Weekend reading links

1. Scott Galloway is spot on in his assessment of Elon Musk's attempt to takeover Twitter. It's the sixth point that Morgan Housel makes here - people who are abnormally good at one thing are abnormally bad at other things. You can be the greatest entrepreneur but also be a very diminished human being!

2. Staggering numbers on employee attrition rates in Indian software companies,

Attrition has reached an all-time high at both the companies. TCS bled at a rate of 17.4 per cent in the fourth quarter of 2021-22, to compound the 15.3 per cent outgo in the previous quarter. Infosys lost 27.7 percent of its people in the fourth quarter and 25.5 percent in the one before... Offer letters are pouring in, and yet at least 40 percent of those who receive offers choose not to join... Three years ago, TCS would have reached out to maybe 500 institutes for hiring. Now it taps nearly 4,000, thanks to the TCS National Qualifier Test (NQT), whose launch in FY2018-19 was a big part of the company’s revamp of its hiring mechanism... Tata Consultancy Services, India’s largest software exporter, hired 100,000 freshers in the financial year 2021-22, more than in any other year. That means an average of 8,300 trainees joining the company every month.

More Indian software industry facts of the week,

Infosys lost 27% of its employees last quarter. TCS is also above 25%. HCL Tech is up to nearly 22%. Wipro is at nearly 24%... Back in 2010, the average salary for a fresher at a top-tier IT company was around Rs 3-3.5 lakh (~US$4,300-5,000 at that time). In 2021, the average salary for a fresher at a top-tier IT company is around… Rs. 3-3.5 lakh (~US$4,000-4,500)... there is a good reason for fresher salaries in the IT services industry barely rising over a decade: there is more supply than demand. Close to 10-15 lakh engineers graduate every year in India, and a significant portion are not employable... Consequently, companies have continued to hire freshers for more or less the same package for over 10 years. To put this in perspective, the CEO salaries for the top four IT companies have seen over 500 percent increase in compensation during the same period.

Two observations. One, are the big Indian software companies becoming the training ground for India's newly entering software developers, and to that extent are they are generating positive externalities? Second, does the high attrition rates also indicate the largely commodified nature of employees in these companies, and thereby the nature of work being done by them?

3. Sri Lankan inflation scenario is not pleasant

A surge in global oil and gas prices, combined with a 60 per cent drop in the value of the Sri Lankan rupee since last month, has also led to critical shortages of petrol and cooking gas. Sri Lanka’s state oil company, which had previously rationed petrol to conserve its limited stock, last week raised prices by a third to SLRs338 ($1.00) a litre... The lack of fuel has led to long queues, lengthy power cuts and stoked inflation as businesses pass on higher costs to consumers. Sri Lanka’s consumer inflation rate in March of 21.5 per cent was the highest in the Asia-Pacific region... Both private and public transport is becoming unaffordable. The Lanka Private Bus Owners‘ Association has received government approval for a 30 per cent fare increase.

4. Underlining the global food security vulnerabilities, at a time when the Ukraine invasion has already edible oil prices have risen sharply on the back of a ban on palm oil exports by its largest producer Indonesia which has been struggling to keep down food prices as consumption peaks during the Eid feasting season. 

5. Excellent FT graphical feature on how the Russian invasion has impacted the global foodgrains supply. 

Ukraine accounts for 8 per cent of global wheat exports, 13 per cent of corn flows, and more than one third of the sunflower oil trade. Normally the country exports 40mn to 50mn tonnes of cereals every year, but Russia’s invasion has meant export volumes in March were a quarter of those in February, according to the agriculture ministry... The country accounts for 30 per cent of the world’s supply of sunflower oil, widely used in both industrial and domestic food production, and grows 4 per cent of the world’s wheat... Some countries are particularly reliant on Ukraine for crucial food supplies. In Libya, for example, 44 per cent of the wheat supply used domestically came from Ukraine in 2018. In India, 77 per cent of the domestic supply of sunflower oil came from Ukraine in 2019. In China, it was 63 per cent. Ukraine supplied 43 per cent of the corn used in the UK in 2019, much of it to feed livestock.

The Russians have targeted the entire agriculture production chain in Ukraine and have taken control of many of the Black Sea ports which formed the gateways for Ukrainian exports. The impact on global food prices have been marked.

6. As Emmanuel Macron returns to power, he'll have the challenge of pruning down the French state, the biggest among large economies. Ruchir Sharma shines light at the French state,

Macron had promised to reduce state spending — then a record at more than 56 per cent of gross domestic product — by about 5 percentage points. Instead, under pressure from protests and the pandemic, state spending rose to a staggering 60 per cent of GDP. France’s government spending is 15 points above the average for developed economies. Moreover, that gap is explained less by heavy spending on education, health or housing than on welfare programmes, which at 18 per cent of GDP is nearly double the average for developed economies. France is stuck in a welfare trap, spending generously on income transfers but pushed by voters to spend even more, given discontent with the rising cost of living and with inequality. Despite its strengths, from large-scale manufacturing to luxury goods, France remains at best an average economic competitor. Its growth rate has long hovered at or below the developed world average. And though GDP growth has picked up under Macron, it averaged just 1 per cent a year in his first term, which ranks 13th among the top 20 developed economies over that period. The French state, taxing heavily to fund its spending habits and muscular regulatory arms, is a major reason for this mediocrity. France’s government deficit is 7 per cent of GDP and its public debt is 112 per cent, both among the heaviest burdens of any developed country.

7. For all the talk of embargoes and sanctions on Russia, the west has stepped back from where it really hurts - energy imports. Gillian Tett points to a study by Anette Hosoi and Simon Johnson who highlight that the volume of Russian exports has risen after sanctions, 

In fact, the movement of Russian crude by tanker ship was just over 3 million barrels per day in February and March, but more than 4 million barrels per day in the first 17 days of April. Despite the evidence of atrocities in Bucha and elsewhere, and the deliberate targeting of civilians with missile attacks (for example, at Kramatorsk railway station), Western countries remain reluctant to impose sanctions on Russian oil exports, fearing the consequences for fuel prices around the world. Most notably, the EU buys 2.2 million barrels of oil and 1.2 million barrels of petroleum product from Russia every day... Speaking in early April, Josep Borell, the EU High Representative for Common Foreign and Security Policy, pointed out that while the EU had pledged €1 billion to Ukraine for military aid: “€1bn is what we pay Putin every day for the energy he provides us. Since the beginning of the war we have given him €35bn.”

