Weekend reading links

1. Steve Mnuchin is the latest addition to the US Government-Business revolving door,

Japan’s SoftBank has followed Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala in backing a new $2.5bn private equity fund set up by former US Treasury secretary Steven Mnuchin just eight months after he left office. Mnuchin launched Liberty Strategic Capital earlier this year after serving four years in the Trump administration. The fund is intended to focus on financial services and technology... During his time as Treasury secretary, Mnuchin nurtured close ties with a number of Gulf countries. His last foreign trip in office, around the time of the January 6 attacks on the US Capitol, involved stops in Saudi Arabia, Qatar, the UAE and Kuwait. In late October 2018, Mnuchin met Prince Mohammed, despite international outrage over the murder of journalist Jamal Khashoggi...

It has become common for former Treasury secretaries to turn to private equity after leaving public office. John Snow, who served under George W Bush, moved to Cerberus Capital Management, while Tim Geithner, Barack Obama’s first Treasury secretary, is president of Warburg Pincus. Jack Lew, Obama’s second Treasury secretary, is a managing partner at Lindsay Goldberg, and Hank Paulson, who also served under Bush, is executive chair of a climate investment fund at TPG.

2.  How marginal income tax rate in the US has evolved over time.

3. From Adam Tooze's newsletter

4. Article in The Ken (or this) on the growth challenges facing MedPlus, India's second largest mostly offline Pharma retail chain. 

Gangadi had claimed that MedPlus would establish 5,000 stores by 2011. In 2015, it revised that projection upward to 10,000 stores by 2019. Today, the chain’s store count stands at just 2,100. Apollo Pharmacy, MedPlus’ fiercest competitor, has nearly double that. “A promoter is always ambitious. One can talk of 5,000 stores, but how do you get that kind of money? For each store you need Rs 20 to 25 lakh ($27,000-34,000), of which Rs 6-8 lakh ($8,000-10,850) is deployed towards capital expenditure, and Rs 15-18 lakh ($20,350-24,400) goes towards inventory. Are you geared up for this at the same time? You have to be reasonable when you come at the ground level,” says a former executive of the company.

The report indicates that while off-line chains have a 0.6-1X revenue valuation, their online only counterparts command 3-4X valuation.

5. As Angela Merkel leaves office, NYT has a feature on her 16-year term. While she has several achievements, she'll perhaps be most remembered for her bold step of admitting nearly a million migrants in 2015-16. This is a striking factoid,

Germany’s immigrant population has become the second largest in the world, behind the United States. When Ms. Merkel came into office in 2005, 18 percent of Germans had at least one parent who was born outside the country. By now it is one in four.

This summary is apt,

Many of her postwar predecessors had strongly defined legacies. Konrad Adenauer anchored Germany in the West. Willy Brandt reached across the Iron Curtain. Helmut Kohl, her onetime mentor, became synonymous with German unity. Gerhard Schröder paved the way for the country’s economic success. Ms. Merkel’s legacy is less tangible but equally transformative. She changed Germany into a modern society — and a country less defined by its history.

This is most interesting, a great example of keeping apart personal and professional choices,

“She saw where the country was going and allowed it to go there,” said Roland Mittermayer, an architect who married his husband shortly after Ms. Merkel invited conservative lawmakers to pass a law permitting same-sex marriage, even though she herself voted against it... Ms. Merkel never backed same-sex marriage outright, but she allowed lawmakers to vote for it, knowing that it would go through.

6. Tamal Bandopadhyay has a very good primer on the new bad bank, the National Asset Reconstruction Company Limited (NARCL). It would aggregate bad assets and manage them till their resolution. In return for the assets, NARCL would offer banks 15% of the value in cash and 85% in the form of Security Receipts, and receive a government guarantee of Rs 30,600 Cr. An India Debt Reconstruction Corporation Limited (IDRCL) which is majority owned by the private sector, would then take the bad assets off the NARCL balance sheet and resolve them. In the first phase, Rs 2 trillion worth assets are being transferred to NARCL from the banks. These assets have been valued at 18% or Rs 36000 Cr, thereby leaving banks with Rs 5400 Cr in upfront cash receipt. NARCL will have a tenure of five years to resolve these and other assets subsequently transferred to it. 

This promises to be one of the most interesting experiments in India's financial markets. How much will the banks ultimately recover from this process? What share of assets will be revived and what will have to be liquidated? What incentive and other distortions will emerge from this in the financial and political markets? How good will NARCL and IDRCL be in their corporate governance? Can the IDRCL avoid either willingly or unwillingly being captured by private equity and other financial market interests? Will the IDRCL be able to avoid crony capitalist tendencies? 

