The missing supply side problem in development

The Business Standard reports about the problem of supply-side in national highways contracting in India,

As the Union government sets out to fix targets for the highways sector, there are few large players that can deliver as required... An official in the know said: “There are few players that can undertake build-operate-transfer (BOT) projects and 25-28 mid-sized firms to build hybrid-annuity projects. Together they may not able to achieve the targets set by the Central government. Therefore, we need global players for not just operation and maintenance but also execution.” The industry says maintaining a steady cash flow to do the job is tough... Over the past three years, 70 contractors and developers have bagged projects from the National Highways Authority of India and the Ministry of Road Transport and Highways, which includes all sizes of contractors. The sector, however, has been falling short of achieving the daily road construction target for the past few years, which may be attributed to unrealistic targets.

It's more than the working capital flows. Even execution will run into problems if expansion is very fast. There are hard limits to how quickly the supply side of BT paver machines, ready mix concrete, or skilled manpower can be mobilised. This example has resonance across other sectors. 

Development is about the combined action of state and markets. 

The former involves state capacity to design appropriate policies and implement them effectively. It is about making political choices regarding policies, but reasonable autonomy and capacity in ensuring their effective design and implementation. 

The latter involves three requirements - availability of market enabling regulations, and the emergence of demand and supply sides. 

There is copious literature on all these, except the last one, the availability of supply-side. I have blogged extensively on India's weak state capacity, deficient demand, and problems with carrying out business activities. 

However, the point about supply-side is often taken for granted. Even those who acknowledge the need for active policies to create demand (say, strategic purchasing by the government) and enabling requirements (say, ease of doing business reforms), stop short of overlook supply-side issues. There is a "build it and they'll come" assumption about the supply side. The strongly held beliefs about India's massive latent entrepreneurial talents and the vast globalised nature of markets reinforce this conviction.

For sure, supply-side will finally arrive. But there are two problems. One, the time taken may be inordinately long, often decades. Two, the system may have to go through multiple wasteful equilibriums before an adequate enough supply side emerges. 

Take a few examples. Private provisioning of water and sewerage or solid waste management or mass transit, or privatised electricity distribution, or public housing projects on PPP, or affordable private schools and hospitals, or various kinds of services ranging from cleaning to managing IT systems. 

As private participation in public services has deepened, an influential line of thinking has sought to shift the debate away from public production and provisioning of services toward private production and public provisioning of services, even private production and provisioning and public payment. Accordingly opinion makers and consultants have advocated that governments buy services instead of owning assets. 

So, for example, why own school or hospital buildings, or sewerage and water treatment facilities, or faecal sludge collection and treatment facilities, but buy the respective services through long-term concessions. 

There is no doubt that these are all thoughts in the right direction. So, for example, it has now become common for governments to outsource cleanliness of its facilities to sanitation contractors or hire vehicles instead of recruiting sweepers and drivers (and own vehicles) as full-time employees. Similarly, many facilities construction contracts are most often bundled with maintenance. These have all been undoubtedly beneficial fiscally and also improve service quality. But they have taken decades of experimentation and iteration to get de-risked and emerge as mature markets with deep enough supply-side. 

The same logic is now being applied to the newly emerging area of software as a service (SaaS) is attracting a lot of interest. So why not ask service providers to provide attendance monitoring as a service (and avoid owning biometric devices), location tracking on public vehicles as a service (and avoid owning GPS devices), or meter reading as a service (and avoid having to own household meters and their billing), or SCADA as a service (and avoid having to own the infrastructure). 

These too will emerge in due course. But now if you call a tender for any of these even in small volumes, you will be lucky to get competitive bids and luckier still to get service anywhere near the expected levels. And higher the volumes of supply solicited, greater the certainty of disappointment.  

There are multiple reasons for the slow pace of emergence of these markets. 

1. These innovations are less about technology and more about implementation. And there are several constraints to implementation - establishing field presence require hiring skilled personnel at affordable prices, being able to overcome entrenched vested interests. This requires getting execution right, a not so easy challenge given its environment. For example, a biometric or GPS implementation can be gamed or go wrong in so many different ways that it requires very tight and high intensity monitoring, for a long enough time for implementation to stabilise. 

As I have blogged here, this requires hunkered down execution by entrepreneurs, something not made easy by the prevailing incentive structures. 

2. Delivering these services at the required service levels often demand a much higher price than what the government offers. These services are often new or being done internally at far lower cost. For example, it would cost more to outsource maintenance of a water or sewerage treatment facility than to maintain them internally since the service level expectations with the former are much higher, which in turn demands higher costs.  

3. Unlike products, these services are generally delivered locally. Even SaaS requires local support teams. Building up such local teams and that too quickly and at reasonable scale is not easy. Managing these local  teams is a non-trivial management challenge. 

In fact, greater the degree of human engagement involved (and therefore quality consideration), the more difficult is it for private providers to deliver such service at scale. It's for this reason that third party quality audits for engineering works (outside the large projects) remains a very fragmented and localised market in India despite being in place for over two decades. 

4. Despite their logical appeal, some of these services are best done internally, at least until the country reaches a certain stage of economic progress and human development. Some, for their inherent nature, may never be done well by private providers or require much higher cost for private delivery.

5. Finally, human imagination and ideation runs far faster than reality can support. There is no cost to ideation and talk is cheap. Execution is costly.   

I have not dwelt on the bigger challenge of regulating these providers once markets mature. This, as developed countries are finding out today is leading to reversion to public production and provisioning in many areas.

So what can governments do to expedite supply side? Two, in particular, come to mind. 

In this context, industrial policy on development issues can be helpful in catalysing the supply side. The central and state governments could signal their policy intent so as to shape market expectations and investment. Announcement of long-term plans and adherence to them would be the best market signal. Even advisories encouraging specific trends, as far as possible, but without any mandatory requirements can be non-distortionary. 

We all know the impact of government purchases of smart meters and LED lights have had on the respective markets. But these are products. We need similar intent and action on the services side. 

Another area is for public policy is to standardise procurement processes and documents and disseminate them for use by interested officials at different levels of government across the country. And actively encourage these officials to apply them. 

RCTs in Development

I have an interview in this new OUP compilation that makes a critical assessment of the use of randomised control trials (RCTs) in the field of development. Available for pre-order here. 

I am also a discussant on a book launch event hosted by UNU-WIDER on November 10.  

The "dual circulation" and "China plus one"

There are two very interesting global dynamics at play about China. On the one hand, China has started pursuing a policy of economic growth anchored on the domestic market, with the global market as support cast. On the other hand, the multinational corporations are pursuing a policy of making in China for China, and making elsewhere for the rest of the world.

It will interesting to see how each of these two trends play themselves out in the years ahead. The architecture of the global value chains as well as global trade and economic growth will depend on them. 

Internally, following President Xi Jinping's announcement in May, the Chinese have formally adopted a dual circulation growth strategy, "a new development pattern in which domestic and foreign markets boost each other, with the domestic market as the mainstay". The world to revolve around the big Chinese economy! 