They propose targeting tanker companies and their insurers in London to enforce the sanctions. 

The hypocrisy in putting pressure on countries like India to ban import of oil and weapons from Russia is striking given this level of continuing European imports of Russian oil and gas.

8. Brendan Greeley writes that the Fed's balance sheet expansion through Treasuries acquisition was a political choice which led to "returns allocation",

Buying Treasuries, however, was also a political choice. There is some argument, even among central bankers, about how buying trillions of dollars of government debt helps lower unemployment. It might work through the “signal channel”, as a sign to investors that the Fed intends to keep rates low for a while. It might work by driving down returns on 10-year Treasuries and encouraging riskier long-term investments. Or it might work through the “supply channel” — buying a lot of Treasuries lowers the return on Treasuries, encouraging investors to buy anything else. Indeed, that is what it seems to have done. If you held any kind of asset before the pandemic — a stock, a bond, a house, a start-up looking for another round of venture capital funding — the returns over the past two years have been amazing. The good news for the Fed is that buying a lot of Treasuries is not credit allocation. The bad news is that it is return allocation. If you didn’t own an asset, you didn’t get the return. Only half of American families hold stocks and bonds in a retirement account.

9. FT long read on the acute scarcity of rental housing in the western cities. This about Berlin,

Berlin is often held up as a model affordable rental market, with a network of rent control regulations and public housing keeping prices low and tenures secure.

And how financialisation may be worsening affordability, 

“Berlin is the new New York: everybody wants to live there,” she says. “And the city never had a co-ordinated land policy in response. Public procurement rules push local government land sales to the highest bidders, often those building the most expensive homes, ignoring the lower bids from not-for-profit associations providing affordable rental housing.” The growing popularity of rental housing to investors is not confined to Berlin. New money flowing into Europe’s rental sector from institutions such as pension funds and insurance companies worldwide increased from $75bn in 2019 to $124bn in 2021; in the US it increased from $193bn to $350bn, according to Real Capital Analytics, a real estate data company. Leilani Farha, a housing campaigner who was UN special rapporteur on the right to adequate housing until 2020, is worried about the social impact of the “financialisation” of housing in this way. She says investment funds are ill suited to owning homes: the need to generate returns for investors must either jack up rents or cut their maintenance costs; either way tenants lose out. In many cases, investors target affordable housing schemes in the US and Europe where people are especially sensitive to price rises. “When you’re a pension fund you’re just looking for a good return,” she says. “Favourable conditions for investors and real estate professionals will not work for tenants.”

10. Amidst the debate on petrol taxes, The Hindu has a useful graphic 

Weekend reading links

1. In the latest episode of corporate corruption, Antonio Horta Osorio, the Chairman of Credit Suisse, has resigned following revelations of misuse of corporate hospitality and company jets for family use. This is a pervasive problem among high-flying corporate executives, but only a few get caught. 

Corruption in the private sector is about misusing shareholders money for personal purposes. As a moral issue, I don't know why it should be any less repugnant than similar corruption in government. 

2. Latest evidence of K-shaped recovery in India comes from the ICE360 survey, conducted by People's Research on India's Consumer Economy (PRICE).

The annual income of the poorest 20% of Indian households, constantly rising since 1995, plunged 53% in the pandemic year 2020-21 from their levels in 2015-16. In the same five-year period, the richest 20% saw their annual household income grow 39%... The survey, between April and October 2021, covered 200,000 households in the first round and 42,000 households in the second round. It was spread over 120 towns and 800 villages across 100 districts... How disruptive this distress has been for those at the bottom of the pyramid is reinforced by the fact that in the previous 11-year period between 2005 and 2016, while the household income of the richest 20% grew by 34%, the poorest 20% saw their household income surge by 183% at an average annual growth rate of 9.9%...

The survey showed that while the richest 20% accounted for 50.2% of the total household income in 1995, their share has jumped to 56.3% in 2021. On the other hand, the share of the poorest 20% dropped from 5.9% to 3.3% in the same period... While 90 per cent of the poorest 20 per cent in 2016, lived in rural India, that number had dropped to 70 per cent in 2021. On the other hand the share of poorest 20 per cent in urban areas has gone up from around 10 per cent to 30 per cent now.

The share of poor belonging to urban areas increased, reflecting the likely greater impact of the pandemic on migrants and those living in slums.

3. More on slow recovery in private sector capex in India. A Business Standard analysis of the 500 most valuable companies by market capitalisation compared the performance of the top 5% and bottom 5% on a host of indicators. On gross block (all assets owned by the company)

On allocations going into investments

And on sales growth

4. The spectacular explosion in smart phone usage time in the US, which rose from 3% of waking hours to one-third over the last decade!

Will be pretty much the same elsewhere.

5. John Hussman points to the growing dissonance between the Federal Funds rate and objective functions of monetary policy like the Taylor Rule and various real economy variables. 

One observation from the graph is the consistency with which the Fed actions have overshot the objective functions when both raising and lowering rates. Fed invariably overshoots its monetary policy calibration. Is this time going to be any different?

6. This is the short history of US monetary policy over the last two decades,

The Fed lowered rates to the “zero bound” for the first time during the financial crisis of 2008. It was part of a great experiment, an effort to rescue the shaken financial system and the sinking economy when Ben S. Bernanke was chair. But the experiment never really ended. Because the economy remained weak, the Fed didn’t begin raising rates until December 2015, and it never got far. By 2019, when Mr. Powell was chair, the Fed funds rate had reached only 2.50 percent before signs of economic weakness made the Fed stop. In March 2020, it fell back to nearly zero. By contrast, the Fed funds rate was as high as 6.60 percent as recently as July 2000... 

The amounts involved in the Fed’s quantitative easing have been staggering. Back in 2008, the Fed’s balance sheet had assets of $820 billion. They reached $4.5 trillion — yes, trillion — in 2015 and dropped only as low as $3.76 trillion in the summer of 2019. With the coronavirus financial crisis, they have ballooned again, to $8.9 trillion, and may swell a bit more before the spigot shuts. Assets held by the Fed are already more than 10 times their size in 2008, and bigger, as a proportion of gross domestic product, than at any time since World War II. The Fed’s monetary stimulus accompanied a total of roughly $5 trillion in pandemic fiscal relief by the federal government.

