Weekend reading links

1. A bond market story of the last two weeks has been the rise of the 10-year Japanese government bond yield above 3% for the first time since September 1996, following a weakening yen and an unprecedented bilateral market intervention with the US Treasury to shore up the currency.

The market expects a rate hike by BoJ from its current 1% to prop up the yen and also quell rising inflation. However, this would clash with the commitments of Prime Minister Sanae Takaichi for fiscal spending to boost the economy. 

The pressure on yen and rising bond yields are also a matter of concern for the US, since it could trigger repatriation of the massive Japanese investments in dollar assets, including the holding of US Treasury bonds.

Japan is the top foreign holder of US government debt, with more than $1tn, much of it held by financial institutions... market concern that Japan’s enormous pension funds and life insurers, nursing tens of billions in paper losses on their bond holdings, could shift their investment strategies as yields at home become more attractive... Citi’s Takashima said life insurers had been waiting for yields on 20-year JGBs to hit 2.5 to 3 per cent but were still not buying at scale as they feared that prices could drop further.

2. This is an excellent article on baby diaper manufacturing in India. The two costliest items are not manufactured in India and are imported.

Further, there's an inverted tax structure.

At the 56th GST Council meeting on 3 September 2025, diapers were moved from 12% to 5%, effective 22 September 2025... But SAP sits under HSN 3906, taxed at 18%... Output at 5%, inputs at 12% to 18%... input tax credit piles up faster than it can ever be set off against output tax. The credit is not lost. It is refundable under Section 54(3), and from 1 October 2025 the government began granting 90% of such refunds provisionally. But refundable is not the same as available.

Diapers are covered under PLI, and it is ending up supporting contract manufacturers who import SAP. 

Until an Indian chemical major commits to commercial SAP capacity, every rupee of PLI is subsidising the assembly of imported chemistry. We are building the world's fastest converting industry on someone else's molecules.

In this case, the PLI should target the SAP manufacturing in India. Supporting contract manufacturers to make what they are already doing does not require PLI. It underlines the point that PLI needs to focus on domestic value addition and not merely investment and sales. This requires more detail-based policy making. 

3. Tata Capital Healthcare Fund appears to be doing what public innovation funds ought to be doing, de-risking new market segments in healthcare. 

TCHF is not really in the business of spotting the next unicorn and riding it to a listing. It is in the business of manufacturing acquisition targets. It finds a chronic, non-negotiable demand, dialysis, cancer, joint replacement, wraps a proven clinical model in Tata credibility, scales it into Bharat where nobody else will do the asset-heavy work, de-risks the operations, and hands a finished, cash-generating, regulation-cleared asset to a global consolidator or a domestic roll-up desperate to enter that exact niche...

TCHF works because of a stack of things that have nothing to do with money: extreme sector focus, operational depth, brand-as-regulatory-passport, a structure that insulates it from its own parent, and the patience to build assets strategic buyers are forced to buy. Take any one away and the model wobbles... The winners in corporate venture will look... more like TCHF: narrow, patient, operationally heavy, and quietly building things the giants of their industry will one day have to acquire.

Jayant Mundhra's Substack is excellent.

4. Is AI exposure driving students to pivot away from Computer Science?

Also on AI, the latest PISA student learning outcomes survey findings show uniform declines in reading and math. 

The new report shows that reading scores across the OECD have fallen by 25 points and maths by 22 points since 2018. “Given that 20 score points is roughly equivalent to a year of learning, this implies that a majority of 15-year-old students across the OECD in 2025, on average, were performing at a level typically expected of 14-year-olds,” according to Pisa. Schleicher linked the decline in the latest scores to the dominance of distracting short-form videos on platforms such as Instagram and TikTok, as the report suggested that “digital distraction” is harming education across the world. “We cannot say for sure, but skimming social media feeds and rapidly processing information may be contributing to worsening ability and motivation to engage with complex texts and data,” the report said.

5. US labour-capital share of output - rising corporate profits amidst falling wage share. 

Pre-tax earnings hit an annualised $4.8tn in the second quarter, or 18 per cent of national income, according to Bureau of Economic Analysis data, the highest share since the aftermath of the second world war. Employees’ share from wages and benefits fell to 60 per cent, the lowest level since the 1950s... Bumper returns largely benefit richer Americans, who receive much of their income from investments, while middle- and lower-income households rely more heavily on pay cheques. Inflation has also outpaced wage growth, causing real hourly earnings to fall by 0.2 per cent in July versus a year earlier.