Externally, hastened by the events in the aftermath of the Covid 19 pandemic, major economies have realised the over-dependence of the global manufacturing supply chains on China. Accordingly, global businesses have resolved to diversify away from China by pursuing a China plus one strategy - use China as the manufacturing hub for its domestic market, but cultivate manufacturing bases in other countries to serve the global market. China for China, and some others for rest of the world!

Yukon Huang and Joshua Levy have a good analysis of the problems facing dual circulation strategy. Whatever the strategy, China's future will depend on it being able to address egregious distortions - between regions, between rural and urban, between producing and consuming, public and private sectors, and the massive debt overhang. Sample this,

Last year investment accounted for 43% of China's gross domestic product. That is not, in itself, a reason for worry, but capital's diminishing efficiency is a cause for concern. Economists evaluate returns on investment with an indicator called the incremental capital-output ratio, which measures how many units of investment are needed to generate a single unit of GDP. Since 2005, that number has nearly doubled from 3.3. to over 6 in 2017, reflecting a halving in returns on investment in China... The International Monetary Fund estimates that fixed-asset investment accounted for about half -- roughly 5 percentage points -- of China's GDP growth over the past several decades... Today, private companies' rate of return on assets is around 9% whereas SOEs only offer around 4%.

There is little to suggest that any of the cleavages are narrowing in a meaningful and sustainable manner.

Besides, there are three aspects of President Xi Jinping's economic paradigm, of which "dual circulation" is an important part, which have the potential to engender distortions. One, a feature of the new paradigm has been the return of state-owned enterprises (SOEs) as important economic actors. The SOEs are being cultivated to become dominant players in their respective market segments. Second, the China 2025 plan seeks to achieve not only self-sufficiency but also global market dominance in several identified industries. Three, the Communist Party's control over Chinese businesses, even private ones, has become more direct and institutionalised in recent years. This effectively forces multinationals dealing in China to engage directly with the Party. 

If these three aspects end up having an inordinate influence on "dual circulation" then it is also likely to end up hurting the interests of multinational corporations and create one more reason to reduce their exposure to China for non-economic reasons. 

The recent decision to pull the plug on the ultra-high profile IPO of Ant Financial at the very last minute came at a very high cost to China's credibility. It points to Xi's willingness to incur any cost to drive home the message about the supremacy of the Party and the system. No one matters. It clearly signalled the boundaries of engagement for the Chinese private sector. It's only the latest illustration of the authoritarian nature of the regime. The same attitudes underpin foreign policy too, with the numerous recent instances of take-no-prisoners Wolf Warrior approach to diplomacy. See this and this. 

The China plus one strategy has its roots going back to at least a decade, arising from the trend of high labour costs causing businesses to shift some of their more labour-intensive activities to countries with lower labour costs. So, it was more a case of giving a name to a practice which was already afoot rather than any conscious effort to move out of China. However the trade war with the US initiated by President Trump may have introduced the risk mitigation by diversification of supply chains and production locations. The pandemic has surely introduced an element of urgency and importance to this trend. Countries like Japan have even offered financing support to help their companies to shift production out of China. 

Be that as may, there is also a need to be cautious about reading too much into the shifts happening to a neighbouring country like Vietnam. For a start, there is only so much that Vietnam can absorb. Then, it's one thing to shift to Vietnam across the border, and an altogether different thing to shift into South Asia or Sub Saharan Africa.

As I have blogged here, any attempt to shift out of China is easier said than done. Apart from the inertia associated with breaking apart comfortably ensconced supply chains, China offers important factors which few, if any, others can match - large pipeline of skilled workers; localised manufacturing ecosystems that encompasses design, prototyping, and production; strong supplier networks; world-class infrastructure; and a massive domestic market. Only when the extenuating factors - labour cost and concentration risk - start to offset these considerable advantages in a significant manner would commercially attuned firms feel compelled to shift in a meaningful enough manner. 

But the non-economic extenuating factors appear to be growing in importance. For example, the changing geo-politics appears to have already influenced the plans of the largest manufacturers like Foxconn. They appear to be shifting towards a strategy of producing in China for China and gradually shifting production, at least in terms of new investments, toward other countries for their export markets. 

Another extenuating factor can be the rise of protectionist tariffs and other non-tariff barriers which slows down and reverses trade. And China's aggressive foreign policy actions may actually be triggering and hastening this trend. A full-fledged Cold War between China and several western countries is well within the realm of possibilities. It is safe to argue that, even with the exit of President Trump, any form of technology related trade between China and the west is now off the table. 

In the final analysis, the repressive, completely centralised, and individual-cult based nature of the regime shift during President Xi Jinping's tenure will be the Achilles heel of "dual circulation" or any other reform. See this, this, and this. History does not have precedents that point to any other direction. 

Francis Fukuyama says that historically China's biggest issue has been the bad emperor problem. Democracy puts a floor on the bad emperor - if he gets too bad, then he can be removed. It has had a long history of recurrent bad emperors. Its recent four decades of prosperity has been due to its ability to keep out bad emperors. Xi Jinping may well have ended that period of good fortune!

Weekend reading links

1. A nice story on the South Indian breakfast dish idlis. 

2. Citing the lack of superstar technology companies, Nicolas Petit writes that Europe lacks economic dynamism. Never mind, the problem with categorising a single Europe which contains both Germany and Ireland; that Europe does indeed lack economic dynamism in relative terms; and that superstar tech companies are imprimaturs of economic dynamism. 

It is an article without any compelling empirical or other evidence, but full of prescriptions couched in jargon. Petit is a great example of an ideologue for the technology companies reinforcing entrenched narratives. 

3. Apple's quarterly results and the 21% overall drop in iPhone sales has raised alarms across Wall Street. It's hard not to feel that iPhone as growth driver is well past its peak. And moving into services is far more challenging than can be imagined. Even the 22.5% share of profits from digital services conceals the big deal to keep Google Search as the default device on Apple devices. As FT wrote, 

...is estimated to be worth up to $12bn per year, equal to about a quarter of Apple’s services revenue. That is a lot of money for not much work. Apple may be working on its own search function but it has no hope of replacing pure profit of this size.

4. The stunning increases in debt to GDP ratios in developed world, estimated to reach 141% next year, a rise of 26 percentage points from 2019. This from Gavyn Davies,

5. Good articles by Mridula Ramesh here and here about the importance of tanks in water conservation and provision of livelihoods (HT: Ananth). This graphic highlights how borewells made their entry in the sixties and have in the last fifty years have come to provide nearly 40% of irrigation water. 

This has had catastrophic consequences on the water table and equitable distribution of water resources. The reliance on bore wells has also detracted from governments having to focus on tanks and other irrigation investments. All the costs taken together, free farm power should count as among the most damaging policy ideas since independence. 

6. The Times article on the now famous Chinese bullying of the German and Arsenal footballer Mesut Ozil for his criticism of Chinese genocide of Uighurs is chilling. 