This is the challenge with monetary policy adjustment,

Calibrating the combined effects of quantitative tightening and interest rate increases in real time is exceedingly difficult. Cut off stimulus too rapidly and the Fed could further unnerve financial markets. It could conceivably cause a spike in unemployment and a sharp slowdown in growth, plunging the United States into a recession. Move too gingerly, on the other hand, and the Fed could allow elevated inflation expectations to become embedded, making high inflation even more damaging.

7. A good NYT piece on the dilemma facing consumer brands in associating with China and the forthcoming Winter Olympics.

“The space to please both sides has evaporated,” said Jude Blanchette, a scholar at the Center for Strategic and International Studies in Washington. “When choosing who to upset, it’s either a bad week or two of press in the U.S. versus a very real and justified fear that you’ll lose market access in China.”... the issue of human rights violations in China has not generated enough protests to threaten the profits of multinational companies, while the angry Chinese consumers have fueled painful boycotts... “If any other government in the world did what the Chinese are doing in Xinjiang or even in Hong Kong, a lot of companies would just pull up stakes,” said Michael Posner, a former State Department official who is now at New York University’s Stern School of Business. He cited decisions by companies to divest in places like Myanmar and Ethiopia, as well as the campaigns to boycott South Africa when its apartheid government sent all-white teams to the Olympics. “China is an exception,” he said. “It’s just so big, both as a market and a manufacturing juggernaut, that companies feel they can’t afford to get in the cross hairs of the government, so they just keep their mouths shut.”

8. Interesting graphic about economic recovery in the US

Inflation-adjusted output last quarter was just 1 percent below where it would have been if the pandemic had never happened. Here’s another one: Ignoring inflation, output is 1.7 percent above where it would have been absent the coronavirus.

9. The Kerala government is planning a semi-high speed railway corridor, Silverline, planned across the length of Kerala. The Rs 63,940 Cr project to be financed through external loans would cut the travel time for the 530 km commute from Trivandrum to Kasargode from 12 to 4 hours. Indian Express has an article that points to the public opposition being faced by the project.

I had blogged earlier here about the value of such a project given the urban continuum nature of the state's demography and topography. However, it remains to be seen from the financials about how sustainable it will be. 

10. The bad bank is finally off the ground with the decision to transfer Rs 50,335 Cr from 15 accounts to the National Asset Reconstruction Company Ltd (NARCL) by March 31, 2022. Its private sector owned twin, India Debt Resolution Company Ltd (IDRCL) will be responsible for the resolution of the debts. NARCL will be majority owned by public sector banks and IDRCL majority owned by private sector banks. This is a good primer. 

The NARCL will purchase these bad loans through a 15:85 structure, where it will pay 15 per cent of the sale consideration in cash and issue security receipts (SRs) for the remaining 85 per cent. The SRs will be guaranteed by the government. The government guarantee will essentially cover the gap between the face value of the security receipts and realised value of the assets when eventually sold to the prospective buyers. The government approved a 5-year guarantee of up to Rs 30,600 crore for security receipts to be issued by NARCL as non-cash consideration on the transfer of NPAs. This will address banks/RBI concerns about incremental provisioning. Government guarantee, valid for five years, helps in improving the value of security receipts, their liquidity and tradability. A form of contingent liability, the guarantee does not involve any immediate cash outgo for the central government.

Once the bad loans are transferred to NARCL, a trust will be set up for each loan account, and the debt resolution will be handled by IDRCL, which will not carry any balance sheet.

11. Finally, on budget eve, this article has numbers which makes a strong case for higher long-term capital gains (LTCG) taxation in India. Those who declared more than Rs 1 Cr annually from LTCG was 8629, with Rs 40,000 Cr income for 2017-18. I imagine it would have doubled in these boom times by 2021-22. 

And India's LTCG rate of 10% pales in comparison to this from other comparable economies.

Weekend reading links

1. Ananth points to Ed Yardeni's hugely informative website. Total assets of central banks in developed countries,

... as a share of GDP

2. On the global EV cars market

3. I have blogged earlier highlighting how corporates across developed countries have used Covid 19 to cut costs and deleverage. It may not be incorrect to argue that the monetary accommodation has had the biggest positive impact for the largest firms. The same appears to have happened in India. Livemint points to an SBI research which shows companies in the top 15 sectors, representing more than 1000 publicly trade firms, reduced debt by more than Rs 1.7 trillion in FY 21. The net debt to equity ratios of BSE 500 companies fell to 0.51 times in FY21.

The pandemic allowed firms to defer expansion plans and use the surplus to retire debt. It also lowered discretionary spends, travel costs, and other operational expenses. 

This comes on top of anecdotal evidence of large businesses cutting down on workers and squeezing suppliers by lowering prices. Even the largest IT companies have used the pandemic to cut employee costs, among other things, by laying off large numbers of engineers and hiring junior engineers at lower wages. 

4. On a related note, the Q4 corporate results continue to surprise on the positive side. This from the results of 1757 listed companies that have so far declared their Q4 results,

Revenues from operations rose 17 per cent, year-on-year, to Rs 26.04 trillion. Profits after tax (PAT) rose a whopping 523 per cent to Rs 2.38 trillion. Operating profits — or PBDIT (profits before tax, depreciation, and interest) — rose 64 per cent to Rs 7 trillion. The interest pay-out dropped 6 per cent, depreciation rose 7.4 per cent, and employee costs increased 9.5 per cent. The resurgence was across many sectors... If volatile sectors such as banking, finance, oil production, and refining are excluded, operational revenues rose 21.9 per cent for the rest. PBDIT and PAT rose 58.9 per cent and 179 per cent, respectively, while interest costs fell 11 per cent and employee-related expenses rose 7 per cent. Banks saw an extraordinary 629 per cent rise in PAT, despite minimal credit growth of 5.3 per cent. Easier provisioning contributed and a turnaround in Canara Bank, Axis Bank, Union Bank, and Bank of India saw this quartet register Rs 5,490 crore in combined PAT, versus combined losses of Rs 10,786 crore a year ago. The story was similar for 163 listed non-banking financial companies (NBFCs), which saw combined PAT rise to Rs 19,977 crore from combined losses of Rs 2,601 crore a year ago. Crude oil, refining, and marketing had combined extraordinary losses of Rs 19,241 crore a year ago, and combined PAT of Rs 45,203 crore this quarter.