6. A global whisky glut, or whisky loch, amidst rising consumption in India.

The amount of whisky maturing in casks has soared from less than 400mn litres a decade ago to around 1.4bn litres this year, or 389mn cases — enough to meet current consumption levels for three years, according to Martin Purvis and Duncan McFadzean’s Commercial Spirits Intelligence newsletter. That has caused many of Scotland’s distilleries to curtail output by more than a third, insiders say... Today’s glut is the result of increasing production during the 2010s, which led to an excess of casks maturing during times of global economic uncertainty.

7. California, the bastion of liberalism, struggles to build. 

A high-speed rail line that voters approved in 2008 but that has yet to lay a track. A large housing project outside Los Angeles and the redevelopment of a Navy yard, both in planning stages for decades. The state has arguably the nation’s worst housing crisis, with rent and home prices that far exceed the national average. The high cost of living, combined with strict environmental and land-use regulations, has led to a steady migration of companies and residents to less expensive states. The main problem, Mr. Metcalf continued, is that California’s overlapping regulatory processes, scattered among state and local agencies, make it nearly impossible to approve — or even outright deny — a project. Even when the governor or state legislators get behind an idea, local governments often have effective veto power. Delay becomes the normal course of nonaction.

8. London's experience in reducing knife crimes.

Knife crime rose dramatically in Britain from 2017, especially among teenagers... Hospitalisations for “assault by sharp object” have fallen by a third in London since their peak. Knife-related homicides have shrunk by a half. Last year teenage homicides in the capital fell to their joint lowest level (similar to 2012) in almost 30 years... As English politicians scrambled for answers during the 2017-19 “epidemic”, Lord Sadiq Khan looked to Scotland. In the previous decade Glasgow, once labelled Europe’s murder capital, had achieved impressive reductions in violent crime. One reason was the roll-out of the Scottish Violence Reduction Unit (VRU), which aims to prevent violent crime by bringing the police, schools, hospitals and sports clubs together to identify at-risk children and direct them away from crime. Between 2008 and 2018 Scotland’s VRUs were credited with bringing about a 38% fall in homicides and a 43% drop in attempted murders and serious assaults—many of them knife-related. 

Lord Khan announced England’s first VRU in London in 2018. Today there are 20 such units across England and Wales, covering areas that account for 80% of all knife crime. A recent Home Office review found that England’s VRUs caused a 12% fall, since 2019, in hospital admissions for violent assault among the under-25s. That is modest compared with Glasgow, but the Home Office looked only at the national average. Violent crime has fallen most in cities like London—dense urban areas where the model is easiest to implement.

9. The state of gender empowerment.

In India violence against women is so normalised that nearly 40% even of women think a husband is sometimes justified in beating his wife. In Mali the figure is nearly 70%... In South Asia only a third of women are in the labour force; in the Middle East and north Africa, only a fifth are. Since 1990 the share of labour income that accrues to women has risen from 35% to 44% in liberal France; in patriarchal Pakistan, from 1.5% to a still-woeful 9%. Removing the barriers to women working would raise income per person by a fifth in many countries, estimates the World Bank—a bigger economic benefit than avoiding a typical civil war...

Yet even the most sexist laws can be scrapped, as Saudi Arabia has shown. Before a series of reforms that started in 2011, women there were barred from all but a handful of jobs and not even allowed to drive. Now they are free to work, drive and shun the hijab if they choose. The share of women in the labour force has nearly doubled since 2010, from 18% to 34%. That is startling progress for a kingdom many thought hopelessly stuck in the past—even if there is still a long way to go.

See also this. 

10. Nvidia is the central bank of AI?

Over the past three years it has pledged over $70bn in investment in startups and offered $300bn in financial support to its customers... It has promised around $25bn in future equity investments. It owes around $33bn in debt. Its potential liabilities to customers amount to about $300bn, but only come into play in a downturn and so do not appear on its balance-sheet. These include the $105bn guarantee behind Open­AI’s data centre; as much as $125bn through the Wall Street partnership; and around $67bn in other backstops.