7. Interesting graphic highlighting the shifting composition of farmer incomes

The three important takeaways - the share income from farming itself is declining and only a little more than a third of the farmer's income; the share of income from non-farm business has almost halved; and the shape of income from animal husbandry has quadrupled. 

8. This's a stunning data about corporate democracy in Indian board rooms,

194 of the 48,000+ resolutions (less than 0.5 per cent) assessed by IiAS in the last six years have been turned down.

The reasons can be found in the data on the ownership and voting patterns in listed Indian companies. 

For all the occasional headlines, promoters remain firmly in the saddle. Just 8% of NSE 500 companies are institutionally owned and held widely. 

9. Britain's truck drivers shortage has caused gas stations to run dry,

The government is sending out a letter to nearly 1 million people who hold a license to drive a heavy goods vehicle, urging them back onto the road. And it is relaxing visa restrictions for thousands of foreign workers, in the hope of luring them into temporary work in Britain... Tens of thousands of drivers from the European Union have left the country — in large part because Brexit made it clear they were not wanted — and prospective drivers couldn’t take their qualification tests for over a year because of the pandemic. Long dominated by men, the drivers industry has done little to add women to its ranks. As a result, Britain has a shortage of up to 100,000 truck drivers, according to the Road Haulage Association... Prime Minister Boris Johnson upended his post-Brexit immigration rules when he approved the issuance of five thousand temporary visas for foreign drivers until the end of the year... 

For truck drivers who have long felt underappreciated and increasingly stressed by difficult work conditions, lower pay and neglected truck stops, the fact that employers are struggling to find workers wasn’t a surprise... The emergence of long-overlooked drivers as an essential cog in the nation’s economy is reminiscent of the first year of the pandemic. Workers who had been considered low-skilled and who were poorly paid — many of them migrants — captured the nation’s attention and gained newfound respect. Across Britain, people came out onto their doorsteps to clap for National Health Service workers. Supermarket assistants and public transport employees were no longer invisible, and featured on the front covers of publications like British Vogue. 

10. A new study by Krishna Kumar Choudhary, Sayan Das, and Prachinkumar Ghodajkar uses data from three rounds of the National Family Health Survey (NFHS) (II 1998-99, III 2005-06, and IV 2015-16) to show a trend of decline in heights among women and men in India. A summary,

Between NFHS-III (2005-’06) and NFHS-IV (2015-’16)... women between 15-25 saw a decline in their mean height by 0.12 cm, while women between 26-50 showed an improvement by 0.13 cm. During the same period, men between 15-25 saw a decline of 1.10 cm in their mean height and those between 26-50 years had a decline of 0.86 cm... For women in the ages 15-25, between NFHS-III and NFHS-IV, the average height of tribal women saw a decline of 0.42 cm while women from the poorest wealth fell by 0.63 cm. This is significantly worse than the average decline for the entire age group (0.12 cm)... In the age group of 26-50, women from the poorest wealth category saw a significant decline in their average height – 0.57 cm – while women from the middle, richer and richest wealth categories saw their average heights improve. Women from urban areas saw their average heights improve by 0.20 cm while rural women only saw an increase of 0.06 cm.

However, a friend informs that the magnitude of the decline is tiny and perhaps not meaningful enough to draw any inference.  

Weekend reading links

1. A new NBER paper highlights another example of capitalism with Chinese characteristics, in the faster growth of private firms with connections to state-owned firms,

We use administrative registration records with information on the owners of all Chinese firms to document the importance of “connected” investors, defined as state-owned firms or private owners with equity ties with state-owned firms, in the businesses of private owners. We document a hierarchy of private owners: the largest private owners have direct investments from state-owned firms, the next largest private owners have equity investments from private owners that themselves have equity ties with state owners, and the smallest private owners do not have any ties with state owners. The network of connected private owners has expanded over the last two decades. The share of registered capital of connected private owners increased by almost 20 percentage points between 2000 and 2019, driven by two trends. First, state owned firms have increased their investments in joint ventures with private owners. Second, private owners with equity ties to state owners also increasingly invest in joint ventures with other (smaller) private owners. The expansion in the “span” of connected owners from these investments with private owners may have increased aggregate output of the private sector by 4.2% a year between 2000 and 2019.