5. Indian Express has a very good investigation which analysed the profile of independent directors in corporate Indian Boards. It does not paint a flattering picture. This about regulators going corporate boards, some even before their cooling-off periods were over, may be the most worrying. 

6. Highlighting the interest generated by the PLI scheme at least in mobile phone manufacturing, Taiwanese iPhone maker Wistron has met its five year investment target by investing Rs 1255 Cr in 2020-21. While Foxconn is already in India, Pegatron has not yet set up a factory in India. Apple, through its three vendors, Apple is planning mobile phone production of Rs 3.4 trillion value in five years. This would be 56% of the entire PLI target for global players of Rs 6 trillion. It is thought that 80% of this will be exported, higher than the PLI target of 60%. 

This is a status report on the PLI scheme.

7. Pratap Bhanu Mehta points to the latest Pew survey on religious attitudes,

Stopping religious intermarriage for both men and women is a very high priority for almost 70 per cent Hindus and Muslims... Opposition to caste intermarriage is only slightly less than religious intermarriage, but declines more with college education. It is higher amongst Muslims, 70 per cent of whom oppose inter-caste marriage for men, compared to 63 per cent Hindus.

This from the Pew Survey,

See also this.  

8. From another Pew survey, negative opinion about China reaches all time highs,

In the soft power race, China remains far behind the US.

9. Another health consequence of Covid 19, impact on patients with other medical conditions,

A study published in The Lancet journal in May, which covered 41 cancer treatment centres in India, showed a sharp reduction in oncology services between March and May 2020, compared with the corresponding period in 2019. The largest decrease was observed in the number of new patient registrations—which plummeted from 112,270 to 51,760 (a drop of 54%). A larger reduction in patient numbers was observed in the major cancer centres located in large metropolitan cities than in the smaller cities. The study, which was done by the National Cancer Grid, indicated that the decline in access will result in 83,600-111,500 missed diagnoses and as many patients will require treatment for a more advanced form of the disease in the next two years. It predicted the need for an additional 98,650-131,500 cancer deaths within the next five years.

10. Livemint analysis on the large corporate profits in India,

A broad-based analysis of the corporate results of over 1,100 companies (1,130 to be precise) shows that even as revenues, at the aggregate level, fell by 6%, the operating profit of this representative set of India Inc shot up by 30% and net profit climbed by 48%. In marked contrast, in the US, aggregate net profit decreased by 6% in 2020, according to the US Department of Commerce. The revenue-profit dichotomy within corporate India suggests that companies went on a massive cost-cutting spree, which was at an order of magnitude different from what unfolded in other countries...

One major area of cost-cutting was compensation to employees, whether in the form of laying off staff, employing contract labour for fewer days, or by pruning salaries. In aggregate terms, for our set of 1,130 companies, total employee expenses increased, but at a much slower pace. The year-on-year increase in employee expenses halved from 7.4% in 2019-20 to 3.8% in 2020-21. Within this, though, companies took very different approaches. About 51% of the companies cut employee expenses in 2020-21, with the aggregate decrease amounting to 10%. Among the firms whose net sales increased, about 28% still cut staff costs. This number increased to 74% among companies whose net sales fell. Firms in sectors that were most affected by the pandemic were also the most active in reducing employee costs. About 62% of firms under ‘other services’—mostly in the travel, leisure and hospitality sectors—cut staff costs. Notably, for 127 companies, both sales and profit after tax have risen, but employee expenses have fallen. In other words, these are firms that fared better during the pandemic year, yet they dialled down on compensation to employees. For example, steel major JSW reduced employee expenses by 12% even though it comprises merely 4% of its total expenditure. Others in this set included Reliance Jio, chemicals major BASF India, and tyre manufacturers JK Tyre & Industries and Apollo Tyres. Adani Green Energy reduced employee costs by 64% amid a 20% increase in net sales.

11. One more graphic highlighting TSMC's dominance of chip making,

Also highlights China's relative backwardness in chip manufacturing.

12. Finally, a friend forwards this excellent conversation with Lant Pritchett where he talks about the problems with international development discourse. It has to be experienced to believe the disconnect between the priorities of real-world governments and those of the theoretically focused funders and development opinion makers. 

Weekend reading links

1. Bill Gross, the original bond king from PIMCO, writes that the real bond kings have been those sitting on the Chairs of the US Federal Reserve.

2. Rana Faroohar points to a new paper by McKinsey which examines trends in the economy over the past quarter century. This is a fascinating graphic,

Globally since mid-nineties while real productivity gains have been 25%, wages have risen by just 11%.

At the level of businesses, companies with more than $10 bn revenues make up two-third of revenue and value added.

This is an interesting but unsurprising finding,

Different types of companies have very different impacts on households and economies. The MGI paper divides corporations into eight archetypes: discoverers (for example, biotech firms, which push scientific frontiers); technologists, including the platforms that build the digital economy; experts (professional services, hospitals and universities); deliverers, which distribute and sell products; makers (manufacturers); builders; fuellers; and financiers. For most of the 20th century, makers and builders were pre-eminent. Over the past 25 years, they lost ground to the other archetypes. While makers represented 56 per cent of large companies in the data set in 1995, they accounted for only 41 per cent by 2016-2018. But as they decline, so does good employment. Makers contribute 20 per cent more than average to labour income, employ the most people and have the widest geographic distribution of value thanks to their supply chains and need for physical space and investment into tangible goods.

3.  FT looks at the decline in inflation globally over last few decades, but asks whether it's now making a comeback.

4. The reality of Bangladesh's economic performance,

This month, Bangladesh’s Cabinet Secretary told reporters that GDP per capita had grown by 9% over the past year, rising to $2,227. Pakistan’s per capita income, meanwhile, is $1,543. In 1971, Pakistan was 70% richer than Bangladesh; today, Bangladesh is 45% richer than Pakistan... India’s per capita income in 2020-21 was a mere $1,947.

5.  China children's studying surveillance idea of the day,

“Smart homework lamps” have skyrocketed in popularity since ByteDance Inc., the creator of short video app TikTok, first introduced the $120 lamps in October. Chinese parents snapped up 10,000 units within the first month... The lamps come equipped with two built-in cameras—one facing the child and another offering a bird’s-eye view from above—letting parents remotely monitor their children when they study. There is a smartphone-sized screen attached to each lamp, which applies artificial intelligence to offer guidance on math problems and difficult words. And parents can hire a human proctor to digitally monitor their children as they study. In addition to the basic version of the lamp, a $170 upgraded model sends alerts and photos to parents when their children slouch. That version of the lamp sold out on China’s largest e-commerce platforms earlier this month.

