Weekend reading links

1. Shein and Zara facts of the week

Shein launches almost 6,000 designs a day across the world; in contrast, Zara does 2,000 designs a year.

Some counter-intuitive lessons on e-commerce from Newme, India's equivalent of Shein,

The typical e-commerce wisdom is that more options will drive more sales. We had a similar hypothesis and were pushing in the same direction, but while interacting with our consumers, we realized Gen Z buyers need enough options, but don’t want to be bombarded with designs. They prefer curation with a healthy mix of designs. If you show them too many options, it confuses them, which leads to them not making a purchase. So, we reduced our styles from 50,000 to 5,000, but increased our curation.

Another conventional e-commerce belief is, the more reviews on a product, the more sales it can drive. But Gen Z don’t want to purchase products that have a very high number of reviews because it signals that many others have purchased the same style, which puts them off. They’re always looking for statement pieces at an affordable price.

2. Gillian Tett points to a 2020 paper by Lily Bailey and Gary Gensler in 2020 which highlights three stability risk concerns from generative artificial intelligence (AI).

One is opacity: AI tools are utterly mysterious to everyone except their creators. And while it might be possible, in theory, to rectify this by requiring AI creators and users to publish their internal guidelines in a standardised way (as the tech luminary Tim O’Reilly has sensibly proposed), this seems unlikely to happen soon. And many investors (and regulators) would struggle to understand such data, even if it did emerge. Thus there is a rising risk that “unexplainable results may lead to a decrease in the ability of developers, boardroom executives, and regulators to anticipate model vulnerabilities [in finance],” as the authors wrote. 

The second issue is concentration risk. Whoever wins the current battles between Microsoft and Google (or Facebook and Amazon) for market share in generative AI, it is likely that just a couple of players will dominate, along with a rival (or two) in China. Numerous services will then be built on that AI base. But the commonality of any base could create a “rise of monocultures in the financial system due to agents optimizing using the same metrics,” as the paper observed. That means that if a bug emerges in that base, it could poison the entire system. And even without this danger, monocultures tend to create digital herding, or computers all acting alike. This, in turn, will raise pro-cyclicality risks... The third issue revolves around “regulatory gaps”: a euphemism for the fact that financial regulators seem ill-equipped to understand AI, or even to know who should monitor it. Indeed, there has been remarkably little public debate about the issues since 2020 — even though Gensler says that the three he identified are now becoming more, not less, serious as generative AI proliferates, creating “real financial stability risks”.

3. The Bank of Japan under its new Governor Kazuo Ueda has started to take steps to normalise its monetary policy after decades of ultra-low rate accommodation. After the first BoJ Board meeting since taking over, Ueda forecast that inflation would drop from its 3.1% high of March 2023 and is likely to remain close to its 2% target for the next two fiscal years.

The BoJ held overnight interest rates at minus 0.1 per cent and maintained its yield curve control policy, saying it would continue to allow 10-year government bond yields to fluctuate by 0.5 percentage points above or below its target of zero. Following in the footsteps of the US Federal Reserve and the European Central Bank, the BoJ dropped a part of its forward guidance that previously said it “expects short- and long-term policy interest rates to remain at their present or lower levels”. The removal of this clause, which was originally aimed at supporting the economy after Covid-19, could make it easier for the BoJ to scrap yield curve control.

4. Andy Mukherjee raises a cautionary note on Reliance's green energy ambitions

Ambani might hit his goal of making blue hydrogen from syngas — a combination of hydrogen and carbon monoxide — at a competitively priced $1.2 to $1.5 per kilogram. But large-scale production of green hydrogen by using renewable energy to split water molecules, and realizing Ambani’s vision of “1:1:1,” a price of $1 for a kilo over a decade, looks like a tall order. Globally, green hydrogen costs between $6 and $7. That renders it uncompetitive as an industrial feedstock and fuel against both gray and blue variants. The only way it comes up ahead is with rising carbon prices in Europe — and then, too, by only 2035, according to the CRU Group, a commodity research firm. Reliance is aiming for 100 gigawatts of solar-power installations by 2030. That’s a big chunk of India’s overall goal of 450 gigawatts, a sevenfold increase from last year. It’s also investing in electrolyzer manufacturing, fuel cells and energy storage, including a sodium-ion technology that could work out cheaper than the lithium-ion batteries used in electric vehicles.

5. Ruchir Sharma argues that the rising gold prices as also arising from increased demand from emerging market central banks to diversify away from dollar. 

The prime example right now is gold, up 20 per cent in six months. Surging demand is not led by the usual suspects — investors large and small, seeking a hedge against inflation and low real interest rates. Instead, the heavy buyers are central banks, which are sharply reducing their dollar holdings and seeking a safe alternative. Central banks are buying more tons of gold now than at any time since data begins in 1950 and currently account for a record 33 per cent of monthly global demand for gold. This buying boom has helped push the price of gold to near-record levels and more than 50 per cent higher than what models based on real interest rates would suggest. Clearly, something new is driving gold prices. Look closer at the central bank buyers, and nine of the top 10 are in the developing world, including Russia, India and China. Not coincidentally, these three countries are in talks with Brazil and South Africa about creating a new currency to challenge the dollar. Their immediate goal: to trade with one another directly, in their own coin...

Thus the oldest and most traditional of assets, gold, is now a vehicle of central bank revolt against the dollar. Often in the past both the dollar and gold have been seen as havens, but now gold is seen as much safer... why are emerging nations rebelling now, when global trade has been based on the dollar since the end of the second world war? Because the US and its allies have increasingly turned to financial sanctions as a weapon. Astonishingly, 30 per cent of all countries now face sanctions from the US, the EU, Japan and the UK — up from 10 per cent in the early 90s. Until recently, most of the targets were small. Then this group launched an all-out sanctions attack on Russia for its invasion of Ukraine, cutting off Russian banks from the dollar-based global payment system. Suddenly, it was clear that any nation could be a target. Too confident in the indomitable dollar, the US saw sanctions as a cost-free way to fight Russia without risking troops. But it is paying the price in lost currency allegiances. Nations cutting deals to trade without the dollar now include old US allies such as the Philippines and Thailand.

6. The Federal Reserve Board, in an internal investigation, has finally confirmed what everyone knew as the reasons for the SVB crisis

Silicon Valley Bank’s failure last month stemmed from weakened regulations during the Trump administration and mis-steps by internal supervisors who were too slow to correct management blunders, the US Federal Reserve said in a scathing review of the lender’s implosion. The long-awaited report, released on Friday, had harsh words for the California bank’s management but also pinned the blame directly on changes stemming from bipartisan legislation in 2018, which eased restrictions and oversight for all but the biggest lenders. SVB would have been subject to more stringent standards and more intense scrutiny had it not been for efforts to scale back or “tailor” the rules in 2019 under Randal Quarles, the Fed’s former vice-chair for supervision, according to the central bank. 