2. Former Secretary Agriculture T Nanda Kumar has an article here with very practical suggestions to amend the agriculture legislations and break the deadlock. 

3. Following its decision to counter-sue a participant in the clinical trials who had sued Serum Institute, the company's high-profile founder has now demanded government indemnification against all lawsuits. 

4. Reetika Khera, Sudha Narayanan, and Prankur Gupta separate the wheat from the chaff on the issue of MSP. Using FCI data on procurements, they find,

One, the proportion of farmers who benefit from (even flawed) government procurement policies is not insignificant. Two, the geography of procurement has changed in the past 15 years. It is less concentrated in traditional states such as Punjab, Haryana and western UP, as Decentralised Procurement Program (DCP) states such as Chhattisgarh, Madhya Pradesh, and Odisha have started participating more vigorously. Three, perhaps most importantly - it is predominantly the small and marginal farmers who have benefited from the MSP and procurement, even if the size of the benefits may be larger for larger farmers. This is true not just in the DCP states, but also in the traditional states. 

5. Twenty20, the Charity registered by Kerala's largest private employer, Kitex, and which had been ruling Kizhakambalam Panchayat of Ernakulam district since 2015, has now expanded its political base by retaining the Panchayat and winning three more in the same district and becoming the largest party in another in the recent local body elections in the state.  

6. Good explainer in Indian Express on the findings of the recently released NFHS-5 survey. 

The article points to this paper by John Hoddinott and two others which has an assessment of the benefits-cost ratio (in terms of potential increments in future incomes) for interventions that reduce stunting.

7. As the pandemic broke out, governments across the world stepped in with, among other things, loan guarantee schemes to support small businesses. In US, the Paycheck Protection Program distributed about $525 bn to 5.2 m companies in the April-August period. In UK, £43.5 bn has been distributed to 1.4 million businesses, and it is still ongoing and expected to reach about £87 bn.  

The efforts to quickly push out these loans was always going to be difficult and ran the risk of serious frauds. Unsurprisingly, both the US and UK loan guarantee schemes have seen massive frauds. The US PPP program has even been described as "legalised fraud". See also this and this on the US fraud and this on the allegations of fraud with the UK program. 

8. Excellent NYT photo feature on how Russia may end up benefiting from global warming as it makes its cold northern parts amenable to agriculture. 

A great transformation is underway in the eastern half of Russia. For centuries the vast majority of the land has been impossible to farm... But as the climate has begun to warm, the land — and the prospect for cultivating it — has begun to improve... Across Eastern Russia, wild forests, swamps and grasslands are slowly being transformed into orderly grids of soybeans, corn and wheat. It’s a process that is likely to accelerate: Russia hopes to seize on the warming temperatures and longer growing seasons brought by climate change to refashion itself as one of the planet’s largest producers of food... for a few nations, climate change will present an unparalleled opportunity, as the planet’s coldest regions become more temperate. There is plenty of reason to think that those places will also receive an extraordinary influx of people displaced from the hottest parts of the world as the climate warms.

And what does it mean for global geo-politics in the years ahead,

No country may be better positioned to capitalize on climate change than Russia... Russia is rich in resources and land, with room to grow. Its crop production is expected to be boosted by warming temperatures over the coming decades even as farm yields in the United States, Europe and India are all forecast to decrease. And whether by accident or cunning strategy or, most likely, some combination of the two, the steps its leaders have steadily taken — planting flags in the Arctic and propping up domestic grain production among them — have increasingly positioned Russia to regain its superpower mantle in a warmer world.

9. The persistent low interest rates and pandemic induced buying opportunities meant that private equity industry had a record year, with buyout groups striking deals worth $559 bn in 2020 with more than 8000 deals, the highest since records began in 1980.

10. Fascinating article in NYT about Japan's centuries old businesses. The article covers Ichiwa, a shop which makes grilled rice flour cake and which has been in existence for 1000 years.

Japan is an old-business superpower. The country is home to more than 33,000 with at least 100 years of history — over 40 percent of the world’s total, according to a study by the Tokyo-based Research Institute of Centennial Management. Over 3,100 have been running for at least two centuries. Around 140 have existed for more than 500 years. And at least 19 claim to have been continuously operating since the first millennium... The businesses, known as “shinise,” are a source of both pride and fascination. Regional governments promote their products. Business management books explain the secrets of their success. And entire travel guides are devoted to them. Most of these old businesses are, like Ichiwa, small, family-run enterprises that deal in traditional goods and services. But some are among Japan’s most famous companies, including Nintendo, which got its start making playing cards 131 years ago, and the soy sauce brand Kikkoman, which has been around since 1917.

