel. That arrangement is part of a complex financial scheme known as payments in lieu of taxes, or PILOTs, that would suspend additional property taxes on the buildings for decades after they are constructed.

See also this, this, this, and this.

I had also blogged here about the King's Cross railway station area redevelopment project and here about the transformative change brought about by the Crossrail project.

The ambition and scale of the redevelopment is staggering. Compare it with the New Delhi or Mumbai railway station redevelopment plans. 

I had blogged here that the biggest problem with the railway stations redevelopment projects in India is that they are conceived and planned as predominantly railway station redevelopment projects instead of being seen as urban renewal projects. The fact that these projects are led by Railway Department and its officials with limited understanding of urban planning, and have limited engagement with and stakes of the local city administrations (beyond the perfunctory memberships in some committees) speaks volumes about its flawed design. 

If these projects are to realise their true potential, the entire redevelopment should be undertaken under the leadership of the local government as a generational project with the objective of transforming the economic prospects of the area around the station. It will have to be preceded by extensive local consultations and public debates, economic growth planning and infrastructure and real estate needs assessment, all of which have to be led by the local government. In fact, the least important stakeholder in the redevelopment would be the Railways Department. 

This is also a teachable example of the problems with experts-driven policy making in complex public issues like urban renewal. An expert like E Sreedharan can be great at a driving pure infrastructure development project but is unlikely to be successful with a civic project. 

On similar lines, as I have blogged here, India's urban metro railways projects are generational opportunities to shape the destiny of cities which too have been lost or frittered away for lack of integration with urban planning. Like the railway stations redevelopment, these too have been seen as primarily infrastructure development projects. Even within the Ministry of Housing and Urban Affairs, these projects are driven by Railways Department officials. These have to change. 

The four (and counting) problems with the Xi Jinping Turn

I have blogged several times arguing that President XI Jinping may be the latest version of China's Bad Emperor problem. 

I can think of at least four critical wrong policy turns driven by him, and will almost indelibly become his legacy. The first three are the roll-back of economic liberalisation and capitalism with Chinese characteristics, peaceful co-existence in its near-abroad giving way to needless aggression by the PLA and its wolf-warrior diplomats, and replacement of the supremacy of the Communist Party with that of the President. I have blogged about it here, here, here, here and here.

This post flags the fourth major wrong-turn, the nature and scale of the Belt and Road Initiative (BRI). The FT has a long read that summarises the challenge,

Since the programme was first proposed in 2013 the value of China-led infrastructure projects and other transactions classified as “Belt and Road” in scores of developing countries had reached $838bn by the end of 2021, according to data collected by the American Enterprise Institute, a Washington-based think-tank. But the loans that finance those projects are now turning bad in record numbers. According to data collected by Rhodium Group, a New York-based research group, the total value of loans from Chinese institutions that had to be renegotiated in 2020 and 2021 surged to $52bn. This was more than three times the $16bn of the previous two years. This sharp deterioration brings the total of Chinese overseas loans to have come under renegotiation since 2001 to $118bn — or about 16 per cent of the total extended, Rhodium estimates. China has had to manage a number of defaults on sensitive overseas loans in recent years but the cumulative impact of the multiple renegotiations that Beijing currently faces amount to the country’s first overseas debt crisis... Many of these loan renegotiations involve write offs, deferred payment schedules or a reduction of interest rates. But as increasing numbers of Belt and Road loans blow up, China has also found itself sucked in to providing “rescue” loans to some governments to prevent their debt distress from morphing into full-blown balance of payments crises.

It's rapidly becoming evident that many of these loans face an insolvency problem.

Bradley Parks, executive director of AidData at the College of William and Mary in the US, says that while the drip feed of rescue loans helps to avert defaults, it does little to resolve underlying financial problems. “I think Beijing is now learning that in some cases the fundamental problem is not liquidity but solvency,” says Parks. Parks says that for almost five years, China’s state financial institutions tried to keep the government of Sri Lanka liquid enough to service its old project debts and to avoid sovereign credit rating downgrades. However, he adds: “Their effort was a spectacular failure. So, the big question that Beijing needs to answer is whether it wants to be in the rescue lending business in the long run.” The transition that Parks alludes to is a critical one. As China has financed roads, railways, ports, airports and a gamut of other infrastructure over the past decade, it has found itself in competition with international development lenders — most notably the World Bank. Now, as its lending shifts to focus more on preventing defaults, it is starting to mirror the role usually fulfilled by the IMF — which provides emergency loans to get countries through economic crises.

The result is also declining interest and falling BRI loans.

The sheer scale of insolvency likely and associated restructuring with haircuts means that China would not only lose financially but also politically. As the example of Sri Lanka shows, the restructuring negotiations process can easily get out of hand. The opaque and bespoke nature of the BRI loans means that any restructuring negotiations will be controversial and acrimonious. Given that countries forced into restructuring will most likely also be facing political instability (as in Sri Lanka), Beijing will dissipate the political capital accumulated in the first place from these loans. Going forward, it's hard to see anything other than downside.

The history of China over the last forty years highlights two central principles - experimentation with economic policies and peaceful co-existence with the rest of the world. They are respectively encapsulated in Deng's maxims of "crossing the river by feeling the stones" and "hide your strength, bide your time" (tao guang yang hui).

In case of the former, President Xi has sought to concentrate powers and centralise the economy by feeling the stones, whereas with the latter he has decided that biding is over and it's now time to demonstrate China's strength. Both have come at prohibitive costs to China, and these costs will only increase. 

Weekend reading links

1. Long read in FT on the issue of weight-loss drugs, especially Wegovy the new drug by Novo Nordisk. The self-administered weekly injection is part of the increasing belief that obesity is a disease rather than resulting from unhealthy habits and for the seriously overweight medical treatment may be necessary.

