The targeting challenge in delivering welfare services and limits of digital solutions

India's digital identity program, Aadhaar, has achieved several successes. It has facilitated financial inclusion through simplified no-frills savings bank accounts under the Jan Dhan Yojana (JDY). It underpins the entire architecture of the Direct Benefits Transfer (DBT) program which has doubtless increased the efficiency of welfare services delivery.

Perhaps the most important transformation from Aadhaar may be its role in becoming an anchor that underpins financial transactions and allows the flowering of fintech in India. The UPI is rightly being hailed as a transformative development. 

But it has not addressed several other important issues, which, while it was never likely to have resolved, had become part of the narrative around Aadhaar. Targeting and delivery of public services are two examples. 

Targeting has been one of the biggest problems with the delivery of welfare programs across the world. The ongoing Covid 19 pandemic has only reinforced the challenge with targeting, especially in the case of migrants. It was one of the major public narratives that Aadhaar will help address this problem. As India has proceeded with the likes of no-frills bank accounts (JDY) and DBT, this narrative may have become entrenched.

However, like several other narratives, this too has little basis. Aadhaar is an identity validator - it validates a person. Validation comes after the identity (or eligibility) is established.

Aadhaar cannot identify whether he's eligible for something. That eligibility depends on whether the person meets the requirements of the particular program. This, almost always, involves some form of physical survey and attestation before being declared eligible. Once declared eligible and tagged with Aadhaar, the administration of that person's account for the particular program becomes simpler. Here too, if there is a dynamic dimension to eligibility (people move out of poverty, by say getting a formal or government job), then too the administration of the person's account becomes a problem.

In other words, Aadhaar is relevant only for administering program beneficiaries identified as eligible through other means, and that too where the eligibility is static. The problem of targeting remains.

Take three of the biggest examples in India - PDS, JDY and farmers.

In case of PDS, the biggest challenge is the issue of identification of eligible households. There has been much progress in this area, including with the latest Socio-Economic Census Survey. But even with these, exclusions are significant. The exclusions cover not only those unidentified but also those identified and not covered under the PDS for various administrative reasons. Some studies point to the extent of under-coverage under PDS being as high as 100 million.

While the actual number is most likely lower, as multiple independently done studies by reputed institutions/researchers here, here, and here show, the numbers are large and very significant. A fundamental problem is that the underlying statistical considerations on PDS are based on the 2011 census.

This problem does not figure in the entrenched narrative about PDS. For far too long, PDS reform has been about eliminating wastage and leakage. Commentators look at any PDS reform as one aimed at enhancing efficiency. The attention of young bureaucrats in the field is aimed at "weeding out the bogus ration cards" using the wonders of Aadhaar-enabled digital technologies. You get an award for reducing leakages due to inclusion errors but not for reducing exclusion errors and expanding coverage. While this should be done, a greater or at least equal priority should be to identify those excluded genuine beneficiaries.

One immediate fiscally-neutral policy response would be to mandate that District Collectors would be allowed to retain the total number of ration cards. They should be incentivised to "weed out the bogus cards" and allot them to the excluded. Needless to say, even this policy can create its set of distortions and will need to be revised in 2-3 years of implementation.

In case of JDY, again the challenge is the eligibility of those who have opened the no-frills JDY account. In the absence of robust eligibility screening mechanism, it suffers from both exclusion and inclusion errors. Sample this,

According to official statistics, roughly 200 million Indian women (47 per cent of adult females) have a PMJDY account... Official statistics do not tell us how many of the 200 million female PMJDY account holders belong to poor households... A 2018 survey (using) a Grameen Foundation methodology where answers to 10 questions about a household’s characteristics and asset ownership are scored to compute the likelihood that the household lives below the poverty line... tells us that roughly two-thirds of adult women — just over 325 million in total — are living on less than the UN-recognised poverty criterion of $2.50 per day. In normal times, nearly nine out of 10 of these women say it would be difficult to pull together Rs 6,000 within a month to deal with an emergency. So, even if we go by government statistics and assume that PMJDY accounts were opened only by these poor women — a generous estimate — then over one-third of poor women or 125 million women, do not have a PMJDY account. However, we know that some better-off households also have accounts. The 2018 survey numbers suggest that 75 per cent of PMJDY account holders are poor. If we instead allocate the government’s count of PMJDY accounts to poor women based on these 2018 survey numbers, then roughly 175 million poor women lack PMJDY accounts.

In fact, as the article shows, even when a JDY account is notionally opened, it still does not ensure access,

A nationally representative survey from 2018, the Financial Inclusion Insights Survey, asked respondents whether they have a bank account and, if yes, whether it is a PMJDY account. Roughly 80 per cent of female respondents stated they have a bank account, but only 21 per cent said they have a PMJDY account. What drives the gap between government and survey numbers? Likely some combination of dormancy, account duplication in the system and the lack of knowledge among women about the type of account they hold.