A few days after Özil went public, the Premier League’s two broadcast partners in China, CCTV and PP Sports, refused to air an Arsenal match. When the latter did deign to show Arsenal again, its commentators refused to say Özil’s name. His avatar was removed from video games. Searching the internet for his name in China brought up error messages. (It was reported his Weibo account was disabled, though that was not true.) Very deliberately, though, and seemingly at the behest of an authoritarian government, Mesut Özil was being erased... Arsenal’s reaction to Özil’s decision to speak out was — at least — inconsistent. Publicly, the club moved quickly to distance itself from his comments. Privately, it considered punishing him. His tweet, and a simultaneous Instagram post to his more than 20 million followers on that service, had caused considerable problems — not just at Arsenal, but also for the Premier League. China, after all, was its largest foreign broadcast partner, and its biggest foreign market, and the league could not afford — even in a pre-Covid-19 world — to have its games blacked out, to have its sponsors and its fans close their wallets... When the club sent out its merchandising celebrating Chinese New Year, it made sure to remove Özil from any of the materials.

In an example of astonishing hypocrisy and moral bankruptcy, the same Arsenal which went out of its way to erase Ozil, tweeted from its official handle virtually denouncing the Nigerian government and supporting street protesters against the government. In other words, it did to Nigeria what it found deeply problematic when Ozil did to China. 

Whatever happened to the indignation and fury of the millennials and GenZs among Arsenal supporters who lose no time to pounce on such issues anywhere.

7. Andy Mukherjee on the Reliance-Amazon tussle over Future Group's retail assets.

8. FT on the impressive strides made by North Korea's weapons development program. 

Kim Jong Un beamed from his palatial rostrum as the world’s largest mobile intercontinental ballistic missile rolled across Pyongyang’s Kim Il Sung Square shortly after midnight on October 10. Here was indisputable evidence of North Korea’s rapid progress in the country’s nuclear technology... North Korea’s Kim Chaek University of Technology ranked eighth in the world at the International Collegiate Programming Contest last year, beating top institutions such as Oxford and Harvard, noted Martyn Williams, an analyst with 38 North, a Washington think-tank.

9. Coal India Limited (CIL) is a classic example of asset stripping by government, which squeezes out its ownership by making the company pay out large dividends each year. 

In the past three years, the company’s average dividend yield is at 10.9 per cent — compare this with a minus 60.47 per cent return on its stock price. In other words, the stock is in value more for the dividend it pays than for its performance in the market.

Despite being in a sheltered environment, in a simple enough activity, with assured customers, CIL remains uncompetitive,

BSE data shows CIL’s operating profit margin (operating profit to sales ratio) for the June quarter at 16.51 per cent, the lowest in five quarters. It was 26.51 per cent in June 2019. A third of its income from operations disappears in its staff cost. No surprise, CIL has the costliest output per man shift among major mining companies globally. CIL’s efficiency is slipping despite operating in a protected market (so far) with a straightforward line of business. CIL has to just dig for coal and dump those besides the rail lines running past the mines. India, faced with a perennial shortage of coal, has enough buyers ready to arrange the transportation and pay for the entire cost... the company routinely supplies coal of inferior quality than the buyers have contracted for, which raises the cost for companies because they often have to import better quality coal... a tonne of coal from Mahanadi Coalfields, the most efficient of CIL’s seven subidiaries, costs Rs 4,365 per when it reaches a power station in Tamil Nadu against the imported coal price of Rs 3,779. Ironically, despite having the world’s fifth largest coal reserves, India’s coal imports have risen by a CAGR of nearly 10 per cent in the five years up to 2019-20, the third largest by value among imports. In response, major coal customers such as public sector NTPC have created a backward linkage to develop their own coal mines. In the recent auctions, key power, aluminium and steel producers, such as Adani, Hindalco, Vedanta and JSW, have bid for mines that will substantially end their dependence on CIL.

10. Christophe Jaffrelot points to Bihar as an example of social mobility without economic mobility. 

The post-Mandal rise of the Yadavs was confined to the electoral domain; it did not have much impact on their socio-economic status. Second, the uneven mobility among OBCs has offered space for upper-caste manoeuvres to co-opt emerging castes within the caste dynamic, preserving the hierarchical caste structure.

Remarkable similarities with post-Apartheid South Africa. Is this the general trend with social mobilisation efforts - it leads to social mobility and lags on economic mobility? For how long? Would economic mobility, like in the US with blacks, remain elusive for very long?

11. AK Bhattacharya points to the growing fiscal squeeze being applied at the level of state governments. 

The combined fiscal deficit of all states and Union Territories with their own legislature was in 2019-20 contained within their budget target of 2.6 per cent of gross domestic product (GDP), even though their revised estimates had shown a significant slippage at 3.2 per cent. And they achieved this fiscal correction not by increasing revenue collections, but by sharply cutting back on both revenue and capital expenditure. Even as their revenues according to the provisional accounts fell by 6 per cent, compared to the revised estimates, the spending squeeze was by a margin of 11 per cent for revenue expenditure and by 14 per cent for capital expenditure...

In 2018-19, the states’ actual revenue receipts were lower by 8.4 per cent compared to the revised estimates. The slippage in non-debt capital receipts was higher at 19 per cent. But a squeeze on expenditure saved the day for the states. Their revenue expenditure was down by over 6 per cent and capital expenditure was lower by a higher margin of 18 per cent. The result: The combined fiscal deficit of the states was down to 2.4 per cent, compared to 2.9 per cent shown in the revised estimates. The actuals for the states’ combined revenue receipts in 2019-20 were also lower by 6 per cent, compared to the revised estimates. Even their non-debt capital receipts were lower by 25 per cent. But the states pressed the pause button on their expenditure, as a result of which their revenue spend was down by 11 per cent, and worse, their capital spend was lower by 14 per cent. The result: The actual fiscal deficit for states in 2019-20 was cut to 2.6 per cent, from the revised estimates figure of 3.2 per cent of GDP.

Two points. One, state (and central) governments have been consistently keeping their revenue and expenditure projections unrealistically high, leading to revisions which basically make a mockery of the original budgetary exercise. This is one more reason for government statistics losing their credibility. Two,  the scramble to stay within the redlines makes governments invariably squeeze their expenditures, with knock-on effects on the economy.

The article also points to a slower pace of growth of state budgets compared to central budget, and slower growth of state government revenues compared to central government revenues.

The combined size of the state budgets at Rs 12.85 trillion in 2011-12 was smaller than the Union budget size of Rs 13 trillion that year. However, from the following year, the state budgets began growing at a rapid pace showing double-digit annual growth ranging between 11 and 19 per cent till 2016-17. In contrast, the Union budget size grew at a smaller rate in this period with annual increases ranging between 6 per cent and 10 per cent... In 2019-20, the size of the state budgets was only 24 per cent more than the size of the Union budget. This was a significant change from 2016-17, when the state budgets were more than 33 per cent of the Union budget. This trend is likely to continue, given the way states have been curtailing their expenditure in the last two years. Between 2011-12 and 2018-19, the states’ own tax revenues grew at less than 7 per cent in each of these years. But the Centre’s gross tax revenue recorded double-digit growth in most of the years during the same period. Similarly, while the Centre’s tax revenues fell by over 3 per cent in 2019-20, the states are likely to have suffered a steeper decline.