The article points to the long history of failures with weight loss drugs,

Despite the vast need, many major pharmaceutical companies have held back from developing weight-loss drugs, in part because the category is marred by a long history of quackery and safety scares. From the 1930s to the 1960s, the industry poured money into diet pills based on amphetamines. These eventually fell out of favour because they were highly addictive and had harmful side effects. In the 1990s, fen-phen — a combination of fenfluramine and phentermine — became so popular that weight-loss clinics sprung up across the US just to prescribe it, even though some patients on the drug experienced manic episodes. It was later taken off the market after a study showed up to a third of patients could suffer from heart valve defects. As recently as 2020, US regulators forced the withdrawal of weight-loss drug Belviq because of concerns it increased the risk of cancer. For the most desperate, surgery has become popular, though it is expensive and comes with its own risks and restrictions.

2. George Bass, a security guard in a university, has a brilliant essay chronicling life in times of rising inflation.

In my job keeping people and property safe on a university campus, I earn £10.71 per hour. Working 16 12-hour shifts a month bags me an average £1,400, after tax. I’ve always been comfortable earning a modest wage. Since I began working at the age of 15, I’ve picked jobs based on two guiding principles: I don’t want to have to tell lies all day, and I don’t want to get work calls beyond the car park. In my various roles over the past 25 years, working on a gun range, in a lead factory, as a labourer and shifting boxes, those two rules have never been broken. Getting a job in security taught me a third: once the uniform’s on, you need to help people. This year, the drumbeat of news about inflation has made me increasingly anxious.

The essay is a great example of how exceptional talent can remain hidden in all of us. Some, and only some, realise it and become rich and famous (in varying degrees), whereas it remains latent in the lives of most others. And the reason for the talent getting expressed in most cases is either the ovarian lottery of birth circumstances or plain good luck. 

3. The tumult in financial markets have hit emerging market bonds very hard. It's estimated than $52 billion has already been pulled out from EM bonds this year, with devastating consequences on EM bond yields.

EM bonds are having their worst year on record.

4. As it pulls ahead in mass manufacturing of 5 nm chips, TSMC's lead in the semiconductor chip business increases.

5. The age of ultra-loose monetary policy is being followed by a period of frenetic tightening,

In the three months to June, 62 policy rate increases of at least 50 basis points were made by the 55 central banks tracked by the Financial Times. Another 17 big increases of 50 basis points or more have been made in July so far, marking the biggest number of large rate moves at any time since the turn of the millennium and eclipsing the most recent global monetary tightening cycle, which was in the run-up to the global financial crisis. “We’ve seen this pivot point in the market where 50 is the new 25,” said Jane Foley, head of foreign exchange strategy at Rabobank.

 

This demonstrated collective resolve is an important point that can help anchor inflation expectations. 

6. Pratik Datta writes about the latest example of judicial activism which threatens the future of the Insolvency and Bankruptcy Code.

The Supreme Court recently passed an important judgment in Vidarbha Industries Power Ltd. v. Axis Bank. It held that the National Company Law Tribunal (NCLT) cannot admit an insolvency application filed by a financial creditor merely because a financial debt exists and the corporate debtor has defaulted in its repayment. Instead, the NCLT must consider any additional grounds that the corporate debtor may raise against such admission... The balance-sheet test is one method for determining insolvency at the point of trigger. This test, however, is vulnerable to the quality of accounting standards. That’s why the Bankruptcy Law Reforms Committee did not favour this test in the Indian context. Instead, it recommended that a filing creditor must only provide a record of the liability (debt), and evidence of default on payments by the corporate debtor. This twin-test was expected to provide a clear and objective trigger for insolvency resolution. The hope was this would minimise litigation at admission stage, enabling quicker resolution of distressed businesses. The Supreme Court’s latest ruling is likely to radically alter these expectations. Even if the NCLT is satisfied that a financial debt exists and that the corporate debtor has defaulted, it may not admit the case for resolution if the corporate debtor resists admission on any other grounds. Corporate debtors are likely to use this precedent to the fullest to resist admission into IBC. The likely outcome would be more litigation and delay at the admission stage, enhancing the risks of value destruction in the underlying distressed business. Unless the NCLT consciously constrains the use of its own discretion at the admission stage, the IBC may well end up like the SICA. 

7. The rising dependence on imported medical devices, in particular from China.

The problem is the competitiveness with Chinese manufacturers. The pandemic boost has since subsided and makers are struggling to compete with the Chinese in a normal competitive market.

8. FT has a long read on the enduring high risk appetite among young investors in the US. It has a graphic which points out that only half Americans born in 1984 were likely to out-earn their parents at 30.

And this sums it all on high risk investing

Gary Stevenson, a 35-year-old former trader and financial education campaigner from east London, is one: “My dad never went to university. He worked at the post office for 35 years and could raise three kids and pay off [a mortgage] . . . he has a comfortable retirement,” he says. “That is off the table for most young people now. It’s created a bit of a panic.” “If you can’t do what your dad or grandad did . . . you have to come up with a better plan,” he adds. At some point, risky bets starts to look like the rational choice: “One way, you see a zero per cent chance of success. But if you take on insane risk . . . at least you have a chance.”... “If you said, ‘My dad spends all day gambling,’ [I’d] say, ‘Oh man I’m so sorry for your family’,” he says. But “if someone says, ‘My dad spends all day FX trading’, you think he’s the Wolf of Wall Street . . . It’s not gambling, it’s investing — and investing is how you get rich.”

9. Esther Bintliff has a long read in FT assessing the value of feedback in improving performance. She examines the research and literature on the topic and leaves you wondering whether there is any scientific basis to the claim that negative feedback when given appropriately can lead people to change habits and behaviours and improve their performance.

The article points to a 1996 meta-study of feedback literature by two academic researchers Avraham Kluger and Angelo De Nisi,

The two reviewed hundreds of feedback experiments going back to 1905. What they found was explosive. In 38 per cent of cases, feedback not only did not improve performance, it actively made it worse. Even positive feedback could backfire... Kluger came to believe that as a performance management tool, it is so flawed, so risky and so unpredictable, that it is only worth using in limited circumstances, such as when safety rules must be enforced. If a construction worker keeps walking around a site without a helmet, negative feedback is vital, Kluger acknowledges. The most effective way to give it is with great clarity about potential consequences. The worker should be told that the next time they go without a helmet, he or she will be fired. But in many other types of work, the formula for good feedback includes too many variables: the personality of the recipient, their motivations, whether they believe they are capable of implementing change, the abilities of the manager...