And all this is even without the biggest challenge of them all, easy access to physical cash-out or digital transaction channels so as to be able to regularly utilise these accounts. A cash-transfer mechanism does not achieve the objective of ensuring genuine access for those once enrolled. There is the issue of accessing the transfers under JDY, utilisation of the no-frills account, replenishing the gas cylinders after the first one, and so on.

In case of farmers, the big and insurmountable problem is to differentiate and identify tenant farmers. It is widely acknowledged that the biggest problem with PM-KISAN is that of identification, as it includes only landowners and mostly excludes landless and tenant farmers and sharecroppers. Aadhaar cannot solve this problem of identifying the excluded.

Any formalisation will run into complex political economy challenges since owners will be loath to recognise them. Land records maintenance by way of updating Adangal every crop season has long since fallen out of favour across the country. In short, there is no record that links the tenant/sharecropper to the land. Their identification therefore requires physical field verification surveys. And, given the dynamic nature of these relationships, they need to be revisited periodically.

The only option is to do what some states like AP and Telangana have done. Do physical survey and then recognise tenants and give them some document, and keep doing it every 3-4 years. Even with all its challenges and problems, it seems the only practical solution. It is a reminder that Aadhaar and digital technologies have not moved us one inch in the tenant farmer targeting problem!

Again, even if the identification and validation problems are solved, there is the real problem of access to the associated benefits.

In its 2019 report, the Reserve Bank’s Internal Working Group to Review Agricultural Credit estimated that despite numerous existing initiatives, at most, only 40 per cent of India’s small and marginal farmers are covered by formal credit... KCCs, a scheme first introduced in 1998, over 20 years ago, should concern us. The RBI’s Internal Working Group estimated that as of 2019, only around 45 per cent of all Indian farmers possessed an operative KCC and that given the existence of multiple accounts per farmer, the percentage is likely to be even lower. Nabard’s own NAFIS Survey 2016-17, reported that only 10.5 per cent of agricultural households were found to have a valid KCC.

All this puts in perspective the true gains from Aadhaar and DBT. For sure while efficiency gains have been aggressively reaped, what about the welfare loss from these various aforementioned problems? 

We should not be under any illusion that the problem of identification has somehow become any less important in the aftermath of Aadhaar. To put it in simple terms, Aadhaar has not moved the needle in any meaningful manner on the issue of identification. And it will not do so. It was meant to only validate identified beneficiaries of public welfare programs. 

And let's not talk about the other idea supporters often point to, the use of data analytics. We can safely say that while data analytics will doubtless help with weeding out certain categories of false positives in some programs, it will be of no help with identification of new beneficiaries.

Then there are the technical challenges with delivering the cash benefit through the Aadhaar enabled eco-system. See this account of the problems in case of NREGS. 

Ironically, there is a compelling case that in times of Covid 19, despite all the Aadhaar innovations and digital technologies, the good old NREGS job cards may be the most reliable (in terms of being dynamically adjusting) targeting database for rural areas,

There are... about 14 crore for NREGA job cards, and 12 crore or so for women’s JDY accounts in rural and semi-urban areas (assuming that the gender distribution of accounts is similar in rural and urban areas). For purposes of cash relief, the JDY approach turns out to fare poorly on several counts. First, JDY accounts are a mighty mess – the NREGA job-cards list is far more transparent and well-organised... a large proportion of JDY accounts (40% in March 2017, down to 19% in January 2020) went “dormant” as customers were unable or unwilling to use them... It is not clear what proportion of JDY accounts are operational today, in the sense that a bank transfer to these accounts will actually reach the recipient in good time. Second, cash transfers to women’s JDY accounts are likely to involve large exclusion errors... Third, inclusion errors are also likely to be larger in the JDY approach. Job cards are meant for rural workers, JDY accounts are for everyone... (studies) show... JDY beneficiaries tend to be better-off than NREGA beneficiaries... the probability of having a JDY account is more or less the same for poor and non-poor households. 

Aadhaar has doubtless helped improve the efficiency of transfers through DBT. But it has done precious little on addressing the issue of eligibility verification and helping enrol the excluded into government programs. It was never meant to. 

There are serious limits to any digital pathway to address targeting and access, leave alone poverty reduction. Acknowledging that may be a good first step. 

Update 1 (23.07.2020)

Rohini Pande et al on how PDS helped during Covid 19,

Our research team recently evaluated how Chhattisgarh’s public distribution system functioned through the lockdown and how rural households were faring in the state. Ration shops functioned well: Out of over 4,000 PDS shops we surveyed, 99 per cent were open through the lockdown and stock-outs were extremely rare. Of the over 3,900 households we surveyed in rural Raipur, 95 per cent reported receiving rations. But 20 per cent of the surveyed households worried they would run low or out of food in the coming weeks. Interviews with anganwadi workers revealed that households were eating fewer fruits and vegetables, and more rice and dal than before the lockdown. This is consistent with the NSS data that suggest free rations in Chhattisgarh helped households cover 15 to 33 per cent of their monthly food expenditure, depending on the ration card holder.