This points to a trend of increasing centralisation of spending by government. 

12. The Chinese government's decision to postpone the IPO listing of Ant Financial in Shanghai raises several questions. The IPO is now off by at least six months and investors are being returned back the money raised. 

One important question is on what it tells us about finch regulation. Ant has been at the forefront of the fintech trend in China, a push which has recently been receiving intense regulatory scrutiny,

The head of consumer protection at China’s banking regulator, Guo Wuping... in a sharply critical article in 21st Century Business Herald, a government-owned newspaper... argued that online finance products were not fundamentally different from traditional ones, and that financial technology companies should therefore be regulated in the same way as established institutions. Huabei, a credit function in Alipay, is no different from a credit card issued by a bank, Mr. Guo wrote. And Jiebei, an Alipay loan feature, is no different from a bank loan. Ant has called Huabei and Jiebei the most widely used consumer credit products in China. Loose regulation has allowed financial technology companies to charge higher fees than banks, Mr. Guo wrote. This, he said, “has caused some low-income people and young people to fall into debt traps, ultimately harming consumers’ rights and interests and even endangering families and society.”

This scrutiny has even made Ant pivot away from being seen as a financial company to a service provider to financial institutions,

Instead of using its own money to extend loans, the company now primarily acts as an agent for banks, introducing them to individual borrowers and small enterprises that they might not otherwise reach. It describes itself as a technology partner to banks, not a competitor or a disrupter.

The new regulatory rules tighten things for fintech lenders, 

Oliver Rui, finance professor at China Europe International Business School, says that Ant could previously leverage Rmb3bn ($449m) in capital into Rmb300bn in loans. But under the new guidelines, online lenders would need to make at least 30 per cent of the loans themselves rather than outsourcing them — up from about 2 per cent currently. “What this means for Ant is that it might have to find an extra $20bn or so in capital reserves to back its current loan portfolio,” says one Chinese finance professional, who asked to remain anonymous. “If you think that the IPO was supposed to raise about $37bn, that is a really big amount of money. No wonder Ma was so agitated.”

See also this and this on how Jack Ma may have overplayed his hand and ruffled too many feathers and brought about his own downfall. It's also a timely reminder about the limits to how much private businesses can push the boundaries and assume celebrity status. 

13. WSJ has a graphical feature on the changing face of the global semiconductor chip making industry. While US continues to have the dominant share of semiconductor sales, 47% in 2019, its share of manufacturing capacity has been continuously declining - US and Europe's share of manufacturing declined from more than 75% in 1990 to less than a quarter now. 

In recent years, US semiconductor companies have preferred to focus on higher value upstream activities, and outsource their production. 

A latest chip manufacturing facility costs more than $30 bn to build and operate for 10 years, which in turn necessitates public subsidy, something which Chinese governments have been more willing to fork out.

14. A significant ballot during the Presidential elections was the Proposition 22 vote in California to decide whether ride hailing services are contractors or employers. In a major setback to the anti-trust movement, the Californian voters voted 58% to support the Proposition 22 that the drivers are contractors.

15. Auction mechanism designers Paul Milgrom and Robert Wilson may have won the Nobel Prize for economics this year. There are several practical uses of auctions. But telecommunications is not an area for its use. Shyam Ponappa has a column cautioning against auctions in telecoms. 

I'm sure important people in the government realise this, but are unable to act for two reasons. One, as much as sectoral progress, auctions have also come to be seen as an important means to raise resources for government. Two, it is inconceivable that any bureaucrat or politician will stick their neck out and propose a discretionary allocation approach. And no consultant will have the professional integrity and incentive to do away with auctions.

The "eliminate-the-middleman" obsession in development

The conventional wisdom on development, across sectors, paints the middleman as an evil set of actors exploiting customers, especially poor people. In agriculture, there are middlemen who skim away a major share of the profits of farmers. There are money lenders who charge usurious rates from poor borrowers. Another are the quacks who peddle false and dangerous medical treatments to poor people. 

Accordingly, the mainstream narratives from the academia and the media have advocated their elimination. This is a simplistic and dangerous view. 

This post will argue that such middle-men while undoubtedly responsible for several problems and being exploitative, are also important and unavoidable actors in their respective contexts. So strategies to eliminate them are not only likely to fail but are also undesirable. It is required to acknowledge the reality and figure out means to formalise their activities by integrating them into the mainstream activities in each of these areas. This will be extremely challenging and will be a long-drawn process with several pitfalls and failures, but cannot be avoided.

Let's examine three specific types of middlemen.   

In the context of the recent agriculture reforms, the role of arthiyas or commission agents has come into focus. The popular media narrative paints them as the exploitative agent from whose clutches the farmers have to be liberated. Consider this from a recent report,

When farmers get their produce to mandis, they approach the commission agent who sorts, cleans, weighs and sells the produce. The procuring agency pays the commission agent the money who deducts 2.5 per cent of the amount before handing over a cheque to farmers. The government has often urged commission agents to transfer the entire MSP to the farmer and then take payment for their services, but this practice is seldom followed... The commission agent is also the farmers critical credit support system in times of need. Even though interest rates on these loans range from 18 to 24 per cent, most farmers don’t mind this practice. Bahadur Singh, 62, a farmer from Sangrur said, “Arthiyas help us with money whenever we are in need. They lend us money for seeds, farm operations and even for our children’s education. Will any big company or bank lend me money without any paperwork within a few hours’ notice?” The 27000 commission agents in Punjab generally have a network of more than 100 farmers who hail from the commission agent’s village and villages in the vicinity. These farmers sell through them and are financed by them...

Sanjeev Dhammi, a commission agent at Khanna has been in the business for 30 years. His family has been in it for 50 years. “The farmers we lend to have been our family acquaintances for generations. When a farmer approaches me for a loan, I give it without any paperwork or collateral. That’s because of the trust and mutual respect between us. A farmer can knock on my door in the middle of the night for any financial help for a medical emergency and I issue a cheque without any questions asked. The government wants to finish us off by ending mandis with this new law. It must realise that without our services the procurement system would become a nightmare.”... Commission agents are a single source of collecting produce of hundreds of farmers. Big corporations don’t have the capability to go to every farmer and collect their produce.

As can be seen, the middlemen offer important and necessary post-harvest sales related services. In their absence, someone has to perform these services. Besides, many also fill other market failures, especially access to credit and inputs. There are some recent field studies which indicate that the maximum possible increase in farmer incomes from direct sales is, at best, no more than in the high single digits.  

Interestingly, even among the farmers, elimination of the middlemen ranks very low as a priority for action by governments. 

The most commonly cited example of exploitative middle-men are the moneylenders. But they play a critical role in being the lender of last resort to the poor and others who do not have access to the formal financing networks. 

In this context, it is useful to keep in mind that the rapid progress in recent years on financial inclusion has been mostly about having a bank account. It provides a savings mechanism and also collateralised loans. But for the vast majority of people who do not have either collateral or formal creditworthiness assessment signals, financial inclusion counts for little in terms of access to credit. They have to rely on moneylenders and pawnbrokers.  