Also this

Nvidia’s financial engineering is partly a response to its biggest customers’ transformation into rivals. “Hyperscalers”, tech giants such as Amazon, Google, Meta and Microsoft, account for roughly half of Nvidia’s revenue. This year they are projected to invest around $800bn, largely on AI infrastructure. But most of them have begun designing their own chips, which puts their future purchases from Nvidia in doubt. For the hyperscalers, these custom chips are much cheaper, costing between a fifth and a third as much as Nvidia’s...

Hyperscalers have investment-grade credit ratings, which keep their borrowing costs low. Upstart neoclouds have similar spending needs, but little revenue. Their loans are naturally much more expensive. Alphabet, Google’s parent company, sold $2.75bn of 50-year bonds in November, at an annual interest rate of 5.7%. The rate at which CoreWeave, the biggest neocloud, borrowed $2.6bn in July was almost double. It is this gap, between hyperscalers’ borrowing costs and everyone else’s, that the bank of Nvidia would like to narrow. One way it does that is by taking equity stakes in startups that will be customers themselves or that will help fuel demand for Nvidia’s chips indirectly. Last year Nvidia made about 90 such investments, nearly twice as many as two years earlier. This year it has already agreed another 60-odd. 

Some of these cheques aim to propagate open-weight AI models, which users can download free of charge and adapt, unlike proprietary offerings from firms like Anthropic, OpenAI and Google, which users tend to access via subscriptions and whose inner workings are hidden. In August Nvidia agreed to pay Poolside, a startup building AI coding models, $6bn to license its software and a further $1bn for a stake. It has also agreed to buy Hugging Face, a platform hosting open-weight models, for $12.9bn. The intention behind such investments is to fuel demand for Nvidia’s chips by creating a proliferation of AI products and companies that are independent of the hyperscalers... In early July it announced a new stratagem in which it promises to top up neoclouds’ income from new data centres to an agreed floor. These undertakings, the exact terms of which vary from deal to deal, often last for six years. Throughout that period, Nvidia promises to pay a set price for “compute”, as the jargon has it. If the neocloud manages to sell the capacity in question at a higher price, Nvidia receives a share of the difference. This safety-net makes neoclouds’ future revenues much more predictable and so lowers the cost of the debt they take on to build new data centres. That, in turn, spurs demand for Nvidia’s processors.

In the graphic below, red are neoclouds, yellow are AI labs, and blue are financial firms. Also, the dashed circles are equity stakes, and the black boxes indicate guarantees and purchase commitments. 

But things may still be under control.

Morgan Stanley, an investment bank, reckons Nvidia’s “all-in” debt will rise from $53bn early next year to $200bn by the beginning of 2029 as guarantees come into effect. But that is offset by a stash of cash and liquid securities currently worth $99bn, and a business that will generate about $200bn in cash this year. Only a cataclysmic downturn that caused all Nvidia’s guarantees to come due and its profits to evaporate almost entirely would imperil the company—as things stand. The picture may change, however, if Nvidia’s commitments keep growing.

See also this. 

11. Friendships across classes matter for life outcomes. 

Recent research suggests... having pals across class boundaries appears to be one of the strongest predictors of upward mobility for people in low socio-economic groups... What’s more, children who grow up in areas with more cross-class mixing go on to earn more on average, controlling for parents’ income. To isolate the effect of the county itself, the researchers tracked families who moved. Assuming those moves were not related to their children’s future prospects — a reasonable assumption — the analysis found that people who spent a larger portion of their childhood in a better-connected county went on to earn more.

12. The graduate premium is reversing in US and UK.

13. The Indian space ecosystem is a reform success.

India’s space ecosystem has expanded significantly, with more than 450 space industries and over 440 startups now engaged in the sector. Isro is facilitating greater private-sector participation through the government-owned, company-operated (GOCO) model, under which private industry can manufacture, test and supply components and subsystems using its own facilities and infrastructure. Isro has facilitated nearly 440 technology transfers so far, enabling wider adoption of space technologies.

14. The victory of the far-right Alternative for Germany (AfD) in the Saxony-Anhalt province in the east of Germany was expected. Though it has fallen short of a majority by just three seats, an FT editorial calls for allowing it to form the government.