Update 2(01.11.2020)

Indian Express investigation on fraud with the DBT in scholarships for minorities in Jharkhand. The two sources of corruption being failures in verification during registration of eligible students, and fraud in fingerprint validations.  

Mapping cross-border capital flows

Antonio Coppola, Matteo Maggiori, Brent Neiman, and Jesse Schreger have a very good paper that documents the true picture of cross-border capital flows of all kinds.

Their work is an example of a global public good in the context of detecting global tax avoidance and cross-border capital flows monitoring.

In this paper, we develop a new... algorithm that combines information from seven main commercial sources to associate subsidiaries with their ultimate parent firm and with their ultimate parent firm’s country. Each source uses its own methodology to form these matches and to assign firms to particular countries, and we establish majority and priority rules to resolve disagreements across sources... Our final dataset covers the universe of traded securities – bonds and equities – globally... We find that the scale of portfolio investment from developed countries to emerging market companies is vastly understated when foreign issuance is not taken into account. Further, we demonstrate how the pervasive use of corporate subsidiaries to raise money overseas is important for assessing the scale of global imbalances, the currency composition of emerging markets’ external liabilities, the nature of foreign direct investment (FDI), and the growth of financial globalization.

Their algorithm is available here and is replicable for any country. They have documented for eight developed countries. 

Some of the findings of the paper,

First, we highlight that the nationality-based positions involve significantly larger portfolio investments from developed markets to large emerging markets, with the difference primarily reflecting issuance in tax havens. For example, whereas the national statistics for 2017 list the United States as holding $160 billion in Chinese equities, we find the position to be worth about $700 billion. These positions are largely associated with Variable Interest Entities (VIEs), structures designed to avoid China’s capital controls that restrict foreign ownership in key industries... Second, in our restated data, foreign-currency corporate bonds account for a greater share of portfolio investment from large developed countries to large emerging markets (compared to sovereign borrowings)... Our nationality-based statistics imply the corporate bond positions are in fact worth more than twice the positions in government bonds... The greater weight of corporate bonds on a nationality basis, together with the fact that foreign-held corporate bonds are overwhelmingly denominated in foreign currency, leads to a marked increase in the foreign currency share of external portfolio liabilities of emerging economies. For example, switching from residency to nationality reduces the local currency share of external portfolio debt from 70 to 34 percent for Brazil and from 71 to 41 percent for Russia... Third, the nationality-based data show that a portion of foreign investment positions in the residency-based data should, under nationality, not be considered foreign investment at all. For the United States, we find that 7 percent of all foreign common equity holdings and 11 percent of all foreign bond holdings in official statistics are actually domestic investments. These investments largely reflect the issuance in the Cayman Islands of collateralized loan obligations (CLOs) backed by U.S. assets as well as tax inversions into Ireland by U.S. firms. 

And this on the over-statement of China's net creditor status is important,

We show that due to Chinese companies’ reliance on equity issuances via foreign affiliates, China’s reported net foreign asset (NFA) position is roughly twice as large as its true value. When foreign investors take small equity positions in a country’s companies, these positions constitute a portfolio liability in the country’s external statistics such as its NFA and its balance of payments (BoP). By contrast, if those foreign investors buy shares in offshore affiliates that themselves have a majority stake in a country’s companies, then the affiliates’ positions constitute an FDI liability in the country’s NFA and BoP. Whereas the value of portfolio liabilities in these external accounts typically moves together with market prices, BoP accounting rules grant countries more options in how they estimate the value of FDI liabilities. Additionally, the complex series of corporate linkages embodied in the VIE structure used for China’s offshore issuances further distances the entity listed on public markets from onshore operations in China. As a result, China’s NFA does not reflect significant changes in the market value of its listed companies. For example, we show that when China’s offshore listed companies increased in market value by nearly $1 trillion during 2016-2018, China’s FDI liabilities barely moved. Our analysis suggests that, due to this issue, China’s true NFA position is $1.1 trillion smaller than the $2.1 trillion officially reported. This large reduction in China’s net creditor position – one of the world’s largest – is of first order importance for both policymakers and academics. A large literature has emphasized how capital flows between the United States and China only go in one direction, namely official Chinese purchases of U.S. Treasury bonds. Our work highlights the comparable scale and under-appreciated importance of flows in the other direction, namely private U.S. holdings of Chinese corporate securities. Our estimates strengthen the view of the United States as a world banker.

The source was this FT article on the concerns with EM debt,

TIC data show that US ownership of Brazilian bonds at the end of 2017 amounted to $8bn, based on the residency of issuers. But restated by nationality, the total rises to $68bn. For Chinese bonds, the total rises from $3bn to $55bn... What is also striking is the role played by tax havens such as the Cayman Islands. In the TIC data, of Brazil’s $59bn in reallocated bonds, $42bn were issued in tax havens. Of China’s $52bn, $44bn were issued in tax havens. 

