Weekend reading links

1. On the false belief that India can go past thermal generation and plough all its generation investments into renewables.

According to the estimates, even if the renewable energy (including large hydro) capacity grows at four times the pace it has grown in the past five years, India would need new (greenfield or brownfield) thermal power plants in a decade from now.

2. NYT writes about the trend of "premiumization" across market segments, whereby businesses are offering differentiated and higher priced products aimed at higher income buyers which also offer higher margins. The paper describes this trend as the gentrification of the economy.

3. Two Venezuela graphics for the week. One on the scale of economic contraction under Nicholas Maduro over the last ten years.

Another on how the country has fallen to the bottom rung of Latin American economies.

The US government has tried everything to bring down Maduro, including derecognition of the government and even attempts at kidnapping him, but failed. 

4. Alain Bertaud on the point about higher FAR and the challenge of expanding utilities carrying capacity, 

If you build a high-rise building in an area which now is underutilized, you’ll have to adjust the infrastructure. Now, adjusting the infrastructure is much less costly than expanding the land that is urbanized. You’ll have to have a mechanism to have, let’s say, an impact fee or something like that where when people then install—let’s say more middle class will consume more water in an area which consumed before less water—you will have to adjust infrastructure. 

Now, this is not very difficult. Some people think, “Ah, but in this street we have a pipe of this diameter; therefore we cannot have more water.” Well, it’s very cheap and easy to put a second pipe or replace a small pipe by a big pipe, whatever. It can be done very quickly. It’s not very expensive. Much more expensive to expand the city. I think that you should have a mechanism to do that and to recover the cost either through bonds, general public, or maybe through impact fee directly from user, saying in this area we increase the floor ratio by that much, or even we leave it free.

The idea that if you free the floor ratio, you will suddenly have a 100-story building is not true. As you go up, the price of construction goes up; the cost of construction goes up. Maybe you’ll have a skyscraper where some Bollywood actress will be, but in general, the Indian middle class will probably go into buildings which are six, seven, eight stories high and not towers, except in business district or things like that.

5. India cold storage infrastructure facts of the day

Currently, India has about 7,129 cold storage facilities with about 32 million metric tonnes capacity and about 10,000 actively refrigerated vehicles, most of which are operated by small cold storage and/or transport service providers. According to a report by Crisil Research in 2019, 95% of cold storage capacity is owned by the private sector, 3% by cooperatives and the remaining 2% by public sector undertakings; 33% of the total cold storage capacity of our country is in Uttar Pradesh (mostly for potatoes). However, that capacity is very low in some other states, as per data from the National Horticulture Board for 2019... This cold storage infrastructure is also poorly distributed, with urban areas getting easier access to these spaces, thanks to their market proximity.

6. Instead of sucking people and resources from the rest of the country, a new report appears to show that London may be having a "levelling down" problem.

Ever since the global financial crisis, London’s annual productivity growth of 0.2 per cent has been lower than the 0.3 per cent achieved in the rest of the UK. This contrasts with the decade before 2007, when the capital achieved annual productivity gains of 3.1 per cent, compared with 1.7 per cent elsewhere. The UK economy does therefore have a London problem. It is that the capital is no longer boosting output and incomes as it once did. New research from the Centre for Cities think-tank shows that the collapse in London’s productivity growth accounts for 42 per cent of the UK’s overall productivity puzzle since 2007, even though it houses only 15 per cent of the population and accounts for 25 per cent of economic output.

In many respects, the problem of weak productivity growth in the capital reflects the one clear finding about the causes of the UK’s growth slowdown since the global financial crisis. It has been concentrated in the nation’s most productive sectors, best companies and most dynamic regions. The UK’s London problem is not part of a wider trend, according to the Centre for Cities, and has not been replicated in comparable cities such as New York or Paris. This matters for everyone in the UK. With progressive taxation and higher incomes in the capital, economic weakness in London leads to worse public services across the country. Average Londoners paid £4,519 more in tax than they received in public spending in 2019-20 while Britons as a whole received a net government subsidy of £820. If you’re worried about being on an NHS waiting list in Leeds or burglaries in Bradford, you should be gunning for London’s economy to be stronger.