6. Stanley Druckenmiller puts the Fed's persistence with quantitative easing despite the recovered and even overheating economy in perspective. (HT: Ananth)

7. The PLI scheme now covers 13 sectors and has an outlay of Rs 1.97 trillion over five years.

8. China (non) decoupling fact of the day,

Of Apple's top 200 suppliers in 2020, 51 were based in China, including Hong Kong, according to a Nikkei Asia analysis of the Apple Supplier List released last week, up from 42 in 2018 and knocking Taiwan out of the top spot for the first time. Apple did not release data for 2019... The rise of Apple's Chinese suppliers has come at the expense of its other suppliers. The number of Japanese suppliers has fallen to 34 from 43 in 2017 and 38 in 2018. Japan Display and Sharp, which remain on the list, face competition from Chinese display makers BOE Technology Group and Tianma Microelectronics, while Sharp and Kantatsu are up against Luxshare and Cowell in camera modules. Taiwan -- which held the top spot on the list for more than a decade -- is also losing ground. Its 48 Apple suppliers in 2020 made the island the second-largest group after China and Hong Kong, but that represents a drop from 52 suppliers in 2017. The number was 47 in 2018.

But Apple's supply chain has also been diversifying, helped ironically by China-based suppliers,

China-based suppliers are also rapidly helping Apple increase production outside the country. The number of Apple suppliers in Vietnam grew to 21 last year from 14 in 2018, when the trade war began. Seven of those 21 are owned by Chinese- or Hong Kong-based companies. These include AirPods assemblers Luxshare Precision Industry and GoerTek, which both have been producing the wireless earbuds in Vietnam since early 2020. Most Apple-certified factories in Vietnam are in the north of the country, a growing cluster for consumer electronics gadgets.

9. Interesting news that Adar Poonawala, the talkative CEO of vaccine maker SII, has made investments worth Rs 3456 Cr to take a controlling stake in a financial services company Magma Corporation. This comes on top of the company's recent announcement that it's investing £ 240 million in vaccine manufacturing in India. There are murmurs of other investments. 

It appears the case that even as SII has been complaining about inadequate resources to invest in manufacturing capacity expansion, it has actually been taking money out to make purely financial investments. Clearly, this is not a company short cash surplus arising out of its vaccine manufacturing business. 

Another interesting point is about SII's profit margins despite being just a contract manufacturer of vaccines - underlining its predominantly manufacturing role, despite profits of Rs 17,146 Cr over the 2010-19 period, the company spent just Rs 900 Cr on R&D. However, its margins appear more closer to those of a Pharma company - among the 418 Indian companies with revenues of more than Rs 5000 Cr in 2019-20, SII had the largest net margin of 41.3%.

All this raises questions. 

Did it use the at-risk commitments made by the likes of BMGF, GAVI, and Covax Alliance to merely manufacture more or invest in capacity expansion? If the latter, by how much and at what cost? More generally, as distinct from advance manufacturing, how much has been actually invested to expand capacity? What does it actually cost SII to make a vaccine? How much margin is SII actually getting on its sales to Government of India at Rs 150? Given that the original investments made were on the back of at-risk commitments by NGOs and western governments, did SII assume any risk at all? 

Being a privately held company, SII is not required to answer any of these questions. Further, in purely commercial terms and in Econ 101-speak, a private company cannot be faulted of leaving nothing on the table and charging the highest price possible, a la Apple on the iPhone. But what triggers repugnance is when commerce meets moral posturing (see also this), and worse still when commerce verges on the margins of price gouging in the domestic market in times of a pandemic. 

In the meantime, Indian Express reports that half the vaccines sold privately have been purchased by nine hospital groups,

These nine corporate hospital groups cumulatively bought 60.57 lakh doses of the total 1.20 crore doses of vaccines procured by private hospitals in the first full month since the Central government revised its vaccine policy and opened it to the market. The balance 50 per cent of the vaccine stock was procured by 300-odd hospitals, located mostly in the country’s urban centres, with hardly any of them serving regions beyond the Tier-2 cities... The purchases by private hospitals in May added up to 1.20 crore doses or 15.6 per cent of the total procurement of 7.94 crore doses. Of this, they administered only 22 lakh doses or 18 per cent of the doses received during the month. States procured 33.5 per cent (or 2.66 crore) and the Centre 50.9 per cent (or 4.03 crore) of the vaccine doses. The top nine private entities are Apollo Hospitals (nine hospitals of the group procured 16.1 lakh doses); Max Healthcare (six hospitals, 12.97 lakh doses); Reliance Foundation-run HN Hospital Trust (9.89 lakh doses); Medica Hospitals (6.26 lakh doses); Fortis Healthcare (eight hospitals bought 4.48 lakh doses); Godrej (3.35 lakh doses); Manipal Health (3.24 lakh doses); Narayana Hrudalaya (2.02 lakh doses) and Techno India Dama (2 lakh doses).

10. Global food prices rise by 40%, the biggest margin in a decade, spurred on by demand from China and drought in Brazil. 

11. Taiwan is clearly the hottest geo-political spot in the world today, as China shows enough signals that it may be willing to annexe the Island nation using force.

As tensions with the United States have heated up, China has accelerated its military operations in the vicinity of Taiwan, conducting 380 incursions into the island’s air defense identification zone in 2020 alone. In April of this year, China sent its largest-ever fleet, 25 fighters and bombers, into Taiwan’s air defense identification zone. Clearly, Xi is no longer trying to avoid escalation at all costs now that his military is capable of contesting the U.S. military presence in the region. Long gone are the days of the 1996 crisis over Taiwan, when the United States dispatched two aircraft carrier battle groups to sail near the strait and China backed off. Beijing did not like being deterred back then, and it spent the next 25 years modernizing its military so that it would not be so next time...

Several retired military officers have argued publicly that the longer China waits, the harder it will be to take control of Taiwan. Articles in state-run news outlets and on popular websites have likewise urged China to act swiftly. And if public opinion polls are to be believed, the Chinese people agree that the time has come to resolve the Taiwan issue once and for all. According to a survey by the state-run Global Times, 70 percent of mainlanders strongly support using force to unify Taiwan with the mainland, and 37 percent think it would be best if the war occurred in three to five years.