This may be a useful tool for India to unpack opaque corporate ownership chains and clarify the true exposure of its businesses to Chinese investors, an issue that has come to salience in recent times and given the widespread use of off-shore and on-shore havens to route foreign investments into the country. 

This type of work has relevance also in mapping trade flows. How about an algorithm which matches the data of trade invoicing of the firms at both sides of a transaction (under/over-invoicing among firms and transfer pricing within the same MNC entity)?

Update 1 (15.07.2020)

Interesting factoid about India's FDI inflows,

FDI inflows from the Cayman Islands have been rising rapidly in the last few years — from about $1 billion each in 2017-18 and 2018-19 to $3.7 billion in 2019-20. Why have FDI inflows from the Cayman Islands gone up so sharply? The Netherlands with its low tax rates is treated by many as a tax haven and FDI inflows from this European country have also been rising steadily — from $3.87 billion in 2018-19 to $6.7 billion in 2019-20.

It is useful to analyse the real sources of these investments. It could be round-tripping of MNC or domestic corporate capital, Chinese capital, or even questionable capital.

The paradox of schools choice revisited

Diminishing returns is a feature of many things in life. School quality is one example. It is already widely acknowledged that a significant part of learning takes place outside the classroom through parental and peer engagement, and other off-classroom sources. This also means that incremental school quality beyond a certain level is unlikely to have any effect. 

This point about the importance of school quality is brought out in a new paper that uses data from parental preferences, peer quality, and causal effects on outcomes for applicants to New York City's centralised high school assignment mechanism,

School choice may lead to improvements in school productivity if parents’ choices reward effective schools and punish ineffective ones. This mechanism requires parents to choose schools based on causal effectiveness rather than peer characteristics... We use applicants’ rank-ordered choice lists to measure preferences and to construct selection-corrected estimates of treatment effects on test scores, high school graduation, college attendance, and college quality. Parents prefer schools that enroll high-achieving peers, and these schools generate larger improvements in short- and long-run student outcomes. Preferences are unrelated to school effectiveness and academic match quality after controlling for peer quality... 

Moreover, no subgroup of parents systematically responds to causal school effectiveness. We also find no relationship between preferences for schools and estimated match quality. This indicates that choice does not lead students to sort into schools on the basis of comparative advantage in academic achievement. This pattern of findings has important implications for the expected effects of school choice programs. Our results on match quality suggest choice is unlikely to increase allocative efficiency. Our findings regarding peer quality and average treatment effects suggest choice may create incentives for increased screening rather than academic effectiveness. If parents respond to peer quality but not causal effects, a school’s easiest path to boosting its popularity is to improve the ability of its student population. Since peer quality is a fixed resource, this creates the potential for socially costly zero-sum competition as schools invest in mechanisms to attract the best students. MacLeod and Urquiola argues that restricting a school’s ability to select pupils may promote efficiency when student choices are based on school reputation.

The results of the new study and its concerns about zero-sum competition among school managements is confirmed by anecdotal and other qualitative accounts of how the best schools in India compete to attract the best students. This, in turn, allows them to command a disproportionate fee premium. The quality divide gets exacerbated in the process, leaving the best performing children in a few schools and the rest to struggle in the large majority. 

I have blogged earlier, using the logic of Schelling's chessboard experiment, to argue that school choice is likely to lead to 'emergent outcomes' that may be far less benign than expected. This is a wonderful game illustrating the point. See more on school choice here. 

Weekend reading links

1. This should strike a chord with several readers who have attended team retreats,

Anyone who has spent a long time in an office job will have suffered the indignities of a training day. The group-bonding exercise where workers fall into each other’s arms, as if they were part of a 1960s encounter group. The overenthusiastic guest lecturer who constructs a lengthy and banal presentation out of a series of random nouns. The debate about the company’s future which turns into an exercise in Stalinist self-criticism. It all resembles one of those nightmares when you find yourself marooned back in the school classroom.

If there is one good thing about the current pandemic, it is that no one is being sent to an awayday event at a seaside resort or a country retreat. Perhaps the whole idea will become less fashionable.

2. As oil prices have been plunging China has been stocking up on its oil reserves,

... about 200m barrels of oil went into storage in China in the first three months of the year, as the government, refiners and other buyers stocked up on inexpensive oil... In April the Shanghai International Energy Exchange approved new storage capacity for Sinopec and PetroChina, national energy giants.

Time for India too to lock in cheap oil and also co-ordinate and support its large corporate oil importers similarly buy contracts.

3. A friend forwarded this nice game about the impact of the Covid 19 lockdown on India's poor households.

4. This Mark Tully oped is a nice description of the problems faced by migrants. And this very good interview of P Sainath. This is another description. 

5. Why has this not generated the level of scrutiny and debate it deserves,

Uttar Pradesh, for instance, has suspended, for three years, all but four labour laws. The changes will need to be approved by the Centre, where central labour laws are involved, and all indications are that they will be... Uttar Pradesh explained the suspension as necessary to attract industry and create employment. Yet, among the labour laws that have been suspended are those related to unions, the settlement of disputes, and, most important, those prescribing working conditions. Madhya Pradesh said it will exempt all new factories from most provisions of the overarching Factories Act, 1948, for 1,000 days. Among the exemptions are those related to working conditions and the health and safety of workers.