Prime real estate prices have been much higher in London than NY or Paris.

As to the policy responses

See the slides here and report here (pdf here). 

7. It now emerges that India may have benefited by just around $2.5 bn from switching to oil purchases from Russia in the aftermath of the invasion. Russia, at 28%, is the single largest oil supplier to India. The freight and insurance costs appear to have ensured that the landed price of Russian oil is not much cheaper than from elsewhere. 

Is it the case that the foreign policy cost of having to go against the wind and buy from Russia did not come with any financial gains?

8. The Ken has a very good primer on the food delivery tech companies. The three models are demand aggregation (Zomato and Swiggy), supply aggregation (Rebel Foods), and connect demand and supply even if for one narrow use-case (Dominos). 

9. US becomes the largest LNG exporter in the world

More than $100bn in spending on new US LNG projects is in the pipeline for the next five years, according to an analysis by Wood Mackenzie. The flood of investment will help drive US LNG production to more than 280mn tonnes per year by the end of the decade, more than triple its current capacity and well ahead of second-place Qatar. The US is expected to become the largest exporter of LNG in 2023. Last year was a record for long-term contracts in the country, with 65mn tonnes per year in exports agreed to, more than triple the 2021 amount.

10. The political consequences of Fed's actions are enormous. A good example is, as this NYT article writes, the outcome of the next US Presidential election which could depend very deeply on Fed's actions and their outcomes. It points to the assessment of Ray Fair, a Yale Professor who has been predicting presidential and congressional elections for decades. He writes, 

An optimistic story is that the Fed will raise interest rates a little more, thus contracting the economy some, but by the end of 2023 inflation will be back near 2 percent and the Fed can ease off. This is a positive story for the Democrats retaining control of the White House in 2024. Going into 2024 inflation will have been licked and output growth will have started to pick up. By November 2024 the economy will have been growing for three quarters and inflation will be under control. A pessimistic story is that inflation will not go gently and the Fed will have to keep interest rates high and possibly rising into 2024. Inflation might still be higher than the Fed wants in the summer of 2024 and the Fed will still be tightening or at least not easing off. Output growth in 2024 might be sluggish because of the Fed’s tightening. This is, of course, negative for the Democrats: high inflation and low growth... The Fed’s main goal at the moment is to get inflation down to 2 percent, not to help one political party. But the political consequences of its actions are huge.

11. The distortions in China's land-based local government revenues mobilisation, 

More than half of the Rmb2.2tn ($316bn) in residential property plot sales by local Chinese authorities in 2022 were made to local government financing vehicles (LGFVs), according to a report published last week by the Chinese Academy of Fiscal Sciences, which warned some transactions “might be fake”. The report suggested local governments had overstated their revenue after LGFVs, which are responsible for financing infrastructure construction, stepped in as the biggest land buyer. “Local authorities have a strong incentive to sell assets at inflated prices or have LGFVs purchase land to artificially prop up fiscal revenue,” the think-tank said. Land sales are a crucial source of revenue for China’s local governments, which are responsible for everything from roads to healthcare and education but whose budgets have been hit hard by the Covid-19 pandemic and a property market crisis... Official data show LGFVs accounted for a record 54 per cent of the total value of China’s residential land sales last year. The spending boom was fuelled largely by debt. Some cities then logged the sales in their books before refunding LGFVs so the latter could bid for land in future auctions, the report said.

Income from land sales, the biggest source of the cash that local authorities raise directly, plunged 23 per cent in 2022 as debt-stricken private developers stepped back, home sales sank and Beijing tightened credit. Local authorities have also faced a jump in outlay. Many have increased wages in an effort to stem corruption, with personnel expenses rising more than a third in the four years to 2020... Their budget problems are

exacerbated by a surge in debt service costs. Interest payments accounted for 4 per cent of total fiscal income last year, up from 2.6 per cent in 2019, according to the think-tank. In under-developed western provinces local authorities were spending up to a third of income paying interest, it said.