That ultimately undermined supervisors’ ability to do their jobs, the Fed said. “Regulatory standards for SVB were too low, the supervision of SVB did not work with sufficient force and urgency, and contagion from the firm’s failure posed systemic consequences not contemplated by the Federal Reserve’s tailoring framework,” Michael Barr, the Fed’s vice-chair for supervision who led the postmortem, said in a letter on Friday. More specifically, the Trump-era changes that led to a “shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach”, he said... “The Federal Reserve did not appreciate the seriousness of critical deficiencies in the firm’s governance, liquidity, and interest rate risk management,” the review said. Part of the problem was “a shift in culture and expectations” under Quarles, the Fed found. Citing interviews with staff, supervisors reported “pressure to reduce [the] burden on firms, meet a higher burden of proof for a supervisory conclusion, and demonstrate due process when considering supervisory actions”.

This is a good report of how bad management, poor supervision, and dominant culture derailed the Silicon Valley Bank, and the problems were hiding in plain sight but was overlooked by everyone concerned. 

The crisis that brought down the bank had been hiding in plain sight. More than a year before the bank failed, outside watchdogs and some of the bank’s own advisers had identified the dangers lurking in the bank’s balance sheet. Yet none of them — not the rating agencies, nor the examiners from the US Federal Reserve, nor the outside consultants that SVB hired from BlackRock — was able to coax the bank’s management on to a safer path.

7. Charles Kenny has some interesting numbers on the size of Africa's private sector

In all of Sub Saharan Africa outside of South Africa there are only approximately 183 firms with revenues greater than $500 million and about 87 with revenues greater than $1 billion (in the US there are about 7,000 firms with revenues over $500 million and 3,908 with revenues over $1 billion). An ‘Enterprise Map’ by John Sutton suggests Ethiopia only has 43 firms which employ more than 500 employees. In Tanzania, the Enterprise Survey sample frame suggests there were just 244 firms countrywide with more than 100 employees. For comparison, the US has 19,000 firms with over 500 employees and 107,000 with over 100 employees. There are even fewer internationally competitive firms. Sutton suggests that just 13 firms account for three quarters of Mozambique’s exports, 22 firms for about one half of Tanzania’s, 27 firms for 62 percent of Ghana’s exports, and 31 firms for about half of Ethiopia’s.

The challenge of catalysing private sector led growth in Africa is immense.  

The paradox of India's fiscal federalism

India's framework of fiscal federalism presents interesting paradoxes and raises questions. Ajay Chibber draws attention to some very important statistics. 

The very high share of sub-national devolution to states co-exists with very low share of transfers to local bodies.

India’s share of sub-national (state plus local) spending at 60 per cent of total spend is quite high at its level of development. The 14th Finance Commission shifted about 10 per cent of the divisible pool share of resources to the state level, resulting in a total share of 42 per cent... As a result, sub-national spending, which was about 50 per cent in 2013-14, jumped to about 60 per cent of the total government spending. Other large federal states spend less. Brazil spends around 50 per cent at the sub-national level, Germany 46 per cent, the United States around 40 per cent, and Indonesia around 35 per cent. Only Canada and China spend more than 70 per cent at the sub-national level. India’s share of sub-national spending when looked across the world is high... 

India’s local government spend is less than 4 per cent of total government spending. This share is much smaller than in most advanced economies, but also much lower than in centralised authoritarian governments like China, where local government spending exceeds 50 per cent of total spending by government. China is an outlier in this, but in most advanced economies, the share is much higher than in India. The 28 countries in the EU spend 23.2 per cent at the local level, Canada 21 per cent, the US 29 per cent. In Latin America, local government spending is around 12.7 per cent and most analysts feel it should be much higher. If India is to map its way towards becoming an advanced economy by 2047, it must prepare a road map for greater devolution from state-level spending to local governments, and raise more local government revenues.

The fiscal problems of local bodies are compounded by their very low property tax collections

India has a very low property tax rate, accounting for around 0.5 per cent of its total tax revenue and only a little over 0.1 per cent of GDP. The OECD countries on average collect about 5.6 per cent of total tax revenue in property taxes (about 1.9 per cent of GDP) with Korea at 15.1 per cent and the US, UK and Canada at over 11-12 per cent at the highest levels. Among BRICS countries, China collects around 10 per cent of its revenue through property taxes, and Russia and South Africa between 4 and 5 per cent. 

Two points about China's taxation and fiscal federalism,

First, China remains, by quantitative measures, among the most decentralized political systems in the world. Local governments — starting at the provincial level and working down to prefectural, county, township, and village governments — account for 50 percent of government revenue and almost 85 percent of expenditures. In Organisation for Economic Co-operation and Development countries, the averages are 20 and 33 percent, respectively. China’s central government commands just 15 percent of total government expenditure, compared to the Organisation for Economic Co-operation and Development average of 66 percent. Second, China continues to rely almost entirely on business taxes, collected through a value-added tax on business-to-business transfers and a corporate income tax. Since 1990, these business taxes have made up between 60 and 75 percent of tax revenue. Consumption taxes (7 percent) and individual income taxes (6.3 percent of total revenue in 2021) are relatively unimportant. The remaining 15 percent of government revenue comes from central and local fees.  

Some observations:

1. I believe that the most important snippet here is the low level of fiscal decentralisation. India's local governments are a paradox - it is at the cutting edge of public service delivery and is the face of government, but is chronically under-resourced and with very weak capacity. 

An important reason for the low share of government spending in India by local governments is due to the limited share of untied funds available for state and central governments after accounting for salaries and pensions, interest service, and state and national programs. This is a consequence of India's low tax-to-GDP ratio. Another reason is that, despite being one of the most debated public policy matters and the logical case for devolution being unexceptionable, both the politicians and bureaucrats are loath to devolve funds. Even the well intentioned among them worry about loss of control and leakages from such decentralisation. To the extent that funds (and functionaries) are what confers power and patronage, it's impossible that this devolution will happen on its own. And unfortunately there appears to be no political demand for such devolution. 

2. Whether centrally sponsored programs should be pruned down and the share of untied funds devolved increased has long been a matter of intense debate. But there are strong political economy factors which militate against it happening in the foreseeable future. For a start, the central government has adopted a development model which delivers individual benefits through flagship programs like pensions (NSAP), housing (PMAY), health insurance (PMJAY), crop insurance (PMFBY), direct transfers to farmers (PM-KISAN), household electricity and water connections, Ujjwala etc. This establishes a strong direct connect with the electorate, one which no government will want to give up.    

3. There are two factors which could test this status quo. One, there is the trend of state governments supplementing the central share in programs such that the central share becomes much smaller than the 60% CSS share. This is especially so with pensions, health insurance, farmer transfers, and housing. In each of these, there are states where the state government shares dwarf the central government share. So much so that certain states have even started opting out of these programs. This also means that they can avoid having to share the electoral credits with the central government.