See this interview of a labour union leader. Pratap Bhanu Mehta and Amir Ullah Khan explains the problems with such hastily done reforms.

6. The Economist covers India's UPI digital payments system which besides lowering all entry barriers also disrupts the duopoly in the digital payments gateway. This, when it realises its full potential, could become a global trend-setter in digital money transactions.

7. This is an example of the wrong lesson to draw from Covid 19,

Zaha Hadid Architects, a big British firm, has designed an eco-friendly building in Sharjah, a city in the United Arab Emirates, with “contactless pathways”, where employees rarely need to touch the building with their hands. Doors open automatically using motion sensors and facial recognition; lifts (and even a cuppa) can be ordered from a smartphone.

Instead, as the article itself points out, the more sustainable lesson should be to focus on cleanliness.

8. Ashok Gulati has a set of prescriptions for agriculture marketing side reforms,

While the APMC markets can keep doing their business as usual, it is time to open channels for direct buying from farmers/farmer producer organisations (FPOs). Any registered large buyer, be it processors or retail groups or exporters must be encouraged by providing them with a license, that is valid all over India. They should be exempted from any market fee and other cesses as they will not be using the services of the APMC market yards. E-NAM can flourish if grading and dispute settlement mechanisms are put in place. Private mandis with modern infrastructure need to be promoted in competition with APMCs.

9. Other countries should follow suit on this in their respective Covid 19 stimulus programs,

France, Denmark and Poland exclude tax haven-registered companies from coronavirus-related aid; others should follow suit and broaden the exclusion to benefit from taxpayers.

10. Covid 19 has exposed the limitations of e-commerce and grocery e-tailers in India. Kirana shops, which have stayed open to service communities, have emerged strengthened.

India's 18 million traditional family-run neighborhood stores called kirana are pulsing with life during the lockdown... Kirana stores are the go-to places for consumers as modern shopping malls remain closed and web-based delivery options such as Grofers, Amazon and Walmart-owned Flipkart have not proved nimble enough to adapt to the stringent shortage of manpower and traffic movement restrictions created by the world's largest lockdown in the South Asian country of 1.3 billion people. Deepak Provision store also sells a diverse array of foods such as fresh vegetables, beans and eggs as well as daily necessities such as soap. Over the two months of the lockdown so far, the 110-square-meter shop's sales have increased a whopping 300%. "The e-commerce players have a five-day delivery gap while ours is fifteen minutes," said owner Deepak Gupta. "We also offer credit for the poorer sections [of society] and all kirana stores have a storage godown nearby -- so that supplies of all major brands come in and, given that we are family-operated, our ability to home supply has been relatively unhindered."

11. Market concentration and globalisation in the food industry,

Although farms are, by their nature, local, much of the rest of the food industry is global. The supplies of seed, fertiliser, machinery and fuel that farmers need come from far afield. The companies that tie the system together—giant middlemen like America’s ADM, Bunge and Cargill, Louis Dreyfus, based in the Netherlands, and Olam International, based in Singapore—all operate on a worldwide basis, sourcing, storing and shipping agricultural commodities for foodmakers like Kraft or Unilever. Their size and global reach lets them make a lot of money on quite narrow margins. They can quickly swap one source for another to accommodate changes in supply or demand, smoothing prices and keeping the system flexible.

In the past 20 years the industry has seen increased concentration of ownership as firms chase the advantages of scale. Half of America’s poultry market—the largest in the world—is now controlled by just four firms. Two of the six largest mergers in the 2010s were between companies in food and drink. Emerging markets, where changing diets and urbanisation create fresh demand, have spawned giants of their own. Brazil’s JBS is the largest meat-processing company in the world. China’s largest food manufacturer, COFCO, has gobbled up a bevy of established traders as it keeps the grain flowing to Beijing.

12. The Economist points to the likelihood of emergence of travel bubbles, "binding together countries that have fared well against the coronavirus". 

The first bubble is due to come to life on May 15th between Estonia, Latvia and Lithuania, among Europe’s best performers in taming the virus. Their citizens will be free to travel inside the zone without quarantine. The next might be a trans-Tasman bubble, tying New Zealand to Australia’s state of Tasmania, both of which have kept new cases down. China and South Korea have launched a “fast track” entry channel for business people... Based on an analysis of infection data, The Economist sees two large zones that could emerge as bubbles, subsuming the smaller ones that are now being formed. The first is in the Asia-Pacific region, where countries from Japan to New Zealand have recorded fewer than ten new infections per 1m residents over the past week. The second is in Europe: using a laxer threshold—fewer than 100 new cases on the same basis—the bubble could reach from the Baltic to the Adriatic, and take in Germany (see map). Our Asia-Pacific bubble would, thanks to China and Japan, account for 27% of global gdp. Our European one would make up 8%.