The firewall, a well-intentioned policy of non-cooperation with the far right, which is considered a threat to democracy, has turned into a trap for the mainstream parties, particularly the Christian Democratic Union of Chancellor Friedrich Merz. As support for the CDU shrinks, it is forced to share power invariably with its leftwing opponents in dysfunctional coalitions, whose quarrelling and meagre results drive votes to the AfD, further reducing the scope for compromise between the centrist parties. The firewall has failed to stem the AfD’s advance and is probably furthering it. The alternatives, though, are all bad given the far right’s current strength... 

The least bad outcome there would be for the party to take power with the backing of the Bündnis Sahra Wagenknecht (BSW), a small leftwing nationalist movement that rejects the firewall approach. An AfD regional government would lack the powers to enact some of its more outlandish policies, such as abolishing the right to asylum or renewing energy imports from Russia. To be sure, it could be an extremely uncomfortable time for Germans of immigrant backgrounds and other minorities living in the state. But extra vigilance from the courts and civil society could help to keep a far-right regional government in check. The far right would pose less danger in power regionally than nationally and executive responsibility could deflate its support. In any case, its opponents lack the seats to form an alternative majority. To try to do so would look undemocratic, given AfD’s vote share, and could backfire electorally.

15. Despite all its ubiquity, India's media and entertainment industry is a small revenue earner in proportion to its size.

Last year, IT accounted for 7.3 per cent of India’s GDP, against 0.8 per cent from M&E. The figure is 7 per cent for the US and 4.6 per cent for China... At $32 billion in revenues, the Indian M&E business is abysmally small. It is about a third the size of the Walt Disney Company or roughly equal to that of Tata Consultancy Services. Given the numbers, almost 700 million smartphone users, 650 million television viewers, and 421 million newspaper readers — the size of the firms in any of these segments doesn’t even scale up to Indian standards, let alone global ones... There are only two large media firms with any scale — JioStar and Google India — both at roughly $4 billion in top line. For a country that loves to chat and debate, there is no news brand that has found traction elsewhere. Ninety per cent of all that is watched in theatres, on TV or streaming is Indian stories. Yet there is no global entertainment firm of any heft from India... there is talk about Indian cinema’s soft power globally. But our presence in the global market is a blip compared with, say, Hollywood or Korea. The Indian movie business has been stuck at $1.5-$2 billion in domestic revenues for years. Indian studios simply do not have the money or distribution heft to attempt full-fledged global releases. It is only when the domestic market hits $10 billion or more will you have Indian studios that can have the strength and appetite to go global.

16. This contradicts the oft-repeated claim that a generous social safety net has made Europe a region of shirkers.

17. Huw van Steenis channels Charles Goodhart on the importance of practical wisdom in monetary policy.

Goodhart once put it to me, “every Monetary Policy Committee should have members who have a real-world understanding of the plumbing of financial intermediaries”. In my shorthand: the PhDs need the plumbers.

18. The latest PISA school test scores, where Swedish student scores declined, draws attention to the debate on the country's decision to encourage private schools. Contrary to public perception, Sweden has gone the farthest among continental European countries in privatisation of schools, healthcare, and elderly care, through a series of reforms in the 1990s and 2000s. 

About one in five Swedish children now goes to an independent school... This week’s scores in the international Pisa survey revealed the country’s worst-ever rankings of levels of reading, maths and science of 15-year-olds... The Swedish system is as distinct as it is extreme. Unlike most countries with private schools, Sweden’s system is meant to be egalitarian — so the schools are open to all, through the same free system as state-funded institutions. The private schools receive funding from the state in a voucher system that means they get the same amount of money per pupil as state schools, but can make profits from it if they run things efficiently.

19. Chinese exports have been growing faster than world imports since the turn of this decade. 

20. Finally, an excellent long read on how Javier Milei is taking deregulation to boost Argentina's oil and gas and mining sectors. 

Deregulation - chainsaw Vs the wood-splitting maul

I have been thinking about deregulation. I find myself recalibrating priors. 

There are perhaps two kinds of it we see globally. At one end is the loud, politically driven chainsaw approach of the likes of DOGE and Argentina’s Javier Milei. At the other end is the cautious tinkering at the margins (à la using the wood-splitting maul) that is the feature of deregulation efforts driven by bureaucracies. 

The latter can only get you so far, and there is a need to strike the right balance, or sometimes even verge towards the chainsaw. 

Before we dive deep, the FT has an excellent long read on Javier Milei’s extraordinary deregulation efforts in Argentina, which is now focused on freeing up the oil and gas and mining sectors to make them the engines of Argentina’s economic growth. 