Two, the forthcoming delimitation exercise offers intriguing possibilities. There will be intense political bargaining at all levels, and fiscal devolutions will be an important part of the exercise. The Sixteenth Finance Commission will have its task cut out. There could be grand bargains which open up the possibility of reining in CSS and increasing the share of untied funds in devolution. For example, some programs like electricity and water connections will get phased out, though some others like higher education scholarships and unemployment insurance are politically tempting options. 

4. The very low property tax collections should be one of the top policy priorities before central and state governments. To the extent that cities are engines of economic growth, have massive infrastructure investment needs, and their major share of revenues have to come from property taxes, there is an urgent need to significantly increase property tax revenues. The low 0.1% of GDP property tax realisation is itself misleading in so far as the vast majority of this would be from a handful of the largest cities. The smaller cities and towns are chronically under-resourced and dependent on state governments. 

There is need to adopt a medium-term fiscal framework for improving property tax revenues. For example, a five to ten year plan to increase property tax revenues as a share of GDP from its current abysmal 0.1% to 2% in 5 years and 4% in 10 years. For a start, it's important to shift from the rental value method to capital value method for calculation of property tax, so that it is meaningfully linked to property values and indexed to its changes. This should be complemented with concerted attempts to capture under-assessments, improve collection efficiencies, and ensure governments pay their taxes on their properties.

State capability - US tax administration edition

What makes capable states? As proximate factors, I can think of five requirements to running a capable administrative system - the enabling institutional framework, the numbers of personnel required, their professional competence and capabilities, the infrastructure and other resources required, and the account (the institutional pride) that the administrators hold about themselves and their work as a collective.

This post will about two of them, requisite personnel and their capabilities. The post has been triggered by this Bloomberg long read about the challenges facing the US Internal Revenue Service (IRS). The article talked to several ex-employees and finds it a "dysfunctional agency gutted by budget cuts, staff departures and lousy tech, leaving it incapable of enforcing the nation’s tax laws fully and fairly."

Politics aside, the IRS has undergone a long period of institutional weakening 

Across the past few decades, the IRS has been decimated by cuts, to the point that by most measures it’s the worst-funded major federal department. It’s down to 84,000 (almost all unarmed) workers, a loss of 10,000 employees since 2010 and about the same as in 1974, when the US had 120 million fewer people and an economy a quarter of its current size. The IRS’s most experienced revenue agents have departed at an even higher rate than other employees, leaving 99.9% of the most complex and opaque type of business returns unexamined and millionaires’ and billionaires’ audit rates tumbling by 80% to 90%... Once in office, Reagan slashed tax rates, but the IRS didn’t actually start shrinking until the 1990s, when Republicans won the House for the first time in almost 50 years. As the agency came under sustained criticism in hearings spotlighting examples of overzealous enforcement, its budgets declined and its workforce began an epic 38% slide, losing 45,700 full-time staff from a 1991 peak to a 2018 nadir.

As the IRS was squeezed, the agency resisted laying off staff, but almost everything else was fair game. Training budgets were whittled away. Support staff disappeared. Major tech upgrades were out of the question. The IRS also cut back on the budget for outside expert witnesses such as appraisers, whose testimony is crucial for competing against well-heeled taxpayers in court. In the past decade alone, even as the number and complexity of tax filings have steadily risen, the agency’s inflation-adjusted budget has plunged 15%, from $12.2 billion in 2010 to $10.3 billion last year. The number of revenue agents—auditors who handle more complex returns—fell almost 40%, from about 14,500 to 8,500 over the same dozen years.

The impact in terms of effectiveness of IRS has been serious,

To get basic taxpayer information, auditors must still log in to a pre-Windows system with a black-and-green screen. Computers could take a half-hour to boot up in the morning or would crash if trying to run a web browser and word processing program at the same time. “You would spend a lot of time just trying to navigate the software,” says Katz, who’s now a CPA at Eide Bailly LLP. The IRS’s legacy systems also have trouble merging datasets, making basic financial analyses impossible. When agents couldn’t access taxpayer histories digitally, they would find themselves in the awkward position of asking people for copies of old returns... The audits that are being done are taking much longer to complete, a function of the increasing complexity of returns filed by the wealthy and the attrition of the experienced staff capable of parsing them. The average audit for those earning more than $10 million took 982 days last year, 40% more than in fiscal 2019, according to the National Taxpayer Advocate, an independent watchdog at the IRS... 

Kim, who went on to co-found a law firm, says he has clients being audited by agents who “are not correctly applying the law.” He’s confident he’ll win any disputes when he appeals to higher levels of the agency, if at added cost to his clients. “The lack of agent training has a direct consequence on taxpayers,” he says... The IRS has said it now has fewer experienced examiners, the sort who can spot a sophisticated tax dodge in the field, than at any time since World War II.

The headline fiscal loss has been massive,

The agency’s latest estimate pegs the annual gap between taxes owed and paid at nearly $500 billion—almost an eighth of the $4 trillion a year it brings in. And academic studies suggest that the rich have hidden away far more than that offshore and in business activity the IRS can’t easily track. Nor does the estimate account for the impact of new vehicles for tax evasion such as cryptocurrencies. 

Amidst this trend of weakening, the article points to glimpses of factors which make the IRS a professionally competent and capable agency,

Politics never enters into the job, ex-employees insist, a rule emphasized in annual training. Only two IRS employees are political appointees, the commissioner and chief counsel. Both must be confirmed by the Senate, with the commissioner serving a fixed five-year term. “In 27 years, I never had anything that came on my desk that had a political tint,” Kim says. Former agents say they were nothing like the pro-tax zealots depicted in conservative media as trying to soak the rich and squeeze everyone else. If pressure came from managers, they say, it was usually to close cases more quickly, not to rack up huge settlements. “There was never a vibe with anyone I worked with that ‘We really need to nail these guys,’ that we have to put the screws to the taxpayer,” one lawyer says...

Former employees stick up for the agency. Many say their jobs were the best they’ve had in their careers. It’s a union shop, with excellent retirement benefits, sane hours and an often collegial culture. Those who faced discrimination at other employers—everyone including ethnic minorities, older workers and graduates of less-than-prestigious schools—report finding the IRS unusually welcoming and meritocratic. The latest figures show that almost two-thirds of the IRS workforce are women and almost 29% are Black—levels far exceeding those of the federal workforce as a whole.