Instead of managers giving top-down feedback, he argues they should spend more time listening to their direct reports. In the process of talking in depth about their work, the subordinate will often recognise issues and decide to correct them on their own. Based on this theory, Kluger developed something he calls the “feed-forward interview” as an alternative, or prologue, to a performance review. He offers to give me a demo... Much of how we respond to feedback is driven by the nature of our relationship with the person giving it. This is why Kluger believes it’s useless to focus on the recipient of feedback alone. The outcome will always depend on the “dyad” — the sociological term for two people in a particular relationship — and what transpires between them.

The time, effort, and skill required to do a good feed-forward interview is too rare as to make the likelihood of a feedback being effective very rare.

10. Even as the Sri Lankan crisis occupies attention, the situation in Pakistan deserves greater attention as things worsened this week,

The Pakistani rupee’s 7.6 per cent tumble to Rs228 to the dollar marked the latest setback for the currency, which has fallen sharply this year. It marked the rupee’s sharpest weekly drop since October 1998. The latest slide reflected mounting concerns that a $1.2bn loan disbursement from the IMF agreed last week might not be enough to avert a balance of payments crisis. Pakistan’s bonds have been among the worst performers in emerging markets this year... Fitch Ratings this week downgraded its country outlook to negative from stable, noting what it called a “significant deterioration in Pakistan’s external liquidity position and financing conditions” this year. The rating agency said the central bank’s forex reserves had declined to about $10bn by June 2022, down from $16bn a year previously and equivalent to just over one month’s worth of current external payments. Pakistan’s central bank raised its main policy interest rate 125 basis points to 15 per cent on July 7 in an effort to stem demand for foreign currencies and reduce inflation.

Some thoughts on the energy and other transitions

There are several shifts underway across the economy. The most salient are the shifts from thermal to renewable energies and from internal combustion engines to electric vehicles. Then there are others like physical to digital in specific realms from currencies to meetings, and from informal to formal across the economy. These are momentous shifts, with transformative consequences. Managing them carefully is important.

The emerging conventional wisdom is that these shifts are more likely sudden disruptions than gradual transitions. This world view is in keeping with the dominant theory of change in the scientific-technological age - innovation >> disruption >> transformation. It's become internalised that change is disruptive. 

Accordingly, there is a need to immediately and urgently prioritise all investments and focus towards these emerging technologies and away from those being replaced. The market, it's believed, will weave its magic and show the path towards the shift which minimises the pain and suffering associated with the shift. 

There are at least three issues with these views. 

One, there is no compelling reason at all to suggest that the shift would be abrupt and not a long transition. History of such transitions, from industrial revolution to automobiles and computers, show that they take time, and very long times. These are very slow and gradual transitions than sudden disruptions. 

Two, the legacy industry is too large and with massive capitalised investments as to be accommodated only through the dynamics of market forces. The oil sector alone is an over $2 trillion industry with forward and backward linkages which permeate the entire economy. The thermal power generation industry is even larger and more tightly integrated with economic activities at all levels. Transitioning out of these will involve recalibrations and adjustments along their supply and value chains, running into countless interfaces and sub-sectors. These will require multiple policy changes and painstaking co-ordination across stakeholders, which will hopefully trigger dynamics that can move the private sector. 

Three, there are costs associated with any change, transition or disruption, and someone has to bear those costs. Like with all else, costs should be borne by those who are best placed to bear it. 

To put just the costs in perspective, as the graphic below shows, the vast majority of global coal plants are relatively young. Mothballing them will involve massive costs. It's inconceivable that investors will be able to bear any large share of these without seriously disrupting and bringing down important segments in the financial market. Governments will have to pick up the tab. But are fiscally constrained governments in any position to bear them?

Clean energy transitions will impose steep costs on consumers too. Since consumers would be unwilling to bear such burdens on their existing energy bills, and producers would be unwilling to assume risks and invest without higher returns, it's left for governments to step in and assume the incremental costs required to catalyse markets. But the ambitious pace and scale of transition that commentators call for demand fiscal expenditures that are way beyond fiscally strapped governments. In fact, even in their committed expenditures, like during the pandemic stimulus, the G20 countries allocated only 6% of the $14 trillion stimulus on areas that would cut emissions. 

While immediate triggers like pandemic, Nordstream 2 bargaining, and Ukraine invasion explain the sharp volatility in natural gas prices, I would argue that there are systemic trends responsible for this situation. An excessively optimistic energy transition regime has squeezed investors out of fossil fuels, cut down on exploration and downstream investments (LNG terminals in Europe), forced the mothballing of existing storage and generation sites. Ecosystem changes have a natural pace. Complex transitions like in energy, take time, perhaps even decades. Forcing them through in a few years can rebound. I don't know for sure, but I have a feeling, this may be the problem. And it's going to get worse and show up elsewhere over the coming years. And it's going to show up in other fossil fuels too.

For a start, amidst all the hype about disruptive transition, consider the supply-side reality

According to the International Energy Agency’s net zero pathway, coal use must fall by half this decade in order to stay on track. Meanwhile, electricity generation needs to increase 40 per cent in the same period, according to that scenario, in which emissions fall to zero by 2050 and global warming stays below 1.5C by the end of the century. Doing both at the same time — increasing electricity output while cutting coal — will require huge growth in renewables, especially wind and solar, paired with energy storage.

The shortfall predicted is staggering. And 80% of world energy needs are still being met by fossil fuels. This map tracks all the coal-fired power plants. And it shows no signs of abating and reversing. Sample this,

In the US, coal-fired power generation was higher in 2021, under President Joe Biden, than it was in 2019 under then president Donald Trump, who positioned himself as the would-be saviour of America’s coal industry. In Europe, coal power rose 18 per cent in 2021, its first increase in almost a decade. The global surge in demand has delivered windfall profits for companies such as Glencore, Whitehaven Coal and Peabody Energy, the once bankrupt Wyoming group now planning to expand production after its most profitable quarter ever.