12. An area of Covid response where things could have been much better is in demand management of oxygen use in hospitals. While governments were impressive enough to quickly ramp up supply after being initially caught on the wrong foot, the demand management has been poor. Apart from states like Kerala and a few exceptions like this hospital in Bikaner, it's now very evident that hospitals across the country wasted oxygen without following adequate controls. 

This is understandable given that demand management requires strong state capacity, especially in terms of ability to transmit granular information to the frontline and be able to enforce compliance. It did not help that governments across were more focused on augmenting supply side even at a prohibitive cost when the same could have been achieved at no cost through demand management. 

13. Interesting observations that even as the dues from state discoms to power generators (confined to the 47% from IPPs and 25% CGS) have declined by end-March 2021, the amount of dues under dispute have risen and the dues to IPPs have risen.

The amount of money that remained outstanding after 45-to-60 days of grace period given to the distribution companies fell to about Rs 67,300 crore, over 20 per cent lower than what it was a month ago... In March 2020, the total amount of disputed dues was Rs 10,194 core, which was about 15 per cent of the total overdues (excluding the disputed amount). A year later, in March 2021, the share of disputed dues (Rs 22,565 crore) in total overdues rose to over 33 per cent... The overdues of CPSEs have declined from about Rs 30,000 crore at the end of March 2020 to Rs 20,800 crore at the end of March 2021 — a decline of over 30 per cent... In sharp contrast, the overdues of IPPs... rose from Rs 30,960 crore at the end of March 2020 to... Rs 35,250 crore (end-March 2021)... The total amount of disputed dues for IPPs rose from Rs 9,000 crore at the end of March 2020 to Rs 21,100 crore at the end of March 2021. But the disputed dues for CPSEs saw no such sharp spike as they rose marginally from Rs 1,300 crore to Rs 1,500 crore in the same period.

As indicated in the oped, it may be that the Atmanirbhar package loans were used to pay down the CGS/CPSE dues than the IPP dues.  

14. Privatisation by malign neglect has seen the share of public sector banks decline alongside the share of  private sector banks rising,

As of March 2021... the state-run banks lent ₹62.29 trillion or 56.5% of the overall lending carried out by all banks... the share of private banks in overall lending jumped to an all-time high of 35.5% as of March 2021. In March 2010, it had stood at 17.4%... The outstanding loans of state-run banks during the year went up by ₹2.16 trillion. Meanwhile, the outstanding loans of private banks went up by ₹3.11 trillion or close to 44% more. This has happened in each of the last six fiscals, starting from April 2015 to March 2016. Even when it comes to deposits, the share of state-run banks in outstanding deposits fell to an all-time low of 61.3% of outstanding deposits of all commercial banks as of March 2021. The share of state-run banks peaked at 74.8% in March 2012. The share of private banks in deposits is at an all-time high of 30% as of March 2021. It was at 17.9% in March 2012.

15. There is an unending debate on the merits of quantitative easing by central banks. Sample the latest from India,

Between May 2016 and April 2021, the weighted average lending rate on fresh rupee loans of banks, fell from 10.61% to 8.1%. During the same period, outstanding bank lending to industry has barely moved up from ₹26.63 trillion to ₹28.96 trillion, at the rate of 1.7% per year.

The article's point is that investment barely rose despite the extraordinary monetary expansion. I am inclined to believe that while investment growth may have been the initial primary motivation for QE, it may no longer be so. Instead, while it's not formally acknowledged, the primary motivation may be to keep borrowing costs low, especially for governments with ballooning debts and high deficits. This alone is a dangerous territory, since governments then have the incentive to keep it going for as long as possible. 

The economic history of the last decade in one graphic

The extraordinary monetary accommodation since the crisis is central to understanding the trends in the world economy. 

Ananth points to this excellent graphic from Albert Gallo at Algebris Investments.

This pretty much captures it all. Two small points. One could be to add "rigged capitalism" as an outcome along with populism. Two, on the supply side, there is a Mathew Effect or superstar effect  or TBTF that operates (which is more than just monopoly), which drives business concentration, rising entry barriers etc.

The impact of QE - Bernanke and Ocasio-Cortez

David McWilliams asks, 

Is Ben Bernanke the father of Alexandria Ocasio-Cortez?

The reason, 

Mr Bernanke’s unorthodox “cash for trash” scheme, otherwise known as quantitative easing, drove up asset prices and bailed out baby boomers at the profound political cost of pricing out millennials from that most divisive of asset markets, property. This has left the former comfortable, but the latter with a fragile stake in the society they are supposed to build... Soaring asset prices, particularly property prices, drive a wedge between those who depend on wages for their income and those who depend on rents and dividends. This wages versus rents-and-dividends game plays out generationally, because the young tend to be asset-poor and the old and the middle-aged tend to be asset-rich. Unorthodox monetary policy, therefore, penalises the young and subsidises the old. When asset prices rise much faster than wages, the average person falls further behind. Their stake in society weakens. The faster this new asset-fuelled economy grows, the greater the gap between the insiders with a stake and outsiders without. This threatens a social contract based on the notion that the faster the economy grows, the better off everyone becomes... Ten years ago, faced with the real prospect of another Great Depression, Mr Bernanke launched QE to avoid mass default. Implicitly, he was underwriting the wealth of his own generation, the baby boomers. Now the division of that wealth has become a key battleground for the next election with people such as Ms Ocasio-Cortez arguing that very high incomes should be taxed at 70 per cent. 

It is hard to dispute the influence of QE on amplifying these social and political consequences,

According to the Pew Research Center, American millennials (defined as those born between 1981 and 1996) are the only generation in which a majority (57 per cent) hold “mostly/consistently liberal” political views, with a mere 12 per cent holding more conservative beliefs. Fifty-eight per cent of millennials express a clear preference for big government. Seventy-nine per cent of millennials believe immigrants strengthen the US, compared to just 56 per cent of baby boomers. On foreign policy, millennials (77 per cent) are far more likely than boomers (52 per cent) to believe that peace is best ensured by good diplomacy rather than military strength. Sixty-seven per cent want the state to provide universal healthcare, and 57 per cent want higher public spending and the provision of more public services, compared with 43 per cent of baby boomers. Sixty-six per cent of millennials believe that the system unfairly favours powerful interests. One battle ground for the new politics is the urban property market. While average hourly earnings have risen in the US by just 22 per cent over the past 9 years, property prices have surged across US metropolitan areas. Prices have risen by 34 per cent in Boston, 55 per cent in Houston, 67 per cent in Los Angeles and a whopping 96 per cent in San Francisco. The young are locked out... If only the votes of the under-25s were counted in the last UK general election, not a single Conservative would have won a seat.