Like with most economic, policy and social trends, this too has a Mathew Effect dimension 

The chance that an American reporting income of $5 million or more gets audited fell from 16% in 2010 to 2.35% nine years later... A Stanford University study released in January found the agency over-audits Black Americans, perhaps a consequence of a strategy of pursuing cheaper audits against the poor instead of resource-intensive investigations of the wealthy. And almost no one is checking on vast segments of the economy, especially the 4.7 million returns filed each year for partnerships that hold much of the top 0.1%’s wealth. Only 3,155 partnership audits were initiated last year, one-third the number in 2018... Meanwhile, Americans with simple finances find it virtually impossible to cheat. Employers automatically report worker income to the IRS, which uses basic matching software to spot any discrepancies on returns.

Some observations of relevance to tax administration in India:

1. While part of the weakening has been a concerted political project of "shrinking the beast", the dominant broad-brush narrative that paints governments as ineffective and wasting public resources too has played its part. This is more an Anglo-Saxon trend (the Thatcher-Reagan axis) and less a factor in continental Europe. Unfortunately, this has been a trend that the opinion makers and commentators in the English speaking ex-colonies like India have adopted with some vigour. 

2. While talking about state capability, we should make the distinction between the regulatory, promotional (economic growth creating), and developmental (welfare and basic public goods) states. It's less a matter of dispute that the state is responsible for defence, law and order, contract enforcement, statutory functions, tax assessment and collection etc and should be capable enough to do these effectively. This aspect is lost in the ideological efforts to tar governments in general as being inefficient and wasteful. These regulatory roles (and not the regulations themselves) should not be subjected to the new public management approach of costs-benefits assessment. 

3. This article has strong resonance in the Indian context, especially in tax administration. For example, state indirect tax units are bottom-heavy, deficient in assessment and adjudication officials, chronically weak in  capabilities like proficiency in tax laws and examination of business accounts, poor quality of work-flow automation, do limited systematic data analytics (as against opportunistic and adhoc analytics), and are pervasively corrupt and politicised. 

4. As the economy becomes more complex and globally integrated, tax administration becomes ever more specialised. For example, on the direct taxes side there is the practice of tax "avoidance" by using professional tax firms to minimise individual and corporate tax payouts by the largest taxpayers. On the indirect taxes side, there is the trend of expanding share of services whose production and consumption are increasingly difficult to localise. There is a need to go beyond traditional bureaucratic hiring and personnel management approaches and adopt innovative and practical approaches to address this asymmetry in capabilities.

5. Complicating matters, the taxpayers are advised by professionals whose expertise in these issues is far greater than those of all but a handful of tax administrators. Worse still, after their retirement, the most capable tax administrators end up defending the other side. This also means that the Departments invariably end up on the losing side in tax litigations, most often due to a combination of bad assessment and adjudication, wilful negligence, and poor court representation. 

6. For a country like India which is grappling with low share of tax to GDP ratio, a low-hanging fruit is to enhance the numbers of assessment and adjudication officers, and the general professionalism of tax administration so as to arrest leakages and thereby increase its tax revenues. 

Weekend reading links

1. The Economist has an article on the distortions in the UK's direct and indirect taxation system. This about exemptions from VAT for smaller firms is interesting,

Companies with a turnover of less than £85,000 a year do not have to register for VAT at all. Such exemptions are forecast to cost the exchequer £67bn in the 2022-23 tax year, about half the total actually raised through VAT... the threshold incentivises companies to stay below a certain size. They are duly piling up at the £85,000 mark, which has been frozen in cash terms since 2018. By the time the freeze ends in the 2025-26 tax year the OBR expects the number of firms remaining just below the threshold to have nearly doubled, from 23,000 in 2018-19 to 44,000. This is not only bad for the public purse, which misses out on VAT receipts payable by larger firms, but for the economy as a whole, since bigger businesses tend to be more productive. A lower threshold would make staying small a less viable option. It would also move Britain more into line with the European norm—German companies only need revenues of €22,000 ($24,050), for instance, to start paying VAT.

This has resonance with the composition scheme in the GST, which exempts firms with less than Rs 1.5 Cr from filing monthly returns.

2. Another article points to Britain's problem with affordable housing shortage, attributed to restrictive regulations,

Strict planning rules, which protect the green belt around cities, are effective at stopping urban sprawl. Too effective: just 6% of the land in Britain has been built on. The Countryside Charity claims there are enough vacant or derelict brownfield sites in London to build nearly 400,000 homes there. But brownfield sites can be unappealing places to live and often require costly clean-ups.

Another one concerns affordable housing quotas

Affordable housing quotas also weigh on developers’ profits. In 2021 London’s mayor, Sadiq Khan, unveiled targets calling for 50% affordable housing on all new sites, higher than the 35% threshold set in 2016. Greater numbers of residential sites are being turned over to commercial uses (such as warehouses) as a result, says Emily Williams of Savills, or are concentrated in areas with higher property values such as Canary Wharf. Where high-rise projects succeed, they often do so by sidestepping affordability targets in favour of cash handouts to local communities or promises to build cheap homes elsewhere. Nearly 200 new towers have been built in London over the past decade but many of them have been filled with luxury flats, and boast gyms, private cinemas and rooftop lounges. Buyers are often investors; apartments are frequently left empty... New schemes in London must adhere to stringent restrictions on height and must not obstruct certain views of landmarks such as St Paul’s Cathedral. There is often resistance to high-rise developments from local residents: planning applications for new schemes have been dismissed for being too bulky, too strange or just plain ugly.

3. Is America the biggest wealth generation entity the world has ever seen?

In 1990 America accounted for a quarter of the world’s output, at market exchange rates. Thirty years on, that share is almost unchanged, even as China has gained economic clout. America’s dominance of the rich world is startling. Today it accounts for 58% of the G7's GDP, compared with 40% in 1990. Adjusted for purchasing power, only those in über-rich petrostates and financial hubs enjoy a higher income per person. Average incomes have grown much faster than in western Europe or Japan. Also adjusted for purchasing power, they exceed $50,000 in Mississippi, America’s poorest state—higher than in France... America has nearly a third more workers than in 1990, compared with a tenth in western Europe and Japan. And, perhaps surprisingly, more of them have graduate and postgraduate degrees... American firms own more than a fifth of patents registered abroad, more than China and Germany put together. All of the five biggest corporate sources of research and development are American; in the past year they have spent $200bn. Consumers everywhere have benefited from their innovations in everything from the laptop and the iPhone to artificial-intelligence chatbots. Investors who put $100 into the S&P 500 in 1990 would have more than $2,000 today, four times what they would have earned had they invested elsewhere in the rich world.

This is important pointing to increasing generosity of US social safety nets,

America’s spending on social benefits, as a share of GDP, is indeed a great deal stingier than other countries’. But those benefits have become more European and, as the economy has grown, they have grown even faster. Tax credits for workers and children have become more generous. Health insurance for the poorest has expanded, notably under President Barack Obama. In 1979 means-tested benefits amounted to a third of the poorest Americans’ pre-tax income; by 2019 these came to two-thirds. Thanks to this, incomes for America’s poorest fifth have risen in real terms by 74% since 1990, much more than in Britain.