More specifically, he is intent on exposing the corporatist economic structure of Argentina, centred around Buenos Aires, and established by the populist policies of Juan Perón to a sharp burst of foreign competition.

First, on the nature of deregulation.

In April, Congress passed a law that could provide a major impetus to the mining sector by reducing what the government says were excessive restrictions on projects near the country’s many glaciers... Martín Pérez de Solay, head of the mining conglomerate Glencore in Argentina, says the country has seven mining projects under way that are “world-class” and believes the country could bring on new annual supply of 1.5mn-2mn tonnes of copper over the next decade — about a third of the output of neighbouring Chile, which is the world’s largest producer. The boom in oil and gas is already under way. The US government estimates that Argentina has the second-largest reserves of shale gas in the world, most of it in the Vaca Muerta formation in the Neuquén Basin in the south of the country. Investment is accelerating sharply, partly as a result of a new legal framework introduced in 2024 that provides tax breaks and other incentives. Wood Mackenzie, the energy consultancy, estimates that the pipeline of new projects now exceeds $100bn. “Argentina is on the cusp of a shale revolution,” it says, comparing the atmosphere to west Texas in the early 2010s, at the start of the US shale boom. 

Exports in mining, energy and agriculture have already increased to record levels under Milei, beginning to ease the dollar shortage that has underpinned Argentina’s chronic economic instability. Federico Sturzenegger, the minister for deregulation and one of the architects of the plan to liberalise the economy, says that the cumulative impact of recent investments will allow Argentina to triple its exports in the next five to six years... Sturzenegger says that access to cheap energy from shale oil and gas will lead to a new “industrial boom”, which could include sectors such as fertilisers and petrochemicals.

And it could have profound long-term consequences, including shifting the geographical centre of the country’s economy.

The sectors Milei champions are in some cases more than 1,000 miles away — mining in the far north, or oil and gas production to the south in Patagonia. The government talks about millions of workers moving out from Buenos Aires to outlying provinces in the coming decades... Buenos Aires, where almost 40 per cent of Argentine voters live... In the long run, he estimates that about 4mn people will leave the Buenos Aires area over the next 30 years — with 2mn decamping to the oil and gas region in Patagonia and another 2mn heading for the mining region in the north. “In the second half of the 20th century, there was a big migration from the interior to Greater Buenos Aires at a time when Argentina was one of the most closed economies in the world,” he says. “This process is exactly the opposite; it opens up the economy and generates competitiveness from exports and the population gradually reverts to the interior.”

However, the deregulation, being more like a shock therapy, is also resulting in the hardships and problems its critics have long predicted. 

The excitement among resources companies, however, is mirrored by rising pessimism among the domestic-facing industries that employ millions of Argentines. Manufacturing, construction and retail have all contracted or stalled under Milei even though economists surveyed by the central bank predict the economy will grow 2.1 per cent in 2026. According to government figures, about 3,400 manufacturing businesses have closed since late 2023 — more than 10 per cent of the total. In the formal labour market, over 240,000 jobs have been lost, a fall of nearly 4 per cent, although this drop has partly been offset by growth in the informal labour market where employees have minimal protections. 

Textiles have been one of the hardest-hit industries, as Milei’s tariff cuts open Argentina to a flood of cheaper foreign clothing, including via Chinese e-commerce sites such as Shein and Temu... manufacturers... claim the currency is overvalued in order to curb inflation; others say Chinese producers are using Argentina as a dumping ground for their surplus output... The owner of a large textiles business in Buenos Aires says the government has set companies like his up to fail by opening them to competition from imports without dismantling the high taxes and cost structures put in place under the protectionist Peronist model... Martín Rappallini, head of the Argentina Industrial Union, says that Argentine companies face an annual tax take equivalent to 56 per cent of the formal economy, the highest burden in Latin America... Real wages have failed to fully recover from a sharp drop in 2023, when inflation surged into the triple digits. Disposable incomes have fared even worse as Milei has scrapped subsidies for energy, water and transport, falling 17 per cent in real terms since early 2023.

Clearly, Milei has bitten the bullet with deregulation. There are none of the standard hesitations of bureaucracy restraining the political choice that has been made. Frederico Sturzenegger, an economist-politician with considerable government experience, is carrying out the Milei mandate. 