This has been rudely exposed during the Covid 19 when people depleted their savings quickly and had to borrow to survive. Including those with access to bank accounts, it was not the formal financial channels but the moneylenders and pawnbrokers that they could fall back to meet their credit requirements. When further research of Covid 19 times is done, it is most likely to reveal the central role played by cattle and gold as important shock absorbers, with the latter so for even the middle-class. 

We all know the consequences of the misguided regulatory overkill on Microfinance Institutions by the state government of Andhra Pradesh in 2010 which brought the industry to its knees. The vacuum was not filled by banks and other formal institutions but by moneylenders. In fact, the share of moneylenders only appears to have increased in arguably India's best performing state on financial inclusion. 

A third caricature of middle-men are the so-called quacks or rural medical practitioners (RMPs) in rural areas. They are unlicensed and informal medical practitioners who are often blamed for spreading superstition and wrong treatments among the poor. For sure, all these are relevant for a large number or such practitioners. The representatives of the medical profession in general have been strongly against recognising such practitioners and integrating them into the mainstream of health care system. In fact, there have been several attempts to have them banned altogether and criminalised. 

But such quacks are estimated to form 80-90% of the point of first medical contact in India and number over a million, much higher than doctors. In fact, there is evidence that the quality of treatment by quacks from southern states is better than those delivered by qualified doctors from north and such quacks persist even with increased aggregate incomes. They include alternative medicine practitioners, traditional healers, vaids, compounders, lab technicians, pharmacists, and so on. Many of them are long-time practitioners and also enjoy the deep trust of their communities. In the circumstances, like with the moneylenders, they cannot be ignored and have to be part of any meaningful effort to improve health care, especially preventive and primary care. 

Therefore, instead of ignoring or banning their activities, the objective should be to identify, certify, train, accredit, integrate, and regulate their activities. There should be a well-thought out and practical plan for each one of the six activities. Given the complex nature of the problem, it will have to be second-best plans, with an appetite to see failures in implementation but a resolve to iterate and improve with each failure. Most importantly, while there should be an umbrella regulatory framework for the nation as a whole, the operational details should be left to the discretion of states.

In fact, it's not incorrect to say that in India, arguably the four biggest saviours for the poor during the Covid 19 have been the much derided old-style PDS, NREGS, gold, and moneylenders. To the next list of Covid 19 social stabilising mechanisms one could also add the quack. The millions of JDY accounts counted for little as a credit sourcing mechanism, though they were important to access cash transfers by governments. 

Yet, perversely influential parts of the economic orthodoxy and popular commentary have been strongly advocating replacing all of these with cash transfers like universal basic income scheme and financial inclusion and strongly discouraging gold savings and reliance on moneylenders. 

None of this is to advocate complete deregulation and to allow moneylenders and other middlemen to operate with impunity. Exploitative practices are likely with all these intermediaries will have to be curbed. Instead, the path ahead should be to acknowledge their relevance and figure out ways to utilise them to realise the larger objectives. This would require regulation, but one which has to be like that with any other market, designed on merits rather than any ideological or other biases and prejudices. 

Update 1 (18.12.2020)

Shoumitro Chatterjee et al has this to say about middlemen in agriculture

The market system with many intermediaries at multiple levels is less a sign of market inefficiency and more a rational response to the dominant structure and condition of Indian farming, which is characterised by tiny farm sizes. There is little evidence of intermediaries charging big mark-ups or delays in the movement of goods. Furthermore, farmers are also paid quickly. Other than remote locations, there is little evidence of the market power of the much-vilified middleman. Intermediaries also help reduce risks faced by farmers, often paying them for the produce before they themselves get paid and absorbing the risk of the crop failing or prices falling (this is especially true in vegetables). Brokers also seem to proliferate in dynamic markets where both local and non-local buyers are present, where they play an important role in providing some assurance against counter-party risk in the context of weak relationships between parties. This is especially the case when there is no formal regulation to provide such assurance.

More India "missing" middle class facts

More evidence of the small India middle class comes with the news that Harley Davidson is quitting India as part of its global restructuring to exit markets where volumes and profits have been elusive.

Harley is the third US automaker to shut operations in India during US President Donald Trump’s tenure. In 2017, General Motors — an American multinational corporation headquartered in Detroit — wound up its operations in the country and sold its plant in Gujarat. Last year, another US automaker Ford Motor Company pared back its interests and ceased independent operations in India. It transferred most of its India assets to a joint venture with Mahindra & Mahindra, after failing to gain a foothold for more than two decades in the world’s fourth-largest automobile market... Harley entered the Indian market a decade ago, but has so far managed to sell only 27,000 bikes, barely half of what the country’s segment leader Royal Enfield sells in a month. In the first quarter of this financial year, it sold only 100 motorcycles and for the whole of last financial year, it was 2,470 units — dropping from 4,708 units in 2015-16... Harley has an assembly plant at Bawal in Haryana, where it assembles completely knocked-down (CKD) motorcycles for local sales. While this unit accounts for a bulk of its sales in India, the company also imports completely built-up (CBU) motorcycles, where the import duty is as high as 50 per cent. 

Recently an official of Toyota Kirloskar courted controversy by saying that taxes for SUVs and higher-end vehicles, going upto 50% of the price, made production unviable and had forced the company to shelve any expansion plans in India. Maruti and Hyundai, who are for all practical purposes only small car makers in India, make up over 70% of the market, and most of the rest too are fragmented among several small car brands. For a supposed 200 million middle-class, it is more likely that the demand for cars/SUVs priced more than Rs 15 lakhs (or even Rs 10 lakhs) may be in the order of about a couple (5 m) of million.

It may be true that some foreign auto manufacturers in India may have bet on the wrong market penetration strategies or failed in execution, but even if they had done everything right, in the absence of market demand their fates would not have been any different.

This is no indictment of any government, but an acknowledgement that the hype around the massive India middle class was misplaced. It should be seen as a statement of the reality.

This, this, this, and this are just some of the earlier posts highlighting this point about the narrow consumption class. This is a central thesis of my book with V Ananthanageswaran, Can India Grow? The idea is not to blame or criticise anything or anyone, but to acknowledge this reality as policies get debated and made.

In this context, an old data feature in Livemint on food consumption basket of Indians from the 2011-12 NSSO Survey. Consider this,

Their per capita consumption is 15 bananas a month, or one in two days. They have less than half a kilogram of mangoes a month and 200 gm of watermelon. They have one coconut, 700gm of apples and 200gm of grapes in a month. This is very modest consumption. Let’s take beverage consumption. The top 5% in urban India drink 11.3 cups of tea, 1.9 cups of coffee and 20gm of coffee powder and 0.335 litres of fruit juices. This can hardly be called splurging.

So how much does the 40-50th urban percentile eat then? They have 5.8 bananas per head per month; three-fourths of an orange a month; 5 cups of tea; 0.012 of a pineapple; almost 5 litres of milk; and 2.8 eggs a month, among other things. Indeed, even the relatively well-off 8th fractile in urban India, or the 60-70th percentile, had 3gm of butter a month, Rs1.45 worth of ice-cream, 3.3 eggs, seven bananas, 1.1 oranges and 2.5 lemons and 7 cups of tea a month. And if this is what those in the middle of India’s consumption ladder eat and drink, there’s not much point in looking at how much the bottom 5% eats.