On this point, this is a distribution of household income in the US in 2019 after transfers

4. Amidst all the Chinese grandstanding, what do the Taiwanese people think about independence? How have their views changed over time? Sample this

Fewer than 6% want reunification immediately, and less than 12% want it at all. And both these trends have been stable or declining for the last three decades. In contrast, there has been a sharp spike in those wanting independence in some form or other. 

5. From MR, striking fact on New York shoplifting incidents

Nearly a third of all shoplifting arrests in New York City last year involved just 327 people, the police said. Collectively, they were arrested and rearrested more than 6,000 times, Police Commissioner Keechant Sewell said. Some engage in shoplifting as a trade, while others are driven by addiction or mental illness; the police did not identify the 327 people in the analysis. The victims are also concentrated: 18 department stores and seven chain pharmacy locations accounted for 20 percent of all complaints, the police said.

6. Rana Faroohar writes that immigration into the US is back to pre-Trump trends

In the US, immigration accounted for about half of the growth in the working age population between 1995 and 2014 according to Pew Research... Over the course of four years, according to a February paper from the San Francisco Federal Reserve, the Trump administration took 472 executive actions aimed at reducing immigration, from increasing immigration enforcement to freezing refugee admissions to moving away from family immigration. Between 2016 and 2019, the number of new permanent residents dropped 13 per cent and the number of student F1 visas declined 23 per cent... The two trends together fuelled a strong tightening in the labour markets, according to the San Francisco paper. The authors found that the drop in immigration from 2017 onwards resulted in a 5.5 percentage point increase in the vacancy to unemployment ratio in the US. But happily, the recent uptick has resulted in a 6 percentage point reduction to that ratio. More than 900,000 immigrants became US citizens during 2022 — the third highest level on record and the most in any fiscal year since 2008, according to Pew.

This underlines the importance of immigration to US economy,

While immigrants represent 13.6 per cent of the US population, they start a quarter of new businesses. Indeed, a study by the American Immigration Council last year found that 43.8 per cent of the Fortune 500 companies were started by immigrants or their children. 

7. TN Ninan points to how important Suzuki's entry into the Indian car market in the early eighties was for India's manufacturing and asks whether the same would be the case with Apple.

Suzuki entered in partnership with the government, and enjoyed special benefits and protection from competition for an extended period, whereas benefits offered to Apple and its suppliers are also available to competitors. Suzuki introduced contemporary cars to Indians (alongside Japanese companies that entered the motorcycle and commercial vehicle markets at about the same time), and has enjoyed dominance in the small-car market ever since. Apple is entering a bitterly competitive market that is already used to the best as well as the cheapest products on offer. Importantly, Suzuki brought with it a slew of Japanese vendors to set up shop in India and become suppliers for its Maruti cars. The result is India’s internationally competitive auto component industry. Since a car factory is largely an assembly unit, it is the vendor ecosystem created by Suzuki that has proved to be crucial. Part of that ecosystem is the steel industry itself, which had to start making special grades like deep-drawing steel.

8. The hollowing out of American cities,

The weekly average number of passengers arriving by train at Embarcadero station, which serves the downtown area, has fallen by about 70 per cent since 2019, according to the body that runs rapid transport. By contrast, the number of passengers commuting into New York’s central subway stations is down between 30 and 40 per cent, per official state figures... Vacant office space in San Francisco now totals more than 21mn square feet, according to real estate agency Cushman & Wakefield, while rents have fallen more than 15 per cent from pre-pandemic peaks. Vacancy rates have surged to 30 per cent, compared with 16 per cent in Manhattan and 8 per cent in London, according to real estate agency JLL. 

Amidst the gloom of the hollowing out, there is the silver lining it presents in terms of putting downward pressure on rents. This is perhaps the way in which these cities will become more affordable and thereby attractive newer people. 

9. A fascinating profile of Ursula von der Leyen, the former German Defence Minister and now European Commission President. 

Von der Leyen told me she had been aware that her vaccination strategy would take a bashing in Germany, because EU-wide procurement meant doses were spread among member states, rather than going to countries with the deepest pockets. “It was of existential importance for the EU — if you are big or small or rich or not so rich — that you have the same access to the vaccine. Otherwise it would have torn Europe apart,” she said. “In hindsight, it was right.” Instead of breaking von der Leyen’s presidency, the episode marked a turning point. In spring 2021, vaccines started flowing far more freely, and the commission emerged from the crisis with its powers enhanced. It is now working on plans to replicate the model of common EU procurement to increase the production of weapons and ammunition for Ukraine. 

Von der Leyen helped set another important precedent when member states agreed on €800bn of joint borrowing in 2020 to pay for Covid recovery. It was a major expansion of the commission’s fiscal power and a potential blueprint for future collective action. It also conferred a PR opportunity, as von der Leyen toured European capitals blessing local recovery plans and lining up multibillion-euro cheques. “We have learnt that if the situation is serious and requires European-wide action, it will be tackled rapidly at an EU level,” says Welle, the retired European parliament official.

For all its criticism, the European Union is a truly remarkable project. It's strong living proof that countries will give up their sovereignty, but only if backed with sufficient history. It's also remarkable that a long-serving German minister has managed to set aside her German nationality and put the interests of Europe at the front in managing the affairs of EU, even when the latter conflicts with the former.

10. Finally, a good snapshot of the sources of debt of emerging and developing countries.

Indian economy business concentration update

Business concentration has been an important area of focus in this blog. This and this are the last two posts on business concentration in India. 

It's now no longer under dispute as to the reality that market concentration is a uniform trend across sectors globally and India too. In fact, it can be argued that the most salient feature of modern capitalism over the last two decades has been a form of Mathew Effect which has seen the big companies getting bigger still across important sectors of the economy. Further, as I blogged here last week, this market concentration has been associated with another trend of price mark-ups and increased business margins. 

The debate rages on its causes. They include regulatory and political capture, the role of technology, globalisation and emergence of global markets, the long period of cheap money and financialisation, loss of labour's bargaining power, dominance of private equity etc. The right answer is probably a confluence of some or all of them combining to turbocharge the efficiency and profit maximising model of modern capitalism. However, it's now amply clear that the pandemic has provided a boost to this trend. 

On the issue of business concentration in India, this post will point to three recent commentaries. 

In their latest update on market concentration in India, the Marcellus Asset Managers write (the earlier one here and I blogged about it here). 

As explained in this note, improvements in transport infrastructure (e.g., the highway network has doubled over the past decade), the introduction of GST (in 2017) and new business models which have migrated from the developed world to India over the past decade, are resulting in India’s 20 largest profit generators earning a staggering 80% of the nation’s profits as compared to around 40% a decade ago. This in turn is leading to an increasingly polarized stock market.