And this

In its annual coal report, the Paris-based group said global power generation from coal was set to jump by 9 per cent in 2021 to an all-time high of 10,350 terawatt-hours, after falling in 2019 and 2020... Overall coal demand — including its use in steelmaking, cement and other industrial activities — is forecast by the IEA to grow by 6 per cent in 2021 to just over 8bn tonnes. That puts demand on course to a new all-time high as soon as 2022 and remain at that level for the following two years, the report said.

Notwithstanding talk about rapid transition, net coal capacity addition, while declining, continues to be high and significant. 

During the pandemic too gas shortages caused large shifts in China towards coal, forcing up prices.Now the Ukraine crisis appears certain to end up forcing countries to shift away from natural gas to burning coal for power generation. 

As banks, insurers and shipping companies shun Russia, coal consumers in Europe and Asia are now scouring the market for alternative sources of supply and pushing up prices, which last week hit more than $400 a tonne, from $82 a year ago. At those prices, 2022 promises to be another year of bumper profits for the industry. Russia accounts for about 30 per cent of Europe’s imports of thermal coal, which is burnt in power stations to generate electricity.

While it cannot be denied that coal price rises have been due to supply constraints and due to reduction of investments in recent years, it may be an exaggeration that it's a "dead cat bounce".

Then there is the greenwashing and subterfuge associated with many clean energy claims. Sample this about Glencore

Glencore has pledged to cap its coal production at 150m tonnes a year — but that figure will still allow room to increase output. The company produced about 100m tonnes of coal last year and will mine about 120m tonnes this year following a deal to buy out partners in a Colombian mine.

A narrative has taken ground about a rapid energy transition. Mining and oil and gas exploration have become stigmatised even in developing countries. Important decision  makers and influential opinion makers have come under the thrall of this narrative. This narrative demonises fossil fuels, forces unrealistic and improbable transition timelines, and scares investors away. Given the size of the market, the results of actions prompted by this narrative should have been obvious.

There are at least two problems with such forced supply compression. One, it assumes demand shifts to accommodate the supply squeeze. However, in reality, demand continues to grow or at least not decline. The result is an inevitable upward pressure on prices. Second, it overlooks the large spectrum of unexpected weather, domestic policy shifts, civil conflicts, geo-politics, technology etc related shocks which end up on and off constricting supply in varying quantities. This too ends up boosting prices. 

Sample this from an October 2018 FT report,

Oil and gas companies need to increase annual investment by 20 per cent or face a global supply crunch from 2025, a leading consultancy has warned. An analysis by Wood Mackenzie found that the current industry recovery has been more gradual than in previous cycles, with a dearth of funds being pumped into new production. This could lead to a supply gap from the middle of next decade, pushing prices upward. It could also put increased pressure on companies’ growth targets, triggering increased merger and acquisition activity in the coming years...

Development spending rose 2 per cent in 2017 and is expected to rise 5 per cent in 2018. Wood Mackenzie predicts this will increase from a low of $460bn in 2016 to around $500bn in the early-2020s — well below the peak of $750bn in 2014. But it would need to hit annual levels of around $600bn to meet demand for oil and gas over the coming decade, according to the consultancy. Investment is likely to remain low in the short term, however, with companies taking a conservative approach to new projects, preferring smaller scale investments with quicker returns to larger, more expensive ones. They are also under pressure to return money to shareholders through dividends and share buybacks.

The recent memory of losses from massive shale investments too have not helped,

A decade of debt-fuelled drilling and supply growth prompted a backlash from Wall Street, which in recent years has demanded oil companies cut spending on new crude production and use cash to pay dividends and reduce debt. The strategy has improved operators’ balance sheets, but oil production growth has been tepid. A jump in post-pandemic demand, which has set new records, had resulted in a surge in prices even before the Ukraine crisis... The International Energy Agency last year said that in order to reach net zero emissions by 2050, energy companies needed to halt all new oil and gas exploration projects. But executives in Houston said this fails to account for consumption in the near term. “Last year . . . the industry spent only $350bn on upstream oil and gas. It is a figure compatible with a net zero scenario,” said Patrick Pouyanné, chief executive of French supermajor TotalEnergies. “Unfortunately, the demand is going up so it’s not compatible with demand. And now the price is going up — that is the reality of our planet.”

A BCG Report from 2020 provides some numbers to oil investments. It argues that premature "peak investment" in oil and gas would result in a crisis.

It points to an important factor

We estimate that every dollar of capex that is cut today will have twice as powerful an effect in terms of reducing activity than cuts made following the 2014 fall in prices had. Starting in 2014, oil and gas companies cut capex for two consecutive years. At the same time, service sector companies reduced their costs sharply, which helped to support industry activity. This time around, suppliers have less scope to do that. As a result, the recovery in investments is likely to take longer than it did in the wake of the 2014 price drop.

It points out that such investment compression is a recipe for price volatility. 

 

And it poses the greatest long-term risk to the oil and gas industry.

The report concludes that the industry investment will have to rise over the coming three years by at least 25% yearly from 2020 levels to stave off a crisis.

Besides, such investment compression creates its set of distortions. As this NYT article writes, even as private investors have been shying away from oil and gas, government companies in the Middle East, Latin America, and North Africa have been increasing their investments. Its possible outcome,

State-owned oil companies in the Middle East, North Africa and Latin America are taking advantage of the cutbacks by investor-owned oil companies by cranking up their production. This massive shift could reverse a decade-long trend of rising domestic oil and gas production that turned the United States into a net exporter of oil, gasoline, natural gas and other petroleum products, and make America more dependent on the Organization of the Petroleum Exporting Countries, authoritarian leaders and politically unstable countries... Saudi Aramco, the world’s leading oil producer, has announced that it plans to increase oil production capacity by at least a million barrels a day, to 13 million, by the 2030s. Aramco increased its exploration and production investments by $8 billion this year, to $35 billion... State-owned oil companies in Kuwait, the United Arab Emirates, Iraq, Libya, Argentina, Colombia and Brazil are also planning to increase production... The global oil market share of the 23 nations that belong to OPEC Plus, a group dominated by state oil companies in OPEC and allied countries like Russia and Mexico, will grow to 75 percent from 55 percent in 2040, according to Michael C. Lynch, president of Strategic Energy and Economic Research in Amherst, Mass., who is an occasional adviser to OPEC...