What stands out for me are these - the richest five per cent of Indians spend just Rs 200 per month on eggs, fish, and meat in 2011-12, which would have purchased 1.5-2 kg of chicken!

Navin Kabra uses the 2016 ICE 360 survey and his own survey to show how Indians' perceptions about their income status is so deeply flawed. The ICE Survey found that the average monthly income of the top 1% and 10% of all Indian households in 2016 was just Rs 66000 and Rs 35000 respectively. And a monthly income now of Rs 85000 would leave the person in the top 0.5%. Just 61% of the top 1% had four wheelers.

While this is the reality, the perception,

70% of us think that the average household income of the top 1% is more than ₹2.5L. In fact, a majority of us guess it is more than ₹5L. Similarly, a majority of the respondents assume that the average income of the top 10% of households is more than a ₹1L... We think of the top 1% as super-rich people. A majority of the respondents estimate that all of the top 1% have 4-wheelers. And 70+% feel that at least 90% of the top 1%-ers have 4-wheelers.

The upper class is minuscule, middle class tiny, and the overwhelming majority are really poor by any global yardstick of income and consumption,

The average monthly household income for all of India is about 22k (16.8k in 2016)... 87% of all the people living in metros are from the top 40%. Even if we regularly interact with the poor people in our city (which most of us really don’t), we rarely, if ever, meet anyone from the bottom 60% of India. Your domestic helpers are very likely to be in the top 40% of India. A lot of us think of ourselves as “middle-class”. In fact, the 2016 survey showed that 95% of the top 1% of Indians think of themselves as middle class or worse. Middle-India, defined as the people between the 20 to 80% income range, is not us by a long shot. 75% of middle-Indian breadwinners were illiterate or had studied just until primary school... What does most of India do? Only 20% of them had a salaried job. And 80% of those were grade IV jobs—i.e. peons, gardeners, housemaids, etc. 22% were farmers or had an agri-business of some sort. 25% were labourers or daily-wage earners.

Other interesting findings from ICE 360 - just 11% of Indian households have ever lived in rental accommodation; just 27% had non-trivial outstanding loans; nation-wide 40% of all loans were agriculture loans, whereas in metros 78% were home loans; but underlining how little of India is metro-India and how unrepresentative it is, just about 5% had home loans; 50% used firewood for cooking etc.

These numbers raises questions about the likely stimulative effects of concessions given on home loans, affordable housing etc. These are all sops to a sliver of Indians who live in the largest cities.

Update 1 (08.10.2021)

Interesting data about the missing middle class in India,

There are 40 million fewer Indians working today than there were in 2013, though 250 million more people came of working age. The participation rate in the labour force (those who are working or looking for work) is 61 per cent in the United States, more than 65 per cent in China and 72 per cent in Vietnam. In India this is 40 per cent, both according to CMIE and the government’s periodic labour force survey... Residential property sales have been stagnant. In the eight major cities, sales have been stuck at around 3 lakh units a year since 2012 (last year it was about half that). India is second from bottom on the Knight Frank Global House Price Index. There has been no growth in the sales of passenger vehicles for 10 years — about 2.7 million units in 2012, 2.7 million in 2015, 2.7 million in 2019 and 2.7 million in 2020, according to the Society of Indian Automobile Manufacturers. The government says this is because of Uber and Ola, but ride-hailing apps have not stopped the growth of passenger vehicle sales in the United States, where they went from about 10 million in 2009, the year Uber was founded, to 17 million. In China, sales doubled from 12 million to 24 million in this same period. In India, the sales of two-wheelers have been stagnant for six years, with 16 million sold in 2015, then 17 million in 2019, and 15 million in 2020. Something that has not received attention outside of the business dailies is that sales of commercial vehicles have stopped growing, with 6 lakh sold in 2015, then 7 lakh in 2019 and 5 lakh in 2020. Automobiles are about half of India’s manufacturing sector. Because auto sales have stagnated, manufacturing’s share of GDP fell from 16 per cent to 13 per cent after the launch of Make in India in September 2014. An analysis by the Centre for Economic Data and Analysis in May found that jobs in manufacturing halved from 51 million in 2016 to 28 million today. This aligns with the issue that is highlighted by automobile sales.

Update 2 (26.03.2022)

TN Ninan questions the rich lists put out by various agencies and points to India's missing millionaires  

India as a whole is said to have 140 dollar-billionaires. According to Credit Suisse, there were 764,000 dollar-millionaires in India in 2019, i.e. those with wealth of Rs 7.5 crore and more... And in the same 2019, all of 316,000 filed tax returns declaring income of over $70,000 (or Rs 50 lakh)... Again, there is no central data point, but checks with companies in the business suggest annual purchases and bookings of fewer than 3,000 residential properties that are individually worth Rs 5 crore and more. Even if one were to lower somewhat the bar for unit value, the number of transactions would remain decidedly modest in relation to the reported numbers of millionaires... Sales for the top three German luxury-car makers peaked at 32,500 in 2017 and have fallen since. In 2021, they were just 22,500 -- affected partly by Covid and then the shortage of chips. Allowing for that, and adding on the numbers for Jaguar-Land Rover and top-end Japanese models like the Lexus, the total is unlikely to cross 40,000. The mismatch with the reported number of dollar-millionaires is obvious.

Weekend reading links

1. Large is not always good. Marc Levinson writes how the latest giant container ships have, instead of lowering transport costs and raising efficiency, has increased costs, reduced speeds, and created a host of other problems.

Discharging and reloading the vessel took longer as well, and not only because there were more boxes to put off and on. The new ships were much wider than their predecessors, so each of the giant shoreside cranes needed to reach a greater distance before picking up an inbound container and bringing it to the wharf, adding seconds to the average time required to move each box. Thousands more boxes multiplied by more handling time per box could add hours, or even days, to the average port call. Delays were legion... The land side of international logistics was scrambled as well. At the ports, it was feast or famine: Fewer vessels called, but each one moved more boxes off and on, leaving equipment and infrastructure either unused or overwhelmed. Mountains of boxes stuffed with imports and exports filled the patios at container terminals. The higher the stacks grew, the longer it took the stacker cranes to locate a particular box, remove it from the stack and place it aboard the transporter that would take it to be loaded aboard ship or to the rail yard or truck terminal for delivery to a customer. Freight railroads staggered under the heavy flow of boxes into and out of the ports. Where once an entire shipload of imports might be on its way to inland destinations within a day, now it could take two or three. Queues of diesel-belching trucks lined up at terminal gates, drivers unable to collect their loads because the ship lines had too few chassis on which to haul the arriving containers.

2. Gautam Bhan writes about the lop-sided nature of urban land distribution,

Despite the language of “encroachment” and widespread “land grab,” bastis (slums) are on a minute portion of city land — less than 0.6% of total land area, and 3.4% of residential land in the 2021 Delhi Master Plan. This tiny percentage supports no less than 11-15% but possibly up to 30% of the city’s population, most settled for decades. One example shows how skewed this number is. In 2017, parking Delhi’s 3.1 million cars used 13.25 sq km of land, or 5% of all residential area. Cars, then, have more space than the housing of workers, residents, and families.

