1. China has brokered a landmark peace deal between Iran and Saudi Arabia. The deal will lead to the two countries reopening their embassies in each other (which has been closed since 2016) and activating security co-operation arrangements. It was sealed by President X Jinping with Iranian President Ibrahim Raisi during the latter's recent visit to China. Iran agreed to stop further attacks on Saudi Arabia and curtail support for militant groups targeting the Saudi government. This should count as a major coup for China in its efforts to exert influence in the region. It also throws a challenge to the US, the traditional power broker in the region.
But for the region too it has great significance. In recent times, Bahrain and UAE have established diplomatic relations with Israel (Abraham Accords mediated by Trump administration) and Saudi Arabia and UAE have restored ties with Qatar. This is a boost also for Iran which has now built alliances with Russia (supporting it with drones during the ongoing Ukraine war) and China, thereby raising concerns in Washington. The latest deal will put pressure on Israel, which had been harbouring plans of a grand alliance with Saudi Arabia against Iran, to start re-evaluating its position vis-a-vis Iran. The Israel-Saudi relationship is the only other remaining conflict.
Iran and Saudi Arabia have been fighting proxy wars in Yemen and Syria. However, in recent days, Saudi Arabia seems to have also turned its tracks on Syria, and has called for rehabilitation of the pro-Iran Assad regime.
2. Disturbing slowdown, even reversal, of structural transformation in the Indian economy from the annual Periodic Labour Force Survey (PLFS) data
The absolute number of workers in agriculture declined by 33 million between 2004-05 and 2011-12. Almost a matching decline was observed between 2011-12 and 2017-18. However, the slowdown and pandemic reversed this process. The agricultural sector witnessed a return of 36 million workers between 2017-18 and 2021-22. So pronounced was it that the absolute count of workers in agriculture stood higher in 2021-22 than in 2011-12, a decade ago. Besides a reversal of the structural transformation, the numbers also imply a declining per worker income in agriculture, thereby worsening the rural distress... Per capita income from all employment sources in urban areas was ₹5,186 per month for the pre-pandemic year of 2018-19. By 2021-22, in real terms at 2018-19 prices, this had marginally declined to ₹5,175 per month. For the country as a whole, per capita income increased by only 0.9% per annum between 2018-19 and 2021-22. Per capita consumption in urban areas is lower than its level in 2018-19, though this increased 1.4% per annum for the country. Declines in income and consumption are not surprising, as the PLFS data also shows that regular wages continue to decline in real terms, with urban regular wages declining at 1.4% per annum, faster than the 0.4% decline in rural regular wages...
Though the number of workers in agriculture is no longer increasing, the data suggests that those who found refuge in agriculture during the pandemic are yet to return to their original occupations. This indicates that the economy is yet to fully recover from the twin shocks of the slowdown and pandemic.
3. An FT article on how smartphones and social media are destroying teen mental health. Mental health problems are on the rise in UK and US
The share of US teens who only met up with friends once a month or less has rocketed in the last decade, tracking worsening of mental health.
Girls are especially vulnerable to social media, with large amounts of screen time linked to negative psychological impacts including self-harm
Over the next two years, China’s share of cobalt production is expected to reach half of global output, up from 44 per cent at present, according to a report by Darton Commodities, a UK-based cobalt trader. The increase comes despite western efforts to gain control over supply chains for critical minerals such as cobalt, lithium and nickel, which are essential for making electric car batteries. Chinese refining activity reached 140,000 tonnes in 2022, more than double its level of five years ago, as volumes processed in the rest of the world stagnated at the 40,000 tonnes mark, handing Asia’s largest economy a 77 per cent global share of refining capacity.
6. The Economist writes on supply chain diversification away from China into an Alternative Asia (Altasia) stretching from Japan to India.
Between 2020 and 2022 the number of Japanese companies operating in China fell from around 13,600 to 12,700, according to Teikoku Databank, a research firm. On January 29th it was reported that Sony plans to move production of cameras sold in Japan and the West from China to Thailand. Samsung, a South Korean firm, has slashed its Chinese workforce by more than two-thirds since a peak in 2013. Dell, an American computer-maker, is reportedly aiming to stop using Chinese-made chips by 2024... In 2020 South Korean firms’ total stock of direct investments in Brunei, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam—which together with unstable Myanmar make up the Association of South-East-Asian Nations (ASEAN)—and Bangladesh reached $96bn, narrowly outstripping Korean investments in China. As recently as a decade ago the stock of Korean companies’ investments in China was nearly twice as large as in Altasia...