In recent months, Qatar Energy invested in several African offshore fields while the Romanian national gas company bought an offshore production block from Exxon Mobil... Kuwait announced last month that it planned to invest more than $6 billion in exploration over the next five years to increase production to four million barrels a day, from 2.4 million now. This month, the United Arab Emirates, a major OPEC member that produces four million barrels of oil a day, became the first Persian Gulf state to pledge to a net zero carbon emissions target by 2050. But just last year ADNOC, the U.A.E.’s national oil company, announced it was investing $122 billion in new oil and gas projects.

Similar logic and facts apply to the other technology transitions. Human fascination for new things and the misleading and over-hyped marketing by commercial interests should not blind us to the reality about these transitions. If we do not remain cognisant about the reality, we're likely to end up not only paying very high costs in the short and medium term but also make the transition itself more difficult and costlier. 

The challenge of predicting future trends

Arguably the most important discussion point in the world economy today is on the future trajectory of inflation. What holds for inflation in the coming months and couple of years? Will inflation expectations break out leading to higher wage demands and price pass throughs, and cement an extended period of high inflation? Will the central banks react excessively to the inflation signals, thereby forcing the economy into a long recession? 

Brad De Long has a very good article examining inflation in the US. First he compares the monetary policy response and macroeconomic outcomes post-GFC and today

Two and a half years after the start of the financial crisis in 2007, America’s unemployment rate was kissing 10%, the Federal Reserve realised that it was out of firepower and the Obama administration had just thrown away its ability to help by promising to veto spending and tax bills that were insufficiently austere. After that moment it would take six years for America’s economy to approach full employment. The impact of deficient employment meant that output was $7trn lower in 2013 than it would have been otherwise... We have avoided all that this time around. Relative to the Fed presided over by Ben Bernanke between 2006 and 2014, Mr Powell’s team are public benefactors to the residents of America to the tune of $20trn, if you consider that there are more jobs and fewer idle factories now and in the future because of their actions. We have an uptick in inflation partly because the Fed—alongside Congress and the presidency—responded far more aggressively to the pandemic-induced recession than to the global financial crisis. A world in which the economy recovers so quickly that inflation emerges is better than one in which recovery drags on painfully for years.

He then examines the five or six previous episodes of inflation in the US over the last century or so and feels that the current one is similar to the second and third bouts in 1947 and 1951. On both occasions, well within two years supply shifted to match demand and the inflation receded without much monetary policy firepower. Also in both cases, neither workers nor producers expected inflation to stay high enough to break anchor and demand higher wages or pass on higher prices. 

De Long writes,

In my view, the second and third bouts of inflation, in 1947 and 1951, are the right models. That is because the long-term inflation expectations implicit in the bond market are still trading at their normal “in-the-long-run-inflation-will-be-about-2.5%” range. Bond traders appear to expect a little extra inflation over the next couple of years, but after that a return to what has become considered normal. Unless workers and managers see more inflation in the future than bond traders—something that seems unlikely to me—they have no warrant for pushing for high wage increases or thinking that they can get away with price increases ahead of a continuing inflation wave. So there is considerable hope (though hope is not confidence) for a soft landing.

He also qualifies his opinion with the risks of a hard landing from either over-reaction by Fed (excessive tightening) or inflation getting unanchored (and reshaping expectations). 

In my own evolving opinion, it's almost impossible to predict the future on such issues (like inflation) with any reasonable degree of confidence. There are too many factors at play that come in the way of even the best human minds to exercise good judgement. 

For every compelling view on the ongoing inflation by a reputed financial market participant or observer there is an equally compelling different (and even opposite) view by another equally reputed commentator. I struggle to choose between Larry Summers and Brad De Long. As a distant observer of the financial market, these views make me oscillate between the different interpretations. But over time and experience, I've come to start embracing in a very small way what Keats calls "negative capabilities". 

Let me explain the challenge. 

The most knowledgeable of financial market participants (with both technical and practical experience) suffer from two biases that cloud their judgment. One, even the most practical and grounded experts suffer from a technical bias which blisndpots them to (or makes them discount) the role of non-technical and idiosyncratic factors. For example, it required the unpredictable twin shocks of the pandemic and Russia-Ukraine war (and not any theoretical climaxes) to bring an end to the more than a decade long period of monetary accommodation and financial market boom, and perhaps even reshape the next generation's views on risk and returns. Morgan Housel has several posts on this theme.

Second, even the most experienced investors have only seen so much, blinding them to the "long-view of history". In fact, even those non-historians who claim to take the long-view of history are ill-equipped to comprehend historical details and nuances and get captured by the logic of simplified narratives. As I blogged earlier here, Peter Turchin, Yuval Noah Harari and Jared Diamond are good examples of superficial inductive historical narrative artists. I'll add Neil Howe and William Strauss to that list. All these people occupy primarily the space of public opinion makers and are less of scientific researchers. Their incentives and works are shaped accordingly. 

The best professional historians are equipped to take a long-view of history, but suffer from an inadequate comprehension of the technical aspects of the market as well as its practical realities. 

This leaves us with having to find people who combine the attributes in the best among financial market participants and historians, a near null set. 

Besides, good judgement of any kind, and especially on such complex issues, require certain human attitudes and attributes - receptiveness to contrasting views, non-ideological, not being strong opinionated, iterative opinion formation etc.

So you need super-human qualities to be able to exercise good judgement. The Thomas Schelling kind of polymath.  