For a start, I don't think this is practical. Its administration will be challenging. Further, "clean" countries or regions will not remain permanently so, and the bubble will therefore have to be very dynamic, thereby exacerbating its administrative challenges. Then there is the undesirable scenario of it being successful, which would end up excluding large parts of the developing world. An illustrative consequence, 

If, for instance, Vietnam enters the Asia-Pacific bubble and Indonesia does not, investment that might have flowed to the latter could be diverted to the former.

Covid 19 and world economy - III

1. Japan has opened the bazooka with perhaps the biggest stimulus package of any country. The government unveiled a 108.2 trillion yen ($992 bn) stimulus package, amounting to a headline figure of 20% of GDP. The economy is expected to shrink by 20% this quarter as the lockdown gets extended by the rising number of cases.

The on-budget share of the stimulus is about one-fourth, amounting to 27 trillion yen. The rest would be contributions from loans and guarantees, as well as deferrals. Much of the stimulus is aimed at stopping job and business losses, and cash handouts for struggling households and small businesses.

2. Hong Kong, one of the freest economies and a bastion of free markets, appears to have gone the farthest with supporting business sector. The government has said that it will fund 50% of the affected workers' salaries for 6 months, capped at $1160 a month. HK's duration of support is what stands out, since others too have announced such measures,

Singapore is doling out 75% of salaries capped at the equivalent of $3,231 for the month of April. The U.K. is covering 80% of wages for three months with a ceiling of $3,107, starting at the end of April. The U.S., meanwhile, is giving out enhanced unemployment benefits and a one-time check of $1,200 as part of its $2 trillion stimulus bill. It isn’t aiming directly to keep people in work. Australia is one exception: The government there will pay wage subsidies of about $948 every two weeks per employee for six months.

3. Germany has gone the farthest in offering to take public equity in struggling companies. Other countries have stopped with focusing business support in terms of ensuring liquidity. But as the pandemic persists, these businesses will run down their equity and the liquidity support will increase their leverage and thereby default risk. Equity infusions therefore become essential.

But among the major economies, especially in Europe, Germany is perhaps the only country which can afford such equity infusions. This in turn would allow German companies to emerge from the crisis stronger and be in a position to buy up distressed foreign competitors and capture markets. In other words, the state aid would have created an unbalanced playing field across industries.

In this context, a group of economists have suggested the establishment of a pan-European equity fund, financed by the EIB. They write,

This fund, which would underwrite the issue of new equity capital in companies across Europe, would also be open to participation from long-term investors such as global asset management firms, pension funds and sovereign wealth funds. It could be accompanied by the issuance of very long-term bonds. 

It’s crucial to establish strict rules to determine how this fund should choose which companies to invest in. First, it would have to finance businesses that were hitherto profitable and growing before being hit by the COVID-19 crisis, not those that were already financially stressed. Second, the fund would only have to finance companies that hadn’t already received state aid, because its purpose would be to rebalance capital injections between firms supported by governments and firms that aren’t. Third, the funded companies would be required not to distribute dividends or repurchase their own shares for some time, to prevent the injection of capital from benefiting existing shareholders rather than enabling new investment. Fourth, the compensation of the top management of these companies would be frozen at pre-crisis levels, say for three years. Fifth, the fund would be governed by managers, independent of the national governments, and wouldn’t acquire controlling stakes in the companies in which it invests, so as not to become a source of disruption itself. 

The economic rationale for creating such a fund is that it would allow European companies to invest and compete only based on their profitability, regardless of the fiscal capacity of their respective states.

4. Amidst all these stimulus measures, African economies face a debt reckoning. The continent's debt service payments to bilateral creditors in 2020 amounts to $14 bn, with the Chinese topping the list of creditors. It will be interesting to see how this will get restructured. But it is the large sovereign bond and corporate debt exposure that will be a challenge to restructure in a sustainable manner.

5. Very informative set of graphics on income and wealth inequality in the US on the eve of the pandemic.

6. A tab of the costs being incurred by European governments from wage-subsidy programs,

The French government said Friday that it was helping 785,000 businesses pay the wages of 9.6 million workers, almost half the workers in the private sector. In Italy, 250,000 businesses employing four million workers had applied for help by April 7. In Germany, the Federal Labor Agency had received requests from 725,000 companies to use its Kurzarbeit program, as of April 15. The metalworkers industry association, which includes automobile makers, estimates 1.2 million workers in the industry are covered, with another million expected to join shortly. Ireland's... government said Monday that while 46,000 businesses had applied for help in paying wages, 584,000 were receiving a supplementary coronavirus unemployment benefit. That means 40% of Ireland’s workforce—either jobless or in state-backed short-time programs—is being helped by the government... Through its Covid-19 Pandemic Unemployment Payment, the government pays €350 a week, well above the usual unemployment benefit... According to the U.K’s Office for Budget Responsibility, if 8.3 million workers are supported by the government for three months, the cost will total £42 billion ($52.22 billion). That isn’t far short of government borrowing in a normal year.