Such old businesses cannot survive merely by maximising profits, but need to have a higher purpose. This is called 'kakun', or family precepts which have guided such companies business decisions for generations. These businesses offer useful pointers for those look at an alternative to free-market capitalism. 

11. The Economist on the importance of waste pickers,

The world’s cities produce over 2bn tonnes of solid waste every year. Even before the covid-19 pandemic local governments in poor countries struggled to keep their streets clean, clearing less than half the rubbish in urban areas and around a quarter in the countryside. Informal workers, who make up around 80% of the 19m-24m workers in the waste industry, have helped plug that gap. They both haul rubbish and scour municipal dumps and public spaces for things which can be re-used or sold, normally through middlemen, to recycling companies. In India waste-pickers divert over 40m tonnes of refuse away from landfills and into recycling every year, a task that would cost municipalities 15-20% of their annual budget. In South Africa they are responsible for recovering 80-90% of packaging.

12. In recent weeks regulators in US have opened anti-trust investigations against Facebook and Google, and in China against Alibaba. The markets in the US appeared to have hardly taken any notice of the actions against the two tech giants. But in stark contrast, the markets in US reacted strongly by clipping over 13% from the share price of Alibaba. 

Does this mean that anti-trust investigators in China have greater credibility than their US counterparts? Or is it a case of markets pricing in the resolve of Chinese regulators to go after this particular offender?

At one level, these actions may be another example of capitalism with Chinese characteristics. 

Regulators must consider the broader economic and strategic picture while implementing the law... What prompted the regulator's shift may not be that monopolistic abuses have gotten particularly bad lately, but rather that tech giants are thought to have gone astray in the directions they have pursued. For example, Alibaba and Tencent are criticized for leveraging their dominant digital platforms to repeat their tried and true winner-take-all approach in the local community fresh produce group buying sector. Once again using subsidized user acquisition and rapid scaling via online traffic diversion, tech giants are seen as greedy profit harvesters squeezing small Chinese businesses and potentially causing instability. In the eyes of China's anti-monopoly regulators and the central government, it is equally important to both curb such bad behavior and to point the tech companies to the right place to target, or even to monopolize.

And this, 

A researcher at a Chinese government-affiliated think tank explained the clampdown on Alibaba this way: "Ant was like a loan shark. If the authorities did nothing about Ma, who led Ant, the public could rise up against the government."

13.  Finally, after years of acrimony and months of intense haggling, EU and UK have closed a Brexit deal. While Britain leaves the customs union and single market, it is still a £660 bn trade deal which avoids the potential disruptions from a complete divorce. The preferential access deal means that imports from either side would be free of tariffs and quotas, a provision that goes far beyond any trade deal EU has with another country. This is a good summary of the provisions of the deal and this about the progress of the nine month long talks. 

14. Interview of the NHAI Chairman here about the latest with the agency's road construction program. The agency is planning to use a mix of securitisation of toll revenues, InvIT, and toll-operate-transfer models for asset monetisation. 

Two things, which this blog has long since been advocating and which goes against the commentary in mainstream media, stand out. 

One, the vast majority (over 90%) of the projects are being built with significant upfront public investment, either through HAM (where 40% viability gap funding is given during construction) and EPC. The share of BOT-toll and even BOT-annuity projects has declined to negligible proportions. 

Two, the vast majority of financing is coming from domestic capital, with bank loans being the major contributor (on the developer side in HAM projects, their debt will be mostly bank loans). It's good that NHAI are able to issue a significant share of bonds. Foreign capital will remain negligible in greenfield projects. Even in case of asset monetisation, the share of foreign capital will be small. 

15. A big challenge as fiscally strapped governments, including states in India, navigate the post-pandemic world will be with managing the fiscal balance. Historically governments have sought to respond to such situations by cutting down on capital expenditures. This RBI report on state government finances has a graphic which shows that states have consistently scaled back Capex.

Interesting also that India has the highest Capex decentralisation among a sample of countries. 