There will be costs, with its suffering and losers. Milei may not even survive to fight the next battle. But it can be legitimately argued that when a system is entrapped in a very bad equilibrium, restrained by powerful entrenched interests, it is unlikely to do any more damage than business as usual to break free and deregulate extensively. 

India is not Argentina. But there are enough pockets of well-settled bad equilibria that survive only due to a systemic preference for the status quo arising from lack of political appetite and bureaucratic restraint, itself perpetuated by a lack of stakeholder demand and accountability and poor quality of public debates and actions on the associated issues. While bureaucracy gets the blame for all the ills, there are others equally or more culpable. Chalta hai at worst, tinkering at the margins at best, has been the norm. 

I can think of a few areas where taking the chainsaw (as against the tinkering using a wood-splitting maul) is the need of the hour. These are just randomly picked top-of-head-recall examples, and there will be many others, even more relevant or important. 

A first-order deregulation measure would be to prepare a negative list of activities from which the government should stay away. It was a leap of faith two decades back when state governments in India decided to stop purchasing their own vehicles, recruiting drivers and Class IV employees, and generally outsourcing services. They were brave decisions then. The same appetite, to a much higher degree, must now be summoned to exit other areas. What good can be achieved for government agencies to be entrusted with the development of land and real estate, or develop solar and thermal power generation, or use public funds to compete with private investors, or generally make anything that is widely available in the market? Pure public goods, demonstrated market failures, and strategic considerations must be the only reasons for governments being directly involved in activities. 

One of the highest-impact areas for reform would be a wholesale deregulation of urban planning norms. This would involve significantly easing (or increasing) development control limits, allowing much greater flexibility to landowners and developers, generally avoiding micromanagement with tight prescriptions, and proportionality in regulation depending on the nature of the property and use. This would entail radical upending of the prevailing paradigm of urban planning, a task that goes far beyond the imagination of even the most progressive of domestic planners and policy makers.

On the ease of doing business, the real disruption can happen only when we make the process of starting, expanding, diversifying and closing a business, exporting goods, etc., essentially automatic unless a genuine public-risk threshold is crossed. This would entail essentially culling several gatekeeping rules, or at least confining the rigorous gatekeeping only to a small set of prioritised categories. Deregulate extensively for all but the subset of higher-stakes categories, thereby making life simple for the vast majority. 

Another deregulation would be to dramatically reverse the inverted duty structure on inputs and outputs that inflicts serious costs on manufacturing and trade. This structure makes manufacturing and exports uncompetitive, entraps industries in bad equilibria, creates numerous perverse incentives, and also ends up creating distortions in areas like the utilisation of GST tax credits.

More specific areas of doing business in a globalised world deserve radical overhauls. In gatekeeping areas like food safety, product standards, communications security, etc., where our own regulatory regimes have struggled to keep pace, it may be more appropriate to embrace global standards through the likes of mutual recognition agreements. The only caution should be to ensure that they do not discriminate against domestic stakeholders. 

Human resource management within the government is another area which requires radical deregulation. The tightly prescribed one-size-fits-all recruitment rules are a relic of a bygone age, and must be revised wholesale to be made fit-for-purpose in the age of AI and disruptive changes. Even with all its risks, the recruiting entities must be given significant flexibility to formulate these rules as per their requirements. In general, the procurement rules are aimed at the median circumstances and stymie the growing long-tail scenarios. It is precisely the opportunities lurking in these long-tail scenarios that have the highest transformative potential, which are now blocked out by these procurement rules. 

Two specific industries where deregulation can have potentially transformational impacts are in the areas of clinical trials and other processes for drug development, and in oil and gas exploration. In both cases, the outcomes of all policy engagement to date have generally been disappointing. It therefore stands to reason that it cannot get any worse with deregulation. 

Arguably the most disruptive deregulation would be to delegate functions, funds, and functionaries to local governments. Decentralisation across levels of government can be transformational. This will certainly create abuses and excesses, but will lay the foundations for positive long-term change. 

More generally, as an agenda for those interested in taking forward effective and sustainable deregulation, here is a project.

I can think of six fundamental principles that are the heart of regulation, and the shift required in them. They involve moving from the process of permissions to one involving registration, ex-ante approval to ex-post accountability, one-size-fits-all rules to risk-based regulation, government inspections to self/third-party certifications and audits, protecting incumbents to protecting competition, and regulating inputs and processes to regulating outcomes. 