7. The US has passed a fourth stimulus package amounting to $484 bn. It includes a $320 bn for the fund created under the Paycheck Protection Program (PPP), a small business lending programs, $75 bn for hospitals, and $25 bn for expanded corona testing. The stimulus was necessitated by the original $349 bn funding for the PPP program running out within less than two weeks.

The PPP program has been dogged by controversies over larger and publicly listed companies getting loans from the fund. The government has claimed that these companies will be asked to return their loans, and that more than 1 million companies with less than 10 workers received these loans in the first round.

8. Stephen Roach thinks that inflation may not be far away given the stimulus and the re-shoring of global value chains.

Consumer retrenchment will persist only until a Covid-19 vaccine arrives. If this takes another 12 to 18 months, as scientists believe, pent-up demand will build as never before. Assuming that governments continue to support worker incomes in the meantime, the release of this pent-up demand could spark an inflationary spiral that markets are not expecting.

The seeds for such an outcome are also being sown by the disruption of global supply chains... Before Covid-19 hit, the Bank for International Settlements estimated that global inflation would have been about one percentage point higher were it not for the supply-chain enabled efficiencies of global production. Therein lies the inflationary risk for the post-coronavirus world. As part of a growing backlash against globalisation in general, and China in particular, nations are threatening to bring their offshore platforms back home... Reshoring may well increase the security of supplies. But it will also involve higher-cost domestic producers. Moreover, the anti-China weaponisation of supply chains promises to riddle global production systems with bottlenecks. Inflation will not return while the recession deepens. But as recovery takes hold, a new world of fragmented, more expensive supply chains may tell a different story.

9. The German constitutional court has waded into the ECB's bond buying program.

The court on Tuesday ordered the German government and parliament to ensure the ECB carried out a “proportionality assessment” of its vast purchases of government debt to ensure their “economic and fiscal policy effects” did not outweigh its policy objectives, and threatened to block new bond-buying unless the ECB did so within three months. In recent weeks the central bank has vastly expanded its quantitative easing programme of bond-buying to mitigate the economic consequences of coronavirus. It has bought more than €2.2tn of public sector debt since launching quantitative easing in 2014 in an attempt to halt a slide in inflation.

The bond-buying programme has long been controversial in Germany, where critics argue the central bank has exceeded its mandate by illegally financing governments and exposing taxpayers to potential losses. Ruling in a long-running case about the legality of the bond-buying, the court in Karlsruhe said the German government and parliament had “a duty to take active steps against” QE “in its current form”. The complainants — a group of about 1,750 people, led by German economists and law professors — first brought their case in 2015. They argued the ECB was straying into monetary financing of governments, which is illegal under the EU treaty. The case was referred to the European Court of Justice, which ruled in favour of the ECB in 2018, but it went back to the German constitutional court, which on Tuesday rebuffed part of the ECJ’s earlier ruling, calling it “untenable from a methodological perspective”.

This will be an interesting area to follow in the days ahead. The intensity of the reaction to this decision is surprising. The German court is after all only urging prudence and caution at a time when the monetary policy decisions are creating several moral hazards and other distortions. 

10.  Robert Armstrong in FT writes about the alarming rise of global corporate debt, and offers some suggestions,

Containing corporate debt by regulating lenders is also unlikely to work. After the financial crisis, bank capital requirements were made stiffer. The leverage merely slithered off of bank balance sheets and re-emerged in the shadow banking system. A more promising step would be to end the tax deductibility of interest. Privileging one set of capital providers (lenders) over another (shareholders) never made sense and it encourages debt. The time for reform may finally have come. The 2017 US tax law limited the deductibility of corporate debt to 30 per cent of income. The deduction should be scrapped altogether with a decrease in corporate tax rates to compensate, so the net effect on bottom lines is zero.

Next, executive bonuses should be tied to pre-leverage return measures, such as return on assets or on total capital, rather than after-leverage measures such as return on equity or earnings per share. Debt can increase EPS, but not the value of a business. Bosses should not be paid more for borrowing more. These changes may not be enough. As the economist Andrew Smithers points out, if companies are going to deploy more equity, someone has to want to buy it — even as an ageing population pushes portfolios towards debt. Investors’ preferences will have to change; this may mean a rethink of the way public and private pensions are structured.

11. Government of India announces its stimulus spending amounting in the aggregate to 10% of the GDP, including the liquidity support measures from the RBI. It includes packages for MSMEs, migrant labour and farmer, agriculture and marketing, natural resources and FDI. This is an examination of the numbers, and this and this explains the MSME package. This is an assessment of the implementation challenges with these measures.

How do the various financial institutions assess the on-budget share of the Rs 20 trillion stimulus?