Watch this space. I have a full book due for release in April, in which the impact of QE is a major part!

Some thoughts on central bank "independence"

Viral Acharya, the Deputy Governor of the Reserve Bank of India (RBI) has this speech where he makes a very strong case for central bank independence. He argues that it is in the government's self-interest to allow autonomy to central banks since refusal to do so would be catastrophic in terms of market reactions and its impact on the economy.

One can appreciate the underlying larger point about the need for central bank autonomy. Also, especially in the context of recent history of disputes between the government and the Reserve Bank of India, the need for governments to exercise restraint is undoubtedly greater.

But there is a tendency to take such arguments about central bank independence to excessive extremes. It only amplifies the narrative about dispassionate and wise central bankers trying to protect the economy from the capriciousness and corruption of governments. Viral Acharya's speech is not immune from playing to this tune. But global experience shows that this is far from true.

In this context, it is worth stepping back and placing his claims in some perspective. This is also the subject of my forthcoming book with V Ananthanageswaran.

Some observations in this regard.

1. The point about markets punishing governments which threaten central bank autonomy has its origins in one of the most dominant narratives of our times - markets are an efficient aggregator of information and therefore know what is best for the economy, and therefore policy should follow market signals. While this may be right on some occasions, it is also wildly off-mark on several others.  The events leading up to the sub-prime mortgage meltdown and in its aftermath are only the latest manifestation of the reality that markets are not only not efficient and self-correcting but also engenders deeply destabilising distortions. This, this, this, this, this and this are only the latest posts in this blog alone on the issue. 

Unfortunately, this has become an article of faith among opinion makers, financial market participants, and central bankers, thereby limiting their ability to appreciate pervasive market failures.  In fact, central banks have taken "following market signals" to its extremes. The market's "confidence fairy" rules the roost. A growing body of research appears to indicate (see this and this) that monetary policy decisions, especially in developed economies, have become captives of financial market dynamics. Talk about putting the cart before the horse!

2. The recent ring-side accounts by insiders like Yanis Varoufakis and Paul Tucker gives the lie to the conventional wisdom about central bankers as independent and objective technocrats selflessly pursuing public interest and broader macroeconomic concerns. While the former indicates how the European Central Bank (ECB) was a captive of political interests, the latter exposes the belief about the superior wisdom and expertise of central bankers and experts in general. 

There have also been numerous recent instances of practices ranging from border-line compromised accommodation to wholesale information leaks involving central bankers and preferred financial market participants. In fact, just in the last five years, there have been high profile examples of culpability and corruption from US (Jeffrey Lacker, President of Federal Reserve Bank of Richmond) UK (Charlotte Hogg, Deputy Governor of Bank of England), Switzerland (Philip Hildebrand, Governor of Swiss Central Bank) and ECB (Benoit Coeure, ECB Board member). The first three were forced to quit once the scandals surfaced. 

With great power comes great responsibility and accountability as well as the need to exercise restraint. In democracies, despite all its flaws, political leaders face checks and balances which significantly limits the degrees of freedom available for excesses. Unfortunately, the experts in central banks neither have anything similar in terms of the accountability nor the restraints. Like with executives who have reached the C-suite of the largest financial institutions, central bank leaders are largely impervious to reputational considerations. A revolving door with financial institutions and high-paid speech circuits raises serious concerns about objectivity and fairness, not to speak of malafide actions. 

3. Since the nineties, aided by the Goldilocks global macroeconomic conditions, central banks have assumed an aura of competence and credibility. These conditions have had their origins in several factors,  of which central bank actions are but just one. But given the amorphous and diffuse nature of the other factors (globalisation, liberalisation and deregulation, technology revolutions, financialisation, emergence of China etc) and the growing omnipresence of a few individual central bankers, a narrative around the superior wisdom of central banks has taken hold. It can also be argued that the conditions too allowed governments leave central banks to their domain and ignore the emerging narratives. In any case, when the going is good, the policy challenges for all concerned are that less demanding. 

Once the global financial crisis struck, faced with their own limited fiscal space as well as the difficulty of mobilising political consensus, governments in the developed world left their central banks to do the heavy lifting. Central banks went the full hog into uncharted territories with quantitative easing and extraordinary monetary accommodation. It gave the impression of central banks being the only game in the town. In the guise of transparency and central bank communication, some central bank governors merrily assumed the status of populist media darlings. 

While it may have perhaps helped avert another Great Depression, nearly a decade of such policies has not succeeded in restoring balanced growth and macroeconomic stability. In fact, it is now certain it has engendered several distortions. And, in the thrall of their theoretical frameworks and captives of market confidence fairies, central banks appear to have lost sight of the emergent distortions. 

Consequently, it is no surprise that governments have sought to wrest back control. In recent years, governments have not shied away from taking on central banks. The actions of Presidents Trump and Erdogan in the US and Turkey respectively are only high profile examples of such actions. And such trends are likely to become more frequent going forward. 

4. Unfortunately the issue of central bank independence gets framed on an absolute basis, whereby any policy action by a government that intersect with the domain of central banking is viewed as a threat to its autonomy. In fact, central banks react sensitively to even perfectly legitimate public statements by governments indicating their preference for particular monetary policy actions, say lowering of rates or exchange rate interventions. 

There is nothing absolute about the issue of central bank independence. Its separation from the government cannot be absolute. Instead, a more appropriate question should be about what is the right level of independence or autonomy for central banks, consistent with its role in a democratic polity and the need for an integrated and comprehensive macroeconomic perspective. 

The argument that central bank actions are purely technocratic and therefore apolitical, and therefore demanding absolute independence, is deeply flawed. This all the more surprising since we are only just emerging from the decade-long extraordinary monetary easing, whose effects are now a matter of intense debate. Central banks are not just technocratic bank regulators. Their actions have deep distributional consequences. There is a growing pile of evidence about the adverse distributional consequences of quantitative easing. This goes beyond just the issue of penalising savers and benefiting borrowers, and in contributing to important structural shifts in the nature of modern capitalism itself. 