Instead of expending energy articulating principles, holding workshops, and writing opeds, it may be useful for those interested in getting governments to deregulate to prepare drafts of specific regulations that incorporate these new paradigm principles and make them available in a transparent manner (indicating the changes as proposed) as the agenda for engagement with policymakers and for public debates. Thanks to the likes of Claude, the task becomes easier, though getting the details reasonably credible is still a painstaking process of discussion and iteration. In a large country like India, all it takes is for one among several governments to make the leap of faith on deregulation. 

I’ll blog on this at a later occasion.

In all these cases, there will be an avalanche of protests and stiff opposition. There will be scaremongering of all kinds that would restrain even the boldest of bureaucrats. Hell might break loose in some cases. In electoral economies, the political economy of such costs can be daunting, as Milei is finding out. 

For sure, the costs will be real when looked at from narrow and limited time perspectives. But it is the medium- and longer-term that should be of interest. There will be capture by vested interests, exploitation, corruption, wastage of public resources, and abusive practices. But they are unlikely in the aggregate to be worse than the slow-moving dysfunctional train that we have now. 

In a famous essay, The Principle of the Hiding Hand, Albert Hirschman articulated the hiding hand principle as a form of beneficial ignorance that helps planners start projects they would otherwise have avoided due to uncertainties and risks. He points to the power of unseen creativity that would emerge to solve these unexpected challenges. Likewise, it is required to trust the hiding hand to make the leap on deregulation and be prepared to address the egregiously bad outcomes that invariably emerge. 

While at it, it is pertinent that there are also areas where taking the hammer on enforcement is equally required. Tukaram Munde’s strident ongoing enforcement of food safety law is a case in point. Excesses and apparent disproportionality of enforcement are par for the course with such endeavours in ultra-permissive systems. Here too, the wood-splitting maul is inadequate, and the chainsaw is necessary for any meaningful dent in the problem, even with its collateral costs.

Update on the emerging AI economy

This post compiles a few articles on AI’s emerging impact on the economy. 

If the chatter is to be believed, AI is eating the economy. One striking graphic on the importance of AI firms came from John Mauldin’s weekly newsletter.

Nowhere is AI’s role in economic growth more pronounced than in the US, contributing more than a third of US corporate investment.

Of course, the most salient manifestation of the outsized role of AI is in the stock markets (notwithstanding some pullback). 

The McKinsey Global Institute identified 18 arenas of future growth, in which they placed what they described as the AI foundation, consisting of three industries - semiconductors, cloud services, and AI software and services - at the top. 

They mapped the economic profit across the chip and compute value chain, with profits being concentrated in chip designers, foundries, cloud providers, and now memory. 

In what could have serious implications for competition, the report highlights the ever-tightening linkages downstream of the chip value chain. These linkages also raise entry barriers across the ecosystem. 

It identifies nine omniscalers - Alibaba, Alphabet, Amazon, Apple, Huawei, Meta, Microsoft, Samsung, and Tesla - as investing and dominating across the 18 arenas. The average omniscaler participated in six arenas and is rapidly expanding and deepening across and within arenas. 

These omniscalers generate more cash and invest more than others in the same arenas and those in other industries. 

Both in terms of market capitalisation and revenues, US firms dominate across the 18 arenas. 

In revenues, US firms generate over 50% of the revenues in these arenas, with those in the Greater China area (China and Taiwan) contributing 30%. Another threat to competition is the adjacency of arenas and the possibility of the omniscalers and other dominant incumbents in an arena also shifting to an adjacent arena. 

While AI dominates investments and equity markets, especially in the US, there is also growing interest in sectors that are by nature insulated from interest in sec AI development. 

Josh Brown, chief executive at Ritholtz Wealth Management in New York, has coined the term Halo, for Heavy Assets, Low Obsolescence, to signify sectors which have business models difficult for any AI model to replicate. 

These can be capital-intensive electric utilities, miners or oil companies, groups such as Italy’s Enel, or Rio Tinto and Shell in the UK… Halo businesses combine substantial physical capital with long-lived economic relevance. That means they should have sustainable business models in a world where “AI bots” could not just replace people but also any software programming and intellectual property previously thought to complement this new transitional technology… Commodities, for example, had already begun to attract interest from investors last year, helped by the weakness of the dollar.