In the decade ending 31st March 2012, the Nifty added around $440 bn in market cap. In these ten years, ~80% of the value generated came from 17 companies and the median Total Shareholder Return (TSR) CAGR was 26% for these 17 companies. Moving forward by a decade, in the decade ending March 31st, 2022, the Nifty added ~$1.4 trillion in market cap. And 80% of the value generated in these ten years came from just 20 companies whose median TSR CAGR was 18%. As the table above shows, wealth creation in India is being driven by a dozen and a half companies. Another way to understand this is to look at the polarisation in Free Cashflows to Equity (FCFE). A decade ago, the top 20 FCFE generating companies in the Nifty (in the decade ending March 2012) accounted for just 23% of India Inc’s FCFE. Moving forward by a decade, if we look at the top 20 FCFE generating companies in the Nifty in the decade ending 31st March 2022, they account for 51% of India Inc’s FCFE.

The list of these companies is below

In a recent paper, former RBI Deputy Governor Viral Acharya used the Prowess data to document a sharp rise in business concentration with industries.  The market share of the Top 5 firms by sales has started rising since 2016 after having declined for long.

Much the same trend of reversal is observed in case of Top 5 by assets

This concentration has been especially pronounced among the Big Five corporate groups (Ambani, Tata, Aditya Birla, Adani, and Bharti Telecom). The sales share of the Big 5 have been rising, compared to the declining share of the next five. 

The Big Five have been consolidating their presence at the extensive margin (expanding into newer industries)

And also at the intensive margin (deepening their assets share in the already existing industries) 

Finally, Ishan Bakshi in the Indian Express documents several duopolies across sectors, mostly foreign owned,

The automobile sector in India is dominated by Maruti Suzuki and Hyundai. Both are foreign-owned. Together, the two account for roughly six out of every 10 cars sold in the country. Add Tata Motors, the biggest Indian auto player, and these three players control almost 70 per cent of the total car market... Three players — Hero MotoCorp, Honda and TVS Motor — account for nearly three-fourths of the total two-wheelers market. Two of these – Hero and TVS – are Indian-owned while Honda is a subsidiary of a Japanese firm... the mobile phone market in India is dominated by the Chinese brands Xiaomi, Vivo and Realme, and the South Korean giant Samsung. Vivo, Realme, Oneplus and Oppo are reportedly linked to the same Chinese company. Together these companies controlled roughly 70 per cent of the market in 2022. The smart TV market is similarly dominated by the likes of Xiaomi, Samsung and LG. Similar patterns can be observed in other consumer appliance markets as well as in various segments of the FMCG market... Indian players exercise more control in the core infrastructure sectors. For instance, in steel, the four biggest companies — JSW Steel, SAIL, Tata Steel and JSPL — control more than half the market... Similarly, the four biggest Indian cement firms command half of the market share in the country...

The telecoms sector is dominated by two large players (Jio and Airtel) and a weak third player (Vi) with an uncertain future. Together, Jio and Airtel account for more than two-thirds of the market... The airline industry (domestic travel) is also now dominated by two players — Indigo and Tata (Air India, Vistara, AirAsia India and Air India Express). Taken together, the two airline groups accounted for more than 80 per cent of the domestic market share in the year so far (Jan-Feb). In the private banking space, HDFC, ICICI and AXIS account for a significant share (though all of them have sizeable foreign ownership), while concentration is also evident in airports and ports. Similar patterns can be observed in online markets as well. For instance, the retail market is dominated by Amazon and Flipkart; the payments market has been cornered by PhonePe and Google Pay; food delivery is split between Zomato and Swiggy; and transportation between Ola and Uber. Most of these companies are either foreign-owned or majorly backed by foreign players.

In the Indian context, the Marcellus report points to a the digitisation of business activities and the associated network and other effects which benefit the largest firms, the improvements in transportation infrastructure, increased formalisation of the economy, emergence of new business models, the introduction of GST etc as being responsible for benefiting the large incumbents at the cost of their smaller competitors. 

Since business concentration is invariably associated with political and regulatory capture (with all its  corrosive consequences not just on capitalism but on politics and society in general) and price mark-ups, there is a strong case to regulate business concentration as an end in itself. The current regulatory tests of consumer welfare and market harm have to be supplemented with this additional test of the likelihood of business concentration resulting in regulatory and political capture. This may entail making explicit the objective of breaking up large corporations. 

Critics will point to loss of innovation and efficiency associated with this approach But a cost-benefits assessment would reveal that this loss would be more than off-set by the avoidance of political and societal harm from the inevitable regulatory and political capture by large firms. Further, there is nothing to suggest that large firms are essential for innovation and productivity improvements. In fact, the recent history of capitalism would suggest exactly the opposite - innovation and business dynamism coming from smaller and newer firms. 

Furthermore, even if we agree with the contention of loss of efficiency and innovation, there is the question of whether human society needs so much innovation and efficiency which anyways benefits only a small majority of the global population. There is a strong case that the far more important priority and greater challenge is that of broad-based diffusion of the progress that has already been achieved. Finally, there is also the philosophical question of the environmental sustainability (climate change, resources depletion etc) and social desirability (social media, automation, AI, widening inequality etc) of such levels of turbo-charged innovation and efficiency maximisation. 

Edtech and student learning outcomes

I have thought about blogging on Edtech, but never managed to get around. This post has a set of observations on the sector, triggered by an article in The Ken which draws attention to some trends in India's Edtech landscape. 

It points to declining innovation in India's Edtech space,

A useful way to think about edtechs is their evolution(?) from inventions to machines. As inventions, they were allowed to experiment with different technologies and business models. The novelty of using tech to solve learning or teaching problems was still… novel. The possibilities for scaling were unmatched. The price points, for quality education, were unbelievable. We may not have invented new ways of learning—it was still a digital lecture—but we had hit upon something new. I would argue that these fledgling inventions were coaxed into becoming big machines partly by how much money they raised. Everyone was in a hurry to see the big edtech flagship industry come out of India—Byju Raveendran even made it a personal goal—and churn out machine after successful machine. And you needed lots of staff to turn all the cogs. But yeah, this kind of stuff is surely gone now. What got lost in the mad rush was the invention, and the inventors. And because no one’s building anything new, the need for creators, designers and even product managers has been slashed by approximately 70%... the roles now left behind in B2C edtech are mostly ones that keep the sputtering machines running: sales people, category heads, content developers, engineers. Definitely essential work, but no one’s looking around for a chief innovation officer. It’s all rinse, repeat.

The article also cautions with an example on placing too much expectations on AI in Edtech,

Nirmal Patel is an education entrepreneur based in Gujarat. Patel experimented with GPT-4 to teach a polynomial sum, and took a counterintuitive approach. Patel wasn’t interested in generating only the right answer for (2y+5)*(2y+5), "I asked GPT to tell me wrong ways to solve the problem and it was not able to reproduce any wrong ways. Then I gave it one of the wrong answers, and asked how to go from question to wrong answer and it kept failing... so I felt that it lacks data on how people make mistakes." ... clearing misconceptions are actually a key pathway to learning. Especially with maths, where you could carry misconceptions across grades, and keep making the same mistakes.