Alternatively, and this is a view I am increasingly inclined to, it may be that people with some inter-disciplinary knowledge but imbued with the general attributes of open-mindedness mentioned above may be better placed to exercise good judgement. They are generally the wise people. This is also the view that emerges from the likes of Philip Tetlock who have researched the area of human capabilities in predictions. 

In the circumstances, most of what passes off as good judgement even among the most experienced market participants is, at best, the slightly better among several deeply flawed judgements. 

These flawed judgements are accepted as good or bad by audiences depending on whether it reinforces or strengthens their own entrenched or nascent priors. In this respect what is often considered as conventional wisdom or dominant view owes its rise to the reinforcement of the dominant set of priors. 

Weekend reading links

1. High and rising attrition rates among India IT majors.

2. Two very interesting stories about economic clusters in Rajasthan. One is about the already established cluster of coaching institutes at Kota. The article explains the cut-throat competition among the institutes to poach star teachers with exorbitant salaries (and students with attractive offers). The competition has become more intense and dirty with the entry of VC-backed firms like Unacademy and Physicswallah, who have no compunction to poach teachers with annual salaries which often touch several crores.

The article also highlights the risks faced by the original entrepreneurs (in this case Bansal Classes and Allen Career Institute) as the industry matures and competition intensifies. 

Another article is about the emerging industrial cluster of Japanese companies at Neemrana, which straddles the national highway between Jaipur and Delhi. It's reported than over 50 Japanese companies have invested over Rs 6000 Cr in the zone. The cluster has been catalysed by the Rajasthan State Industrial Development and Investment Corporation (RIICO), which apart from developing industrial parks with infrastructure also acts as a financial institution providing loans to large, medium, and small industries. 

3. More on the reality of the small and undeveloped nature of the Indian markets, from the market for business software. The Ken has an article on Tally, the accounting software used by most small and medium businesses in India, to inform why business software companies will struggle to survive on Indian demand. 

Depending on how you measure it, Tally has a market share of 80%. Some reports suggest that that number may be as high as 90%. I can’t think of another product that dominates a category like Tally does, apart from maybe Google in search. And this is an enterprise product which is essential for every single small, medium, and large enterprise across the breadth of India... By all rights, Tally should be an outrageously successful company, making money hand over fist by selling software that every business needs to users who love it in a market that it has a stranglehold on at an obscene profit margin. As a company, it should be worth billions of dollars. In March 2020, Tally reported an annual revenue of around Rs 500 crore. That’s a little less than US$60 million, which is what Netflix paid Dave Chappelle for two of his stand-up specials... 

It took the long, hard road to get to where it is today. It was started in the late 80s, and it’s taken them thirty five years to get here. We keep hearing a lot of stories about the emergence of Indian software-as-a-service (SaaS) companies. Freshworks. Zoho. Chargebee. They are all admirable examples, but what all those stories neglect to mention is that Indian SaaS companies make almost nothing from India. Take Zoho, for example. Last year, it recorded a revenue of close to Rs 4,500 crore (US$570 million). Less than 5% of that was booked from India. There’s a general theory in software and the internet that once you lock-in the users, the money will follow. Acquire now. Engage well. Monetise later... Tally shows us that you can do all of the above, and you still can’t make money.

This should be a cautionary tale for the startups who are pursuing SME business services market. 

4. JP Morgan's Karen Ward sees silver lining in the inflation gloom,

“Good inflation” is a reflection of healthy demand, enough for companies to have a degree of pricing power and confidence to invest for expansion. Then there is “bad inflation” — a cost shock which serves as a tax on growth. While we are experiencing “bad inflation” now, I believe this cost shock should pass within a year. Moreover, inflation will probably settle at a modestly higher rate of good inflation since the cost shock will serve as a catalyst for more robust demand and healthier nominal growth in the future as it encourages households, governments and businesses to invest in labour and energy-saving technologies. Contrary to popular opinion, the new inflation regime should eventually prove to be a good thing for investors. Stronger nominal demand will mean stronger earnings and sustainably higher interest rates.

5. NYT article on the ring-side view (and associated influence) of Washington politics enjoyed by young interns and staff officials to Congressmen and senior government officials, including the White House. 

This is a universal trend. There are at least two pathways to influence. One, the physical presence beside busy and important officials makes these people gatekeepers to them, besides being observers to important events. Two, given that their bosses are too over-burdened and generally grappling with multiple problems, logically appealing (irrespective of their merits) suggestions offered by these non-threatening smart young interns generate natural interest.  

6. Peloton, which makes exercise bikes and treadmills and offers an App to manage your exercise routines, had become a big hit during the pandemic as it helped bring the gyms to people's homes. However, its fortunes have crashed after the pandemic eased - sales have fallen, share prices crashed nearly 75%, and it has laid off 20% of its employees. 

Now comes news that it'll stop making bikes and treadmills at its factories and outsource all its manufacturing. Rexon Industrial, a Taiwanese company that already produces some of its bikes and treadmills will become the primary manufacturer. Peloton is an illustration of the problem with restoring and bringing back manufacturing to the United States. 

7. Good long read about the Conservas Pinhais et Cia in Matosinhos, a fish-canning factory just a few miles from the center of Porto, which has been making the Nuri brand of canned sardines since 1920.

8. The era of quantitative tightening (QT) is on us. The US Fed began reversal of its bond buying program from early June and the balance sheet of major central banks are expected to shrink by $4 trillion by end of next year. 

The era of central bank asset-buying began in 2001, when the Bank of Japan instituted the policy in a bid to stimulate the country’s languishing economy while benchmark rates were already close to zero. From the fringes of the monetary policy toolkit, the practice moved to the mainstream in 2008, when the Fed, BoE and later the ECB established their own bond-buying programmes in response to the crisis that engulfed the global financial system. Through large-scale purchases of government securities, the central banks helped to push up the amount of reserves sloshing around the financial system. The aim was to encourage banks to increase their lending to households and businesses to a degree that would encourage spending, investments and other activities to help ignite growth...