The share of iPhones made in India is expected to rise from around one in 20 last year to perhaps one in four by 2025. Two Taiwanese universities have teamed up with Tata, an Indian conglomerate with ambitious plans in high-tech manufacturing, to offer courses in electronics to Indian workers. Google is shifting the outsourced production of its newest Pixel smartphones from China to Vietnam... More sophisticated manufacturing, especially of geopolitically fraught semiconductors, is also moving to Altasia. Malaysia already exports around 10% of the world’s chips by value, more than America. ASEAN countries account for more than a quarter of global exports of integrated circuits, easily surpassing China’s 18%. And that lead is growing. Qualcomm, an American “fabless” chipmaker, which sells microprocessor designs for others to manufacture, opened its first research-and-development centre in Vietnam in 2020. Qualcomm’s revenues from Vietnamese chip factories, many of which belong to global giants like Samsung, tripled between 2020 and 2022.
But there are formidable challenges,
China’s huge advantage has historically been its vast single market, knit together with decent infrastructure, where value could be added without suppliers, workers and capital crossing national borders. For Altasia to truly rival China, therefore, its supply chain will need to become far more integrated and efficient... For now the infrastructure that connects them is shabby, at best. Finicky regulations and national ambitions can easily gum up the alternative supply chain. Altasia’s poorer countries are not necessarily keen on the logical division of labour, which would see them play a bigger role in the more menial parts of the electronics supply chain. And forgoing all Chinese-made parts is next to impossible... Prospects for deeper integration are hazy, within Altasia and with big consumer markets in the rich world. India, on whose 1.4bn people Altasia’s future may hinge, seems in no rush to join RCEP... Altasia will certainly not replace China soon, let alone overnight... But in time China is likely to become less attractive to foreign manufacturers. Chinese labour is not getting any cheaper and its graduates are not getting much more numerous.
7. An important positive trend about India's IT sector exports growth,
A quick breakdown suggests that IT services make up about 70 per cent of overall services exports. Within IT services exports, computer services have a 65 per cent share, followed by professional and management consulting services (22 per cent), technical and trade related services (8 per cent), and research and development (3 per cent)... Over the last three years, professional and management consulting has grown the fastest, at a whopping 29 per cent compound annual growth rate (CAGR), followed by computer services (16 per cent), and research and development (13 per cent). The one sector that generates revenues under each of these heads, and has, we believe, contributed to the fast growth in IT services, is Global Capability Centres (GCCs) and their rise.What are GCCs? Put simply, they are units set up in India by overseas multinational corporations (MNCs) to provide them with global tech services, research and development, engineering and IT support. Many large MNCs have set up GCCs in India, and the number has been rising, from 1,026 in FY15 to 1,570 in FY22. In fact, India is home to about 40 per cent of global GCCs, and this ratio is only expanding. Currently, their direct output is about $51 billion, making up 25 per cent of overall IT services exports. In the last two years (FY21-23), the output of GCCs has risen by a CAGR of 19 per cent, broadly in line with the growth in overall IT services exports... The GCCs are expanding both in scope and depth. After starting off as providers of support functions, they have moved up the ladder, to tech enablement, business operations, capability development, and even R&D and business development. Almost 50 per cent of the 1,570 GCCs in India provide engineering R&D support. These account for over 40 per cent of the total GCC headcount and have been growing at a CAGR of 12 per cent.
8. Robin Wigglesworth points to a new working paper which highlights a very large gap in the US banks' assets market value and their book value,
The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%... 10 percent of banks have larger unrecognized losses than those at SVB. Nor was SVB the worst capitalized bank, with 10 percent of banks having lower capitalization than SVB. On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run. We compute similar incentives for the sample of all U.S. banks. Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk.
9. Finally, Sekhar Gupta makes the point I have made on numerous occasions
There are powerful Indian company brands known across the world, at least in business circles... None of them, however, has created a product brand that rules the world. India does not have a purely homemade car, a two-wheeler, a software or operating system, not even a perfume or a beverage. We are collecting GI tags for scores of — mostly agri — products and yet not a brand that looks out from shop shelves globally. Corporate India has failed to create a garment brand, and almost all that our factories produce and export is sold under the labels of international store chains. To that extent, our garment makers are also doing outsourced work. Which is precisely what the Modi government is now promising in its larger manufacturing push with production linked incentives and other concessions. While it is great that India is now making a lot of mobile phones for export, none of these carry an Indian brand name. The Chinese and Koreans, on the other hand, have spawned a half-dozen brands that dominate global markets. The Modi government’s manufacturing push is very good and necessary, but basically it is pushing Indian manufacturing in the same direction as our software (services) industry: Outsourcing.
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