3. Obituary in FT of Lee Kun-hee, Samsung's Chairman. Lee was a real business titan and a force behind South Korea's economic transformation.

Samsung, which pulled away from Hyundai to become the biggest of South Korea’s chaebol, or industrial groups, by a wide margin. The company is the largest maker of memory chips, smartphones and electronic displays, Samsung C&T built the world’s tallest building in Dubai and Samsung Heavy Industries is the world’s third-largest shipbuilder by sales. Other subsidiaries’ range from theme parks to insurance. It is for the transformation of Samsung Electronics, however, that Lee will be most remembered. Samsung was a minor player in the global technology industry when he took the helm in December 1987, succeeding Lee Byung-chull, his father and the group’s founder... Within five years, Samsung was the world’s biggest producer of memory chips underpinned by billions of dollars of annual investment, even during downturns. Despite this success, shoppers around the world continued to view Samsung’s consumer electronics as poorly designed and undesirable. Lee’s aggressive interventions to change this perception have now become legend. The most famous came in 1995, after the humiliation of finding that Samsung mobile phones he had given as gifts did not work. Two thousand Samsung employees at a phone manufacturing factory south of Seoul were instructed to don headbands marked “quality first” and gather outside. Thousands of phones and other electronic devices — with an estimated total value of $50m — were incinerated on a bonfire and the ashes were pulverised by a bulldozer.

As I blogged earlier, Samsung's spectacular success breaks the mould on several scared tenets of modern business organisation and management techniques. See this from The Economist.

3. Chandra Nuthalapati et al have a good study that informs significant gains for vegetable farmers from selling directly to supermarkets,

Even after controlling for differences in quality and other relevant factors, we found that imputed farmgate prices that farmers receive in supermarket channels are around 20% higher than the prices received in traditional channels for most of the vegetables considered. For some of the vegetables, price differences are even higher. We also found that selling to supermarkets involves lower transaction costs for farmers than selling in traditional markets, as supermarket collection centers are located closer to the villages and involve lower commission fees Higher prices seem to be needed as an incentive for farmers to deliver to supermarket collection centers, because supermarkets do not offer any other incentives to farmers. In other countries, where supermarkets often procure vegetables from farmers through contracts, farmers benefit from lower price risk or from inputs and extension provided as part of the contracts. In India, supermarkets procure vegetables without contracts, so that higher mean prices are important to ensure regular supplies. We found significant price incentives for comparable qualities. In addition, higher quality grades are rewarded in supermarket channels, which is often not the case in traditional channels. Our data showed that farmers who supply supermarkets typically sell their highest-quality vegetables in supermarket collection centers, whereas they sell lower-quality produce in traditional markets.

While this will surely have some positive effect, these are excessively big effects. Something going on here about the study.  

4. Bihar sugar mill industry fact of the day,

Around 1980, Bihar accounted for 30% of the country’s sugar production, and 28 functional sugar mills. It has now come down to less than 5% of the production, and has 10 mills... At the end of 2016-17, only about 2,900 of Bihar’s estimated 3,531 factories were operational, employing on an average 40 people each. The national average is nearly double, 77 workers. The average salary per annum per worker in Bihar then was Rs 1.2 lakh, again less than half of the national average of Rs 2.5 lakh.

5. FT has a long read on the emerging geo-political struggle in the Middle East between UAE and Turkey, motivated by ambitions in both countries to influence politics in other countries across the region. Their frontline is in Libya, where Turkey is supporting the UN-backed government and UAE is supporting the rebels led by Gen Khalifa Haftar. 

The UAE accuses Mr Erdogan of colonial delusions, supporting Islamist groups and forming a hostile axis with Qatar, its Gulf rival. The belief in Abu Dhabi is that wealthy Qatar provides the funding, and Turkey the muscle as Mr Erdogan seeks to position himself as a leader of the Sunni Muslim world. “Turkey has many things to answer for, with its long-term attempts — in concert with Qatar and the Muslim Brotherhood — to sow chaos in the Arab world, while using an aggressive and perverted interpretation of Islam as cover,” Anwar Gargash, the UAE’s minister of state for foreign affairs, wrote in the French magazine Le Point in June as tensions over Libya soared. Sheikh Mohammed, known colloquially as MBZ, is spearheading the Arab push against Turkey’s influence... The UAE, which has an indigenous population of just 1.5m but is one of the region’s wealthiest countries, has long punched above its weight. Since the 2011 Arab uprisings rocked the region, Abu Dhabi has deployed tens of billions of petrodollars to bolster allies across the Middle East and Africa through trade, aid and the use of military resources. The Gulf state’s foreign investment and bilateral aid to eight countries including Egypt, Pakistan and Ethiopia, has totalled at least $87.6bn since 2011, according to the American Enterprise Institute, which analysed publicly available data.

Turkey is today the hub for the region's dissidents, especially Islamists, who pose an existential threat to the monarchical autocracies. UAE's normalisation of relations with Israel should be seen in this backdrop - an attempt to ingratiate itself in the West, against Turkey.

A related issue is the intensification of the stand-off between Armenia and Azerbaijan over the Armenian enclave of Nogorno Karabakh in Azerbaijan. One important reason for the breakage of the Russia-brokered truce which has held since 1994 has been Erdogan and Turkey, which have aggressively armed and supported Azerbaijan, thereby emboldening it. A humanitarian disaster is now unfolding which has displaced nearly half of the enclave's population. 

6. From Ananth, this article by Norman Doidge on the problems with RCTs in medicine,

An important review of RCTs found that 71.2% were not representative of what patients are actually like in real-world clinical practice, and many of the patients studied were less sick than real-world patients. That, combined with the fact that many of the so-called finest RCTs, in the most respected and cited journals, can’t be replicated 35% of the time when their raw data is turned over to another group that is asked to reconfirm the findings, shows that in practice they are far from perfect. That finding—that something as simple as the reanalysis of the numbers and measurements in the study can’t be replicated—doesn’t even begin to deal with other potential problems in the studies: Did the author ask the right questions, collect appropriate data, have reliable tests, diagnose patients properly, use the proper medication dose, for long enough, and were their enough patients in it? And did they, as do so many RCTs, exclude the most typical and the sickest patients?

7. The reality with Uber's misleading minimum wage adherence claim.

Drivers will be guaranteed earnings — 120 per cent of the local minimum wage — though with a significant caveat: Uber won’t count the time drivers are waiting to be matched with a passenger. When you factor in that period, a Berkeley study suggests that Uber’s promised $15.60 minimum an hour instead becomes, on average, just $5.64, once adjusted for driver expenses such as fuel.

8. This shocking story of the flight of ABC's Beijing Correspondent from China tells everything about today's China, which clearly does not abide by any rules applicable for civilised nations.  