12. Silicon Valley Bank becomes the second biggest bank failure in US history after customers raced to withdraw $42 bn, a quarter of its total deposits, in one day. 

With about $209bn in assets, SVB has become the second-largest bank failure in US history, after the 2008 collapse of Washington Mutual, and marks a swift fall from grace for a lender that was valued at more than $44bn less than 18 months ago. The Federal Deposit Insurance Corporation, the US regulator that guarantees bank deposits of up to $250,000, said it was closing SVB and that insured depositors would have access to their funds by Monday. It came after a run on the California-based bank on Thursday, during which SVB’s deposit holders initiated withdrawals that ultimately totalled $42bn, in some cases after encouragement from their venture capital backers... Many of SVB’s clients were venture capital funds as well as tech and healthcare start-ups, and would have account balances well in excess of the maximum amount insured by the FDIC... At the end of 2022, SVB estimated that almost 96 per cent of its $173.1bn in deposits exceeded or were not covered by FDIC insurance. By comparison, Bank of America has estimated that around 38 per cent of its $1.9tn in deposits were not covered by FDIC insurance...

The banking group’s troubles stem from a decision made at the peak of the tech boom to park $91bn of its deposits in long-dated securities such as mortgage bonds and US Treasuries, which were deemed safe but are now worth $15bn less than when SVB purchased them after the Federal Reserve aggressively raised interest rates. It had planned to sell $1.25bn of its common stock to investors and an additional $500mn of mandatory convertible preferred shares, which are slightly less dilutive to existing shareholders. That would have helped bridge the roughly $1.8bn in losses SVB incurred from the sale of about $21bn of securities initiated to cover customers withdrawing deposits.

And this

In pursuit of higher returns, SVB failed to notice what, in hindsight, seems an obvious flaw in its risk management. Its assets soared nearly three-fold in the space of three years as capital poured into start-ups and was deposited, in turn, at the bank. SVB put much of the money into longer-maturity bonds to generate a higher return. When interest rates rose, the market value of those investments slumped, leaving the bank with losses that, on paper, stood at $15bn at the end of last year. Rather than sell the bonds and take a hit, SVB hoped to nurse its low-yielding bond portfolio through to maturity, suffering lower net interest margins along the way. The plan might have worked. But it emerged this week that the bank’s start-up customers, facing more difficult times, had been drawing down their cash, forcing it to sell investments and take a loss. The resulting need for more capital set alarm bells ringing and led to a flight by depositors: By Friday morning, regulators had to step in and close SVB down.

13. As TN Ninan writes in Business Standard, the Adani crisis underscores the dangers of reliance on debt and the importance of equity in capital investments. And it's here that India's problem of risk capital deficiency surfaces. It's impossible for India to expand infrastructure capacity at the pace expected without the supply of long-term risk capital. 

That leaves the question of how mega-ventures will be funded, for much of India’s ambitions in green energy, semiconductors, telecom, defence, and transport infrastructure depend on a handful of these national champions... it should be obvious that Mr Adani will have to re-visit his multiple investment plans across a broad swathe of industries... One must wait to see whether Vedanta, which has tied up with Foxconn for a semiconductor project, is similarly forced to forgo some of its plans. The JSW group on its part has debt which, net of cash and near-term receivables, has been assessed at over Rs 1 trillion. This is reckoned to be manageable, but it leaves little headroom for still more debt. This suggests that India needs a broader base of national champions. Many companies have improved their debt-equity ratios in recent years, but are they big enough to handle mega-projects? If not, the government may have to rely on the public sector to take up the bit. The difficulty here is that capital investment funded through the Budget is already high, and there is no wiggle room for investing still more public money without the fiscal maths going seriously wrong. In the end, some plans may simply have to be re-visited.