Over the course of last two years, the Fed snapped up some $3.3tn in US government bonds and $1.3tn in agency mortgage-backed securities. As of March, that left the US central bank owning a quarter of all outstanding Treasury debt and a third of agency MBS. The ECB and BoE each own just shy of 40 per cent of their government bonds, while the Bank of Japan, which is unique in having no intention of stopping its purchases, already owns nearly half of Tokyo’s outstanding government debt. As well as expanding the monetary base, official asset purchases also crowd commercial investors out of the world’s safest assets, and force them to support riskier parts of the economy that might otherwise struggle.

For a generation of investors and market participants who have been used to only cheap and plentiful capital, this is a new era. And nobody can predict the consequences of such a massive liquidity drain out. The hope is that the markets are able to adjust to the QT and there is a soft landing with the reversal. 

The scale of reversal is large - by September, Fed is seeking to reach $95 bn per month in scaling down its portfolio ($60 bn Treasuries and $35 bn agency MBS). Different models predict widely varying levels of impact in terms of effective hike in interest rates. 

9. The Economist effective describes Xi Jinping as China's latest Bad Emperor.

There is no one right thing in development - in-house Vs outsource

There are several phenomenon in the world whose universe of possibilities involve either multiple equilibriums or take U or inverse U-shapes. All such phenomenon manifest in multiple forms depending on time and/or location and/or other contextual factors. Let's call these multi-form phenomenon. In fact, most phenomena in the world manifest this way.     

The multi-form phenomena teaches us a few things:

1. There is no unique model to explain the phenomena. There are several models. We need to select the model which is appropriate for the specific context and time. 

2. It's not possible to ex-ante claim with any degree of conviction that we'll be successful, even if the implementation is done well. 

3. When all's said and done, there is an inordinately huge element of fortune associated with many phenomena we see around us. We need to do all the things that's required to make it happen, and then hope that things will fall into place and the desired outcomes will manifest. That's all can be done. 

I'll henceforth occasionally document such phenomenon I come across in the public policy space. This post will focus on the idea of outsourcing activities in engineering departments. 

A conventional wisdom in economics and management thinking is that of core-competence and transaction costs. It follows that we should identify activities which can/should be done in-house and those which can be outsourced. The New Public Management school of public policy advocate the importance of attributes and factors like core-competence, transaction costs, efficiency, value for money, delegation, and so on. 

Accordingly, like elsewhere, outsourcing of tasks or activities has become common in governments too. Three questions follow. One, can this task be outsourced? Two, whom can it be outsourced to? Three, how should the contract be managed?

In this context, take the example of an engineering work. The chain of activities involve the following - administrative sanction, estimates or detailed project report (DPR) preparation, technical sanction, tender process,  work award, contract management, work recording and check measurements, quality audit, work monitoring, renegotiations or time extensions or cost-escalations, bill payments, and work closure. In case of large works, most of these activities are outsourced to project management consultants and third party quality control agencies. 

In theory, it's unexceptionable that at least certain activities like estimates or DPR preparation, work recording and check measurements, quality audit be outsourced, just as certain others like administrative and technical sanctions, work award, monitoring, renegotiations, and bill payments be done in-house. But, as I blogged earlier, reality eats theory and logic for breakfast.

Take the case of work recording and check measurements. Consider the context of a bitumen road being laid in an Indian village by a capacity constrained and often corrupt Local Government Engineering Department. It's a reality that most often (in many states) the work recording is done by the agent of the contractor or a contractually employed work inspector, and a complicit and/or over-burdened Assistant Engineer (the lowest functionary) is merely affixing the signature. The sample check measurements by superiors to the AE is either small or absent. 

In the circumstances, there is a logical attraction to argue for dispensing with recording and check measurements by officials and outsource it. After all, recording and check measurements in case of large projects and by better managed public organisations like the National Highways Authority of India (NHAI) are outsourced. Why not simply formalise what's anyways the reality?

I'll hesitate for at least five reasons. One, the large numbers and small size of these works, coupled with weak institutional oversight mechanisms, mean that the likelihood of fraud and corruption is much higher than with large and fewer works managed by the likes of NHAI. Two, the context and political economy of these works is more complex and more vulnerable to capture by rent-seeking interests. Three, outsourced recording and check measurements are effective when coupled with strong complementary safeguards like strong quality audits, which are likely to be even less rigorous in these works. Four, even in a system where deviation is the norm, the mere existence of a form of recording and check measurement acts as a moral suasion and deterrent to ensure that the entire process is not captured. Five, the presence of a formal requirement also strengthens those committed among engineering officials at various levels in forcing their sub-ordinates to necessarily record and check measure their works. 

So, we are faced with the real possibility that, in case of scattered works and where weaknesses in state capacity really show up, the logically appealing idea of outsourcing could end up worsening things. The legal formality of an AE mandated to do recording and check-recording by superior others may be the basic minimum requirement to ensure that atleast some good engineers insist on the same and thereby ensure that the whole thing does not fall apart.

But, it's possible that in some cases (say, a Department or a city or even a State) the outsourcing approach could work. For example, a Department which initiates outsourcing of an activity and is lucky to have a succession of good leaders with commitment to making the reform work. Even here, it would require dollops of plain good luck for things to miraculously fall into place and the reform to stick. 

Who knows? But a teachable example of how there is no one right thing in public management and how judgement plays an important part in decision-making, and judgement, by its very nature, can be flawed, and therefore the need for constant revisions of priors.

Do we outsource and hope that all those things will hopefully fall into place, or retain in-house since the contextual constraints are too many to make it unlikely that the reform will work? This is a tough judgement call, and it's purely an exercise in judgement and hardly an outcome of theoretical and logical contemplation.   

Weekend reading links

1. Residential real estate prices in major Indian cities have gone nowhere since 2014. Except Hyderabad.

Some interesting facts about housing prices

According to real estate consultancy Knight Frank India, for every 100 basis points increase in interest rates, the EMI (equated monthly installment) on home loans goes up by 7.76%, while the affordability index (EMI/household income) reduces by 2.23%. Not to mention, construction costs have also shot up with the high inflation... the annualised rise in weighted average prices of builder projects in the Mumbai region was about 17% in the 2009 to 2014 period. Between 2014 and 2022, however, it is a negative 1%.