9. A rare example of expose of corruption in the defence forces, which is without doubt at least a pervasive as elsewhere (perhaps even more given the lack of external oversight). The problem though with dragging CBI, CVC etc into investigating works, especially those done in places like Ladakh during the ongoing stand-off, is that it could backfire badly and end up delaying and derailing even those critical and time-bound works. 

10. Talking of burying your head in the sand, and Eugene Fama, in this interview, is a great exhibit. The level of obduracy on financial markets, negative rates, private debt, impact of central bank policies, business concentration and so on is stunning. Virtually every paragraph is an exercise in denial of reality. Evidently Fama is living in a different world. 

11. Economist hails Aditya Puri as the world's best banker!

The attributes are very old-fashioned,

First, Mr Puri’s management style, which features a clear vision, microscopic attention to detail, blunt speaking and a knack for retaining talent... The second factor is strategic discipline. Mr Puri intuited that Indian consumers and firms would be a consistent money-maker and has stuck to that view. He took the sophisticated processes used by foreign banks and used them to target local retail and commercial clients. The result is a large branch network, half of which is outside cities. The firm’s cash-machine and credit-card networks are the largest among India’s private banks. Mr Puri stayed away from foreign ventures and investment projects, avoided lending to India’s indebted oligarchs, and financed HDFC’s balance-sheet through deposits rather than debt... The final element is HDFC's approach to technology—though not a pioneer, it is a fast follower.

12. A Livemint story of the PLI scheme for mobile phone manufacturing, which has a five year allocation of Rs 41,000 Cr. This about the success of the segment as well as the distance to be travelled, 

India had two mobile manufacturing units in 2014. By 2019, there were over 200. The number of mobile handsets produced shot up from 60 to 290 million in the same period; the value of handsets produced jumped 10 times to $30 billion... China exported phones worth over $100 billion in 2019; Vietnam over $35 billion. India exported less than $3 billion in 2018-19.

Even with the PLIs, India stays below Vietnam and China on cost-competitiveness,

Assuming that $100 is the cost of producing a phone without subsidies, China can make it at $80 after factoring in the incentives the country provides. Similarly, the cost of manufacturing a phone in Vietnam. The PLI scheme bridges some of India’s deficit. The manufacturing cost, after factoring in PLI and other subsidies, totals $92-$93.

Interesting thing about the extent of subsidy, which is very significant,

The scheme is also a massive discount on India’s current value-add, the advisor mentioned above explained. Manufacturers in India import most of the components and the assembly value ranges between 8% and 15%. “If 15% is the assembly price, an incentive of 6% is almost a 50% discount," he said.

These are very instructive numbers. If even with assembly, India is not able to compete with Vietnam and China, that's disturbing. But perhaps, this underscores the need to localise component production to become competitive. That will hopefully happen in due course and the PLI scheme will expedite. But till then, the incentive is a massive subsidy cost being incurred. If it does not catalyse component manufacturing, then this can just as well be described as a corporate freebie.

13. The IPO of Ant Financial to raise about $35 billion, the world's largest ever, has attracted a staggering $2.8 trillion of orders from more than 5 million individuals, a sum which exceeds the value of all stocks listed on exchanges in Germany or Canada. For retail investors, the simultaneous listing at Shanghai and Hong Kong was oversubscribed more than 870 times. The company has a billion users and more than $17 trillion in yearly payment volumes.

14. Gillian Tett points to the alarmingly low CDS recovery rate projects with the recent corporate bond auctions. 

Most CDS contracts stipulate that financiers need to know what a company’s cheapest available bond will be worth at the point the company defaults. That’s because CDS contracts make investors whole by paying them the bond’s original face value minus its market value. When a company goes bust, financiers hold an auction to determine the market price, and the resulting prices offer one guide to what creditors think the company’s remaining assets are worth. Over the past decade, the average CDS auction prices have moved in a band between 10 and 60 cents on the dollar, but have generally been between 30 and 40 cents. However the nine US auctions conducted in the year to August produced an average price of just 9 cents — and just 2.4 cents if you look at the worst four: Chesapeake, California Resources, Neiman Marcus Group, and McClatchy.

Worsening matters, bondholders are being continuously shortchanged, 

And because loans take priority over bonds in a bankruptcy, the practice has also weakened bondholders’ claims, sparking fights in some bankruptcies... Bondholders’ claims have been further undermined by debt exchanges and stealthy asset transfers, including one known as the “J-Crew trap door”. Named after the recently bankrupted US retailer, it refers to a manoeuvre pulled off by the company’s private equity owners in 2016 in which they transferred intellectual property rights across to new lenders, out of the reach of the original creditors. Similar tactics have emerged at other troubled groups such as Travelport.

And all this is being driven by the search for yield among investors,

Indeed, four-fifths of US loans issued last year were “covenant-lite”, that is they had little or no control over borrower behaviour, up from one-fifth at the start of the decade. That is because investors are so desperate to chase returns in a zero-rate world that they no longer dare to impose covenants. Indeed, the hunt for returns is so frenzied that junk bond yields have plunged from 12 per cent in March to below 6 per cent. Cheap money, in other words, is enabling some zombie companies to stagger on, even as creditor value shrivels — until they collapse.

15. Fascinating article about the QR Code, the low-profile but functionally valuable invention in 1994 by Masahiro Hara to track components in car factories. Its use took off with its adoption by Ant Financial to make mobile payments through Alipay, and has not looked back. It was the crucial link which enabled the use of mobile phones for digital payments. It's now being used for everything from digital payments to browsing dinner menus online. 

Mr Hara worked at Denso Wave, part of a components group allied to Toyota, which used barcodes to label components in plants. But the barcode, first used in an Ohio supermarket in 1974, could be hard to use — as anyone who has tried to scan a bag of frozen peas will know — and did not hold much information. He solved the data constraint by making the QR code a two-dimensional square instead of a horizontal strip, allowing it to store up to 4,200 characters compared to 20 on the barcode. His team also conquered the time-consuming awkwardness of barcodes — every QR code includes three squares at its corners that help scanners to focus rapidly (hence, quick response). Japanese carmakers found it very useful: it saved some workers from having to scan up to 1,000 barcodes a day. 

This is one more to the point I've been making that Alibaba is a more entrepreneurial e-commerce engine than Amazon,

The QR code enabled Ant to pioneer mobile payments in China through its Alipay super app. The renaissance of QR codes, after years of half-baked efforts by US advertisers and retailers to use them for marketing campaigns and shopping vouchers, shows that it takes time for the strengths of some inventions to emerge.

And this is interesting, an illustration of how non-patenting of such general purpose ideas can have large positive externalities,

But Denso Wave realised that the QR code had greater potential and did not enforce its patent rights. That enabled others not only to use it free but make variations for their industries. The invention knocked around for a decade without finding another compelling use until Alibaba, the Chinese ecommerce group co-founded by Jack Ma, realised it could be used for payments. Shopping in the US and Europe, both online and in stores, is mostly done with payment cards, but the QR code offered an alternative.

It was the industry's good fortune that the QR Code was not invented in the US by the likes of Apple, who would have immediately patented it. 

16. A summary of the changes incorporated in the regulations proposed to implement the new labour codes in India.