Some observations:

1. The point about declining innovation requires some qualification. I don't think Indian Edtechs were ever innovative in expanding the frontier of our knowledge about child learning. Their primary success was in accumulating voluminous digital content (especially questions), organising them, and delivering in a user-friendly manner. Innovation was limited to the superficial aspects like gamification, and not in the science of child learning. For example, personalised adaptive learning, which examines how learning happens (and, more importantly, does not happen) never took off. 

As a reflection of this prioritisation, India's Edtech space was driven by technology professionals guided largely by the anecdotal wisdom of a few teachers, and rarely by education researchers with deep insights into the way learning happens. It would be very interesting to get a break-up of the various categories of professionals employed in the big Edtechs - IT programmers, gaming experts, Education (not economics) researchers and PhDs, teachers, marketing and sales professionals, finance professionals etc.

2. This lack of focus on innovation and R&D (beyond brute force piling content and presenting them) is emblematic of India's startup eco-system. Too many copycat entrepreneurs attracted by the misleading perception of a continental sized market and the attendant possibility of instant gratification from massive growth and high valuations. They follow the boiler plate business model of copying the idea, capturing subscribers with discounts and promotions, boosting valuations, attracting more investors...

Edtech was an area where the entrepreneurs and financiers, as well as their mentors and boosters, had the opportunity to strike out differently, and design and develop a world-class cutting-edge set of products and solutions which truly expanded the frontier of general student learning and thereby addressed arguably the biggest economic development problem facing India and many other developing countries. This has proved elusive and looks likely to remain so. 

3. The binding constraint on learning deficiencies in developing countries is that of basic literacy and numeracy skills among children in lower grades, which gets carried forward to higher grades. In its absence children end up sleep walking through higher grades or drop out. For Edtech to make a dent on this requires content and pedagogy (or digital instruction pathway) which can address deficiencies in foundational learning. This, in turn, requires understanding of how children make mistakes on basic literacy and numeracy or fail to understand basic concepts, so that content can be designed and delivered appropriately to address those deficiencies. 

The better-off children don't suffer anywhere as much from basic literacy and numeracy deficiencies. And they being the primary consumers of Edtech, the developers have limited incentive to develop content and pedagogy that responds to the problem of basic literacy and numeracy. There is also a limited library of answers/responses of the common mistakes made by children in basic literacy and numeracy, and focus on how they can be addressed. 

4. In the absence of good pre-existing data on basic literacy and numeracy (student responses), any AI solution like Chat GPT will struggle to churn out meaningful solutions to the problem. I struggle to imagine how, in the absence of a mechanism to address this data gap, Chat GPT and its likes can do much in the foreseeable future to address the issue of basic literacy and numeracy.

5. If one were to do a balance sheet of the Edtech wave, it can be argued that it has expanded the learning tools available to those already cognitively better-off kids who form a small minority of the kids. However, I don't think it has made much, if any, difference to the massive learning deficits problem that afflict the overwhelming majority of students in India. In fact, the Edtech wave may actually have strengthened the Matthew Effect in life outcomes between the rich and poor by marginally improving the learning levels of the better-off children while doing little or nothing at the margins to the rest. 

I think the same divide applies to teachers too. The teachers in the good private schools (and a few interested teachers in the public schools) may have benefited at the margins from the Edtech materials. For these reasons, I'm not hopeful that this current Edtech wave will have any significant impact on improving the general quality of school education in India. It would have been a missed opportunity. 

6. The boom in the Edtech space happened only because it was marketed effectively as an innovation to improve learning and fed into the most important priority of Indian households, the education of their children. It effectively expanded the off-school (or at-home) learning space and also cannibalised the tuition market (though there may be a re-cannibalisation now happening).

7. Finally, while the jury is still out on whether the venture capital in particular and private equity in general have been net positive for the world economy, this Edtech boom is a great example of the distortionary effects of financial markets and the need for some form of market guidance. The VC bubble of the last few years, fuelled by ultra-low interest rates and fear of missing out (FOMO) investing incentives of VCs, have resulted in a massive misallocation of resources towards short-term business growth and valuations without focus on quality and outcomes (sustainability). 

A few examples of innovation does not mean that, in general, the wild-west of entrepreneurship and VCs can work everywhere and on everything, especially in solving deep-rooted and critical development problems. It should be a strong cautionary reminder to those who think naively that digital technologies can disrupt and solve chronic problems like student learning deficiencies. 

Weekend reading links

1. A very comprehensive presentation by Nathaniel Bullard on the various issues involved in the decarbonation project. This is a stark reminder of the problem with modern economic growth - 1950s appear to have been the CO2 emissions take-off period.

But per capita CO2 emissions appear to have peaked

As a result, economic growth and emissions appear to have decoupled.

In the US, the entire net additions in primary energy is from renewables.

2. Saudi Arabia led OPEC announce further cuts in oil production to shore up prices. While this would be a blow to a world economy already grappling with inflation and an impending slowdown, it would be a boon to the Russians.

3. As China conducts a high intensity naval exercise in international waters near Taiwan and Japan in response to the Taiwanese President Tsai Ing-wen's visit to the US, Gideon Rachman has an oped in FT calling for western unity in containing China's aggressive intentions.

There are three main arguments for sticking up for Taiwan. The first is about the future of political freedom in the world. The second is about the global balance of power. The third is about the world economy. Together they amount to a compelling case to keep Taiwan out of Beijing’s clutches... the Indo-Pacific region as a whole has several thriving democracies including Japan, South Korea and Australia. They all depend to some extent on a security guarantee from the US. If China crushed Taiwan’s autonomy, either by invading or by strongarming the island into an unwilling political union, then US power in the region would suffer a huge blow. Faced with a prospect of a new hegemonic power in the Indo-Pacific, the region’s countries would respond. Most would choose to accommodate Beijing by changing their foreign and domestic policies... The implications of Chinese dominance of the Indo-Pacific would also be global, since the region accounts for around two-thirds of the world’s population and of gross domestic product. 

If China dominated the region, it would be well on the way to displacing the US as the world’s most powerful nation. The idea that Europe would not be affected by that shift in global power is absurd... Taiwan produces over 60 per cent of the world’s semiconductors and about 90 per cent of the most sophisticated ones. The gadgets that make modern life work, from phones to cars and industrial machinery, are run with Taiwanese chips. But the factories that produce them could be destroyed by an invasion. If Taiwan’s chip factories survived but fell under Chinese control, the economic implications would be huge. Control of the world’s most advanced semiconductors would give Beijing a chokehold over the world economy. As the US has already discovered, replicating Taiwan’s semiconductor industry is much harder than it sounds. All these considerations — economic, strategic, political — make a compelling case for the US and its allies to protect Taiwan. No one in their right mind wants a war between America and China. But now, as in the past, it is sometimes necessary to prepare for war — to keep the peace.