This stagnation has had a positive effect on housing affordability, defined in terms of ratio of EMI to household income, across Indian cities

The rising interest rates threaten to reverse the affordability trend.

2. Debashis Basu points to serious corporate governance issues in India's newly listed startup companies,

A few days ago, online food delivery platform Zomato acquired quick-commerce grocery delivery platform Blinkit (earlier Grofers) for Rs 4,447 crore (about $568 million) in an all-stock deal. The deal has raised a lot of eyebrows. For one, Zomato has just about Rs 1,250 crore on its balance sheet and is badly haemorrhaging, losing Rs 750 crore of cash from its operations in 2021-22 alone. Second, the acquisition comes at a time when Zomato’s own future is cloudy. Last year, it reported a loss of almost Rs 1,100 crore and under the current business model, there is no chance that it will make a profit soon. If so, its own existence is in doubt unless it can find new cash to carry on. Third, there are various conflicts of interest in the Blinkit deal. The chief executive officer (CEO) of Blinkit, Albinder Dhindsa, was the head of international operations in Zomato and is the spouse of Zomato’s cofounder (and former chief financial officer) Akriti Chopra. Zomato owned more than a 9 per cent equity in Blinkit. Zomato and CEO Deepinder Goyal was himself a 10 per cent shareholder of Blinkit until last year before selling it to Tiger Global. Finally, the valuation seems to be based on just two months of unaudited results when even a small-time valuer insists on audited results to even start valuation work.

3. India's impressive export growth rate may be deceptive,

India’s merchandise exports increased strongly to an all-time high of $421 billion in 2021-22... an annual growth of 44.7%, the highest ever since independence... Based on 25 major commodity groups that account for more than 90% of total exports, our calculations suggest that... while nominal exports grew by 25.5% year-on-year in April and May, following a surge of 44.7% in 2021-22, real exports rose by only 2.9% during the two month period, following a growth of 21.4% in 2021-22. Further, although nominal exports have posted a growth of 8.5% in fiscal years 2020-22 (during the covid period), compared with 8% in the pre-covid period (fiscal years 2017-19), real exports have grown slower at 1.2% compared with 3% in the corresponding period... 

It suggests that global inflation has played a very important role in pushing India’s nominal exports higher. This conclusion is also confirmed by the fact that while India’s exports have risen very strongly, its share in global exports moved up only slightly from 1.71% in 2019 to 1.77% in 2021. It means that higher prices have led to higher export numbers almost everywhere in the world... Our analysis suggests neither real exports nor real imports have grown at an exceptional rate in recent months or during the past three years, as inflation has played a major role in driving Indian trade figures to record highs.

4. Rana Faroohar points to the declining labour force participation of women in the US,

Indeed, female labour force participation in the US was 1.4 percentage points lower at the end of 2021 than it was before 2000. This puts America very much at odds with the rest of the rich world. During that same period, women’s labour force participation increased 5.3 percentage points in France, 5.4 points in Canada, 6.7 points in the UK, and a whopping 14.3 points in Japan... What’s going on? To sum it up in a word, childcare — or more particularly, a lack of decent, affordable childcare. Commerce department statistics show that mothers with children under the age of five at home generally have lower participation in work outside the home, but that’s particularly true for women with less education and lower pay.

5. MLA salaries across Indian states

And how it compares with percapita income of the state

6. Interesting graphic from this FT Long Read on the largest private polluters in history.

7. India trucking industry facts of the day

According to a NITI Aayog report of 2021, commercial activities in India generate about 4.6 billion tonnes of freight annually, which results in over 3 trillion tonne-km of road transportation demand at a cost of ₹9.5 trillion. The logistics sector employs more than 20 million people. According to trucking industry estimates, there are nearly 15 million operational commercial vehicles across India... Eight out of 10 trucks that run in the country are owned by small fleet owners, who own just five trucks or less. A fragmented market implies that small fleet owners are unable to optimise driving patterns nor bring in required efficiencies. India is a long-distance trucking market, with 95% trucks moving intercity. But truck productivity is low: a truck travels 300 km a day on an average in India compared to the global average of 500-800 km a day. Much of that—40%—is dead miles. This is a measure of empty trucks out on the road, either because they have no shipment or are travelling empty to pick up freight, or are returning after delivering a consignment but have not found a return load.

In this fragmented market, aggregators like Blackbuck, Truckbhejo, and Raaho have an important role in matching customers wanting to transport goods by road with fleet owners who have ready capacity. 

8. The Economist highlights vertical integration within Tesla through its "digger-to-dealership" control,

Tesla’s industrial system is at first glance an embrace of Silicon Valley’s “full stack”—internalising all aspects of production, and therefore all the profits... In an echo of Fordism, Tesla has struck recent deals with lithium miners and graphite suppliers, and last month confirmed a deal with Vale, a Brazilian mining giant, to purchase nickel... It plans to make more cells on its own at its three other gigafactories around the world... Tesla has also pulled other bits of the powertrain in-house. It makes its own motors and a lot of its own electronics, giving it more control over costs as well as over the technology... Tesla designs its own semiconductors and has closer links than other carmakers with those who manufacture them. That has helped it weather the global chip shortage better than rivals. Tesla’s software engineers have created a centralised computing architecture to run on those chips, ensuring smooth integration with the four-wheeled hardware. Mr Musk has even ditched the dealership-based sales model, instead opening his own swanky Tesla stores... This reverses decades of outsourcing to big suppliers such as Bosch, Continental and Denso in order to concentrate on managing supply chains, integrating separate parts, design and marketing... Mercedes-Benz estimates its value-added split at 70-30 in favour of suppliers. Established car firms now want their ratios to more closely resemble Tesla’s, which Philippe Houchois of Jefferies, an investment bank, puts at 50-50 and rising in favour of in-house.  

9. The student learning loss due to school closures during the pandemic may well turn out to be its longest lasting legacy. It's impact is already very bad.

South Asia was the worst impacted by closures