Further, the idea central bank autonomy is not sacrosanct and is a relatively new trend, with its origins in the inflationary episodes of seventies and early eighties. In fact, there are serious question marks about the real extent of central bank independence. But things have changed dramatically over the last three decades. In fact, The Economist, no less, recently advocated revisiting the notion of central bank independence in light of the declining interest rates and persistent low inflation.   

5. About most things in life, there are no clear answers and second-best approaches may actually be the best approach. It applies as much to the mechanics of the relationship between central banks and governments. Some amount of creative tension, even played out in the public domain, may be not just unavoidable but even desirable. 

Consider the present situation in India. With banks already under ailing and the non-banking financial institutions squeezed in the aftermath of the IL&FS crisis, the credit markets have frozen up, thereby dampening economic activity. But this co-exists with signatures of rising inflationary and exchange rate pressures. The central bank justifiably feels that it is not an appropriate time to accommodate. The government equally justifiably feels that the economy could do with some monetary accommodation. 

Only the naive would argue that monetary policy is the rote application of some complicated formula. And we are not even talking about the limitations of monetary policy in demand-pull conditions, especially in supply-constrained developing countries like India. In the circumstances, how can the government be blamed for demanding lower rates, at the least politically not to be seen demanding so? In fact, such creative tensions are perhaps desirable in so far as it keeps central banks too anchored around real world considerations and not be guided solely by straitjacket mandates and disconnected expertise.  

Having said all this, I am inclined to be sympathetic to the Deputy Governor of RBI. In case of India, unlike many developed economies, the RBI would come out in much more favourable light when we examine the balance sheet of the last ten years. This coupled with the lack of maturity of institutional practices within the government is perhaps reason enough to give the benefit of doubt to the RBI over the government. But the notion of absolute independence of central banks should not be entertained.

Update 1 (06.05.2020)

This about the blurring of lines between the monetary and fiscal policy in the context of the pandemic is illuminative,

Steve Mnuchin, America’s treasury secretary, has said that on some days he has spoken to Jerome Powell, chairman of the Federal Reserve, more than 30 times. The Bank of England has co-ordinated interest-rate cuts with Britain’s treasury and recently agreed to increase the government’s overdraft. The Bank of Japan has long been an enthusiastic partner in the economic agenda of Abe Shinzo, the prime minister.

The Governor of the Bank of England, Andrew Bailey, wrote an oped in FT reassuring investors just before the Treasury announced its decision to temporarily monetise its deficit.

Imagine the reaction in India if the government and the central bank worked with such co-ordination. It would have been branded as the central bank having sold out to the government or the government having subjugated central bank independence.

Update 2 (23.05.2020)

In the backdrop of the debate around the German Constitutional Court's questions on ECB's bond buying program, Adam Tooze questions the myth of central bank independence,

In the paradigm that emerged from the crises of the 1970s, independence meant restraint and respect for the boundaries of delegated authority. In the new era, it had more to do with independence of action and initiative. More often than not, it meant the central bank single-handedly saving the day... Rather than obstreperous trade unions and feckless politicians, what central bankers have found themselves preoccupied with is financial instability. Again and again, the financial markets that were assumed to be the disciplinarians have demonstrated their irresponsibility (“irrational exuberance”), their tendency to panic, and their inclination to profound instability. They are prone to bubbles, booms, and busts. But rather than seeking to tame those gyrations, central banks, with the Fed leading the way, have taken it on themselves to act as a comprehensive backstop to the financial system—first in 1987 following the global stock market crash, then after the dot-com crash of the 1990s, even more dramatically in 2008, and now on a truly unprecedented scale in response to COVID-19. Liquidity provision is the slogan under which central banks now backstop the entire financial system on a near-permanent basis.

This about the opponents of the ECB's actions is important,

For them, the ECB serves as a lightning rod for their grievances about the changing political economy of the last decade. They blame it for victimizing savers with its low interest policy. They blame it for encouraging the debts of their Southern European neighbors. Exponents of the old religion of German free market economics regard cheap credit as subversive of market discipline. All in all, they suspect the ECB of engaging in a policy of redistributive Keynesianism in monetary disguise, everything that Germany’s national model of the social market economy was supposed to have ruled out. For these Germans, the ECB is an opaque technocratic agency arrogating to itself powers that properly belong to national parliaments, barreling down the slippery slope to a European superstate. And, for them, it is anything but accidental of course that it is all the creation of a Machiavellian Italian with trans-Atlantic business connections, Mario Draghi. For the body of opinion that had always been suspicious of the euro, Draghi’s commitment to do “whatever it takes” in 2012 was the final straw. The Alternative for Germany (AfD) emerged in 2013 not originally as an anti-immigrant party but as a right-wing economic alternative to Berlin’s connivance with the antics of the ECB. 

The Karlsruhe based German Constitutional Court plays an activist role, and has been a check on unfitted expansion of European power on the grounds of defending democratic national sovereignty. The Court's lates ruling is that the German government failed to supervise the ECB's largescale bond-buying program of 2015 to push inflation to 2%, which, it ruled, overstepped its monetary policy realm and strayed into economic policy which is that of national governments. The German government and ECB have three months to respond.

Update 3 (11.09.2021)

Fed officials market trading activities raises questions,

Federal Reserve officials traded stocks and other securities in 2020, a year in which the central bank took emergency steps to prop up financial markets and prevent their collapse — raising questions about whether the Fed’s ethics standards have become too lax as its role has vastly expanded. The trades appeared to be legal and in compliance with Fed rules. Million-dollar stock transactions from the Dallas Fed president, Robert S. Kaplan, have drawn particular attention, but none took place when the central bank was most actively backstopping financial markets in late March and April. However, the mere possibility that Fed officials might be able to financially benefit from information they learn through their positions has prompted criticism of perceived shortcomings in the institution’s ethics rules, which were forged decades ago and are now struggling to keep up with the central bank’s 21st-century function...

Mr. Kaplan was buying and selling oil company shares just as the Fed was debating what role it should play in regulating climate-related finance. And everything the Fed did in 2020 — like slashing rates to near zero and buying trillions in government-backed debt — affected the stock market, sending equity prices higher... Mr. Kaplan’s financial activity included trading in a corporate bond exchange-traded fund, which is effectively a bundle of company debt that trades like a stock. The Fed bought shares in that type of fund last year.