Across the world, asset-heavy sectors like utilities, mining, and energy have been good investments, with their MSCI All Country World price indices outperforming the broad world index, even before the Iran war began in March.

On a historical scale, where does the ongoing AI capex stand, as of now?

The Economist has an article that points out that the ongoing AI capex boom may well be the largest investment surge in history. The biggest US technology companies that spent $450 bn on AI infrastructure in 2025 are expected to spend $900 bn this year, and another $1.4 trillion in 2027!

However, as the folks at a16z show in a blog post, while the AI-related arenas are dominating today and the capex surge (so far) is unprecedented, they are not in the same league as the railways or finance were in their respective periods of dominance in the nineteenth century.

One caveat here is that the 1900 economy was basically textiles, iron, coal, steel, and tobacco, the rails to transport them, and the banks to finance them, whereas today these sectors are a tiny fraction of the output.

In fact, even the $5 trillion estimated to be spent on AI and AI-related infrastructure by 2030 pales in comparison to that made on railways. 

By 1890 railway companies in the US alone had issued about $5bn worth of bonds. Adjusting for inflation that equates to about $180bn in today’s money. However, this understates the enormous scale of the undertaking, because the US economy was much smaller then. In 1890, $5bn was about one-third of America’s GDP, so the investment spree was arguably the equivalent of spending over $10tn today. It also resulted in an epic, generation-defining crash. In 1873, Jay Cooke & Co, the premier investment bank run by America’s dominant financier at the time, suddenly collapsed under the weight of unsold railway bonds. This caused a giant financial crisis and ushered in what was long known as the Great Depression, until the even larger one in the 1930s.

There are already questions being raised about the viability and sustainability of the AI capex surge. This is most salient in the valuations of the primary AI firms, which have pulled back sharply in recent months and lag many broader market indices this year. The Economist article discussed above has some very interesting revenue numbers about what would be required to justify such massive capex. 

A rough calculation finds that covering AI capex through identifiable AI income requires revenue on the order of $2.5trn per year, more than tech’s entire combined revenue today. Only a small minority of consumers seem willing to pay for personal AI subscriptions, so the real money will have to be made from selling to enterprises…For AI revenues to soar, more firms will have to use AI (what economists call an increase at the “extensive margin”) and use it more deeply (the “intensive margin”)… If, say, a third of firms across the OECD club of mostly rich countries adopt AI, then to generate $2.5trn of AI revenues the firms would have to spend about $100,000 a year on average. 

Against this requirement, the actual revenue estimates are in the range of just $150-200 bn!

Further, the signs of uptake and growth are not very promising, especially given the multiples of growth required.

In May, economists at the Census Bureau… found that about 33% of people now use AI at work, down from a peak of 46% in mid-2025… Researchers at the Bundesbank find that about half of German firms using AI do so for 5% of working hours or less. Ivan Yotzov of the Bank of England and his colleagues estimate that the average American executive uses AI for 1.7 hours a week—enough time to create a decent PowerPoint presentation, but not much more. For these dilettantes, free or ultra-cheap AI models are often good enough. Official data from Britain suggest that close to half of businesses using AI do not pay for it, presumably making do with the free tier of an American model or an open-source Chinese one… The median firm’s monthly spending per worker in June, however, was $10.66. Intuit, a software firm which tracks small and medium-sized businesses in America, Britain and Canada, reports that about one in ten has paid for a dedicated AI tool.

Furthermore, while the capex till date has been mostly driven by the large free cash flows of the omniscalers, it is now increasingly reliant on debt, drawn from risky segments like private credit markets. As a result, the four Big Tech firms are all expected to register their first deficit in years. 

And all this comes at a time when the richer world's citizens appear more wary of AI than those in the developing world.

And this

According to the Annenberg Public Policy Center, 61 per cent of Americans now oppose one being built in their backyard. The politics of the upcoming midterm elections reflect this, with candidates from both parties trying to portray politicians who favour the building of data centres as in hock to big corporations.

As a result, the regulatory free run that the AI industry has had, especially in the US, also thanks to the Trump administration, may be ending. It now stands on the substance of the technology to demonstrate its value proposition to drive the multiple-fold growth (and that too in a manner that accommodates the concerns of the political economy) required to justify the massive capex commitments. And interest rates are rising, and debt service costs are mounting. All this makes things even harder.