India textile industry facts of the day

The importance of textile industry,

The Reliance Industries (RIL) reports $110 billion in assets and 250,000 employees across its various ventures. Therefore, it employs five workers for each $2.2 million in assets. Shahi Exports, which is India’s largest apparel exporter, has assets worth $185 million and employs 106,000 workers in its apparel factories. Therefore, it employs 1,260 workers for every $2.2 million in assets. For the same investment, Shahi Exports creates 252 times the jobs that RIL does. Jobs that Shahi Exports creates are what India needs most today. Its factories can take someone with fifth-grade education and impart necessary training in just six weeks. On average, these workers earn Rs 15,000 a month. About 60% of Shahi Exports employees are women. If we could rapidly multiply what Shahi Exports does, we could begin expanding formal-sector jobs rapidly — especially for women.

On the competition with Bangaldesh, this is a stunning statistic,

Not only are Bangladesh’s garments export at $ 37 billion more than twice that of India, but that West Bengal’s share is just 1 per cent of Bangladesh’s, which was considered a failed state a few decades ago.

This about the average size of Indian and Bangladeshi textile factories,

an average textile firm in India has about 240 employees, while in Bangladesh, garment factories boast an average of 797 employees per enterprise. 

The challenge even for a company as big as Shahi Exports is immense,

... a private equity investor recently remarked at how slim the margin of error is for Shahi because of the disproportionate challenges of operating in India.

The profile of Harish Ahuja of Faridabad-based Shahi Exports by Rahul Jacob is very illuminating. Why doesn't India have more such first generation entrepreneurs in any manufacturing who have scaled into the big league? Given the size of the economy, it surely has to do with more than the likes of restrictive labour laws.

Update 1 (17.05.2020)

From the FT, nice graphic of the global apparel and clothing trade,

And cotton trade

The case for minimum cash reserves for large companies?

An intriguing feature of the post-pandemic situation has been the cash-flow problems faced by several profitable companies which till very recently were generating large cash-surpluses. Companies have used cash surpluses and low interest rates to borrow heavily and use the proceeds from both to buyback shares, thereby keeping shareholders happy and also boosting stock performance based executive compensation.

A NYT article points to a stark reality,

The result was that companies often didn’t have much spare cash, leaving them even more exposed to economic downturns. “They should have built up some buffers against such sudden shocks and risk,” said Willi Semmler, an economics professor at the New School for Social Research in New York. In the three years through 2019, spurred on by Mr. Trump’s tax cuts, companies in the S&P 500 stock index spent $2 trillion on buybacks, 30 percent more than what they spent over the previous three years, according to an analysis of data from CapitalIQ. Including dividend payments, S&P 500 companies spent $3.5 trillion in the most recent three years — an amount that was equal to their net income for the period. Regulatory requirements prescribe how much cash banks and insurers need to hold, but there are few such rules for other companies. They spend their cash as they see fit — on acquisitions, capital expenditures, payroll and, of course, buybacks and dividends. The more money a company spends buying back its shares, the less it has for other uses, making the practice controversial... Over all, S&P 500 companies now have a smaller cash buffer to support their borrowing than they did nine years ago, according to one widely used measure: net debt to EBITDA, which stands for earnings before interest, taxes, depreciation and amortization. The higher the ratio, the less cash the company has on hand and coming in to pay its debts. It was 1.8 as of March 30, according to FactSet, significantly higher than it was a year before the 2008 financial crisis.

Some of the companies struggling for survival now have all run down their cash reserves by undertaking large share buybacks,

Zion Research, which analyzes stocks for investors, recently ranked companies that pushed their stock buybacks to a point where any financial weakness might limit their ability to continue those programs. American Airlines and Boeing — both in line for taxpayer bailouts — were at the top... In the past five years, American Airlines spent $13 billion on stock buybacks and dividends, and Boeing nearly $53 billion. American could receive as much as $10.6 billion in grants and loans from the Treasury. The stimulus bill that Congress passed last month provides as much as $17 billion for companies considered crucial to national security, a category dominated by Boeing...

During the five years that ended in 2019, McDonald’s and Yum Brands, which operates KFC and Taco Bell, made payments to shareholders that were equivalent to a third of the $145 billion in pandemic relief that the industry requested... The industry did not secure the money it sought, but individual restaurant owners are expected to get funds from government programs. Well before the pandemic, Yum repeatedly flagged the mass spread of diseases as a top “risk factor” in its annual reports, warning over a year ago that such outbreaks could “severely disrupt” operations and harm its business and finances. Yum also returned cash to its shareholders, paying $15 billion to investors in buybacks and dividends over the past five years. And it didn’t just spend profits to make the payments; it borrowed to finance them. At the end of last year, Yum’s debt was more than twice the size of its assets, according to Hindenburg — a huge leap from 40 percent of assets five years earlier. During the same period, the compensation of Greg Creed, its recently retired chief executive, totaled $66 million.

The case for regulatory minimum cash reserves for businesses starts to become compelling? Similarly, it should be mandated that any dividends and share buybacks should be necessarily permitted only after all pension and other liabilities have been fully provisioned.