The operative part is that it's necessary to prepare for war to keep peace. 

This is sound advice for appeaceniks like Emmanuel Macron who has implied France will not protect the island since there is a "great risk" for Europe in getting "caught up in crises that are not ours." At a time when China has been conducting aggressive naval exercises and tensions between China and US are on the boil, it's difficult to see Macron's statement, and that too while on a visit to China, as anything other than appeasement. The damage it would have in adversely impacting the delicate deterrence on Taiwan is real. This is a good summary.

Sensing the damage, Germany's foreign minister Annalena Baerbock during a visit to Beijing and EU's foreign policy chief Josep Borrell have both warned China against using military force against Taiwan. Baerbock said that "a unilateral, to say nothing of a violent, change of the status quo would be acceptable to us Europeans."

4. Ruchir Sharma points to how dominant Big Tech has become in the US and how non-disruptive US capitalism has become

Today, all of the top five US companies are tech businesses and together they represent more than 20 per cent of the stock market — the highest concentration since the 1960s and more than double the figure a decade ago. The decline in competitive churn is a side-effect of the rescue culture that has been growing since the 1980s. Ever since the US Federal Reserve stepped in to prop up the market after the 1987 crash, the stock market has grown dramatically, from half the size of the US economy to two times larger at its peak in 2020. One might assume an expanding market should create room for more churn, but no, not in America. The number of US companies that remain in the top 10 from one decade to the next has risen steadily, from just three in 1990 to six at the end of the 2010s. And while churn has weakened in the US, it remains relatively robust across much of the world. From the start to the end of the 2010s, just two companies remained on the top 10 list in Japan, four in Europe, four in China and two in the global list, Microsoft and Alphabet. Today, the top five US companies are bigger than the next five by the largest margin since the early 1980s. The top two alone account for nearly half the market cap of the top 10, up from 35 per cent at the start of the pandemic. Apple is now number one, and is nearly six-times larger than UnitedHealth Group, in 10th place. Three decades ago, Exxon was number one but just over twice the size of the tenth company, BellSouth.

The biggest beneficiary of the bank bailouts in the US are the big technology companies. This is reflected in the rebound in their stocks after the bailouts were announced. The bailouts also reflect the regulatory capture by Big Tech, a point highlighted by the Texas mayor 

In Texas, the mayor of Fort Worth recently said that the “main thing” worrying business leaders is this question: if SVB had served the oil industry rather than tech, would the government “have stepped up the same way?”

5. The recent banking crisis that was triggered by SVB had its roots in classic asset-liability mismatches, excessive exposure to long-term government securities (50% of assets, compared to 29% in India), concentration of credit risk (startups), and liquidity risk (disproportionate share of bulk deposits). In its context, TT Rammohan draws attention of the RBI's "intrusive" regulatory approach which has prevented bank runs in India,

It is fair to suggest that the Indian banking system is better equipped to pre-empt the sort of risks we are talking about...The average holding of government securities in the Indian banking system today is 29 per cent of liabilities. The majority of holdings are held to maturity and hence insulated from market risk... The Reserve Bank of India (RBI) monitors concentration risk closely. It has in place stringent norms for risk exposure to a borrower. Exposure to “sensitive” sectors, namely, real estate, commodities and the capital market, is restricted. The RBI is quick to draw attention to excessive exposure to any industrial sector or product. As for liquidity risk, the RBI watches dependence on “bulk” deposits like a hawk. Where the dependence is high in absolute terms or out of line with that of peers, the RBI asks for the proportion to be brought down in a specified time-frame. 

The RBI’s monitoring of boards and management is more intense than elsewhere. Appointments to the posts of chairman and managing director at banks require the RBI’s approval. The RBI typically approves terms of three years but may approve a shorter tenure. There are age limits for the managing director and chairman. There are norms for the composition of bank boards and for the audit and risk management committees. Most regulators limit themselves to fixing the ratio of variable pay to fixed pay of the chief executive officer (CEO). The RBI does this and, in addition, regulates the fixed pay of the CEO. It understands only too well the link between executive pay and systemic risk in banking. Two reports that the RBI makes available to bank management are noteworthy: The Annual Financial Inspection report and the Risk Assessment Report. These highlight the entire gamut of risks, shortcomings in systems and processes, the functioning of the board, lapses in compliance, etc. Those who have sat on bank boards will vouch for the high quality of these reports.

The RBI need not be apologetic about its approach to regulation and supervision. The approach is intrusive, no doubt. It can be irritatingly prescriptive. It will be seen as micro-management. But it serves a purpose, namely, shoring up stability in banking.

6. Poonam Gupta points to the bias with credit rating agencies in their assessments of developed and developing countries

A UN paper attributes the bias to the location and origin of the staff of the credit rating agencies. The headquarters of credit rating agencies are located in the US. This itself contributes to the bias in favour of the US. Besides, they fear being legally sued by advanced economies for granting them ratings lower than what they think they deserve. A majority of the managers and analysts in the rating agencies have been trained at universities based in advanced economies, resulting in “group think” and “home bias”. Finally, given the oligopoly in the rating industry, the raters mimic one another, perpetuating the bias...

Our own analysis of the credit ratings of the G20 countries confirms this bias. We compute the average numerical ratings of the three largest credit rating agencies, viz., Moody’s, S&P Global, and Fitch, on a scale of 1 to 20. While the average rating of an advanced economy is almost a perfect 19, that of an emerging market is 7.5 points lower, at close to a junk grade of 11.6 (the junk grade is accorded to a rating of 11 and below). The differential is not explained by the levels of growth rate, debt or fiscal deficit of these countries. The emerging countries live under the perennial threat of a potential downgrade to below the junk grade. India’s average rating in 2022 was 12, just one notch above the speculative grade.

7. Interesting article on the changing trends in urban planning, from grids to radial plans to cut de sacs.

8. Finally on the importance of property prices to the developed economies,

In developed economies... real estate is formalised, and mortgages are 30 per cent to 60 per cent of banking credit... Not only is housing an important source of economic demand, accounting for 10 per cent to 24 per cent of gross domestic product (GDP), but it is also an important asset for most households. Most importantly, being a long-term asset, its value is highly sensitive to interest rates... In major markets, nearly a fifth of loans have loan-to-value ratios more than 80 per cent: A 20 per cent price drop would mean a distressed mortgage... We estimated a 0.9 percentage point impact on global growth if housing construction in the US, China, Germany, Canada, and Australia were to fall back to trend: Most of it due to slower construction, and the rest due to weaker consumption caused by negative wealth effects as house prices fall.

The Economist has an update on property markets in developed countries.