16. A not so flattering report card by the RBI on UDAY, the power sector reform initiative.

17. The heavily over-subscribed IPO of Bectors Food has drawn attention to the surprisingly under-reported story of Mrs Rajni Bector. She started her banking business in the seventies with an investment of Rs 300 and has now gone to raise Rs 541 Cr in the IPO. Sandeep Goyal writes,

By 1990, the business was clocking a respectable Rs 5 crore in turnover under the Cremica (cream-ka because of Mrs Bector’s lavish use of cream) brand she created in the 1980s. Business grew quickly to Rs 20 crore by the mid-1990s. But the big leap forward came with McDonald’s signing up Mrs Bector to bake the buns for their burgers in 1995. Today, Mrs Bector’s business, largely run by her sons, counts ITC, Mondelez, Hindustan Unilever, Big Bazaar, Spencer’s, Taj Group, Air India, Indian Railways, Barista, Café Coffee Day, Pizza Hut, Domino’s and Papa John’s as large institutional customers, besides a vast direct-to-customer sales network that retails breads, buns, biscuits, dips, spreads and sauces, and ice-creams under her own brand names... 12 per cent of all of India’s biscuit exports today come from her.

As Goyal writes, it is surprising that she's not received any recognition for her achievements.  

18. Finally, as this NAR report points to (HT: Ananth), the Covid 19 is a great window for some vaccine diplomacy by India to enhance its soft power.

Another Governance Failure?

India’s income per head grew more than fourfold between 1990 and 2010; yet the proportion of underweight children fell by only around a quarter. By contrast, Bangladesh is half as rich as India and its income per head rose only threefold during the same period; yet its share of underweight children dropped by a third and is now below India’s... Brazil cut the number of underweight people by 0.7% a year between 1986 and 1996 and reduced stunting by 1.9% a year. Bangladesh reduced both rates by 2% a year in 1994-2005...

... better nutrition can be a stunningly good investment. Fixing micro-nutrient deficiencies is cheap. Vitamin supplements cost next to nothing and bring lifelong benefits. Every dollar spent promoting breastfeeding in hospitals yields returns of between $5-67. And every dollar spent giving pregnant women extra iron generates between $6-14. Nothing else in development policy has such high returns on investment.

(HT: The Economist)

Tax and subsidy way to healthy eating?

Mark Bittman bites the bullet and advocates taxing unhealthy food like soda, French fries, doughnuts and hyperprocessed snacks, and subsidizing fruits and vegetables.

He suggests that sweetened drinks could be taxed at 2 cents per ounce, so a six-pack of Pepsi would cost $1.44 more than it does now. An equivalent tax on fries might be 50 cents per serving; a quarter extra for a doughnut. He argues that "taxes would reduce consumption of unhealthful foods and generate billions of dollars annually. That money could be used to subsidize the purchase of staple foods like seasonal greens, vegetables, whole grains, dried legumes and fruit."



Such taxes are justifiable despite arguments that it will unfairly target poor people who pay a higher percentage of their income for food. Such critics overlook the long-term health effects of these foods and the much higher medical and other costs imposed on low-income people. Such criticism can be mitigated by subsidies on high-quality, fresh and healthy foods.

Though no American city today has taxes that are explicitly aimed at reducing consumption, many have proposals to tax soda or all sugar-sweetened beverages. Research by the Rudd Center for Food Policy and Obesity at Yale have found that such soda taxes become significant at the equivalent of about a penny an ounce. Further, it is also suggested that these taxes should be in the form of excise taxes on inputs, so that the taxes will be incorporated into the shelf price of the drink, thereby nudging consumers on their purchasing decisions.

There is also an excellent graphic that points to how economic incentives, signalled through prices of cigarettes, have contributed to a dramatic drop in smoking among Americans since the eighties.



Remarkably, more than half of all Americans who once smoked have quit and smoking rates are about half of what they were in the 1960s.

A market solution to child malnutrition problem?

Poor households in big city slums invariably live in unbelievably cramped single room accommodation, with access to limited civic amenities like water supply and sanitation. Furthermore, both parents generally have to work to earn atleast food for the family.

In the circumstances - strapped for time, space, and resources - women make do with cooking simple, but unhealthy, carbohydrate heavy meals (say, rice/roti and curry), which are filling and keeps away hunger. The women do this despite being aware of the importance of nutritious food and what constitutes such foods. The higher cost of nutrient-rich foods is just another reason for this, though this is debatable.

Policy makers have long debated various strategies to improve the nutrition status of atleast the children living in slums. The Anganwadi centers are among the most visible of such interventions, and have had considerable successes in some areas. However, the overall nutrition of the family remains elusive. The large numbers of small eateries - women squatting on street margins, push carts, road encroachment stalls etc - in slums too provide much the same carbohydrate and fat heavy foods.

Faced with similar circumstances in the over-crowded slums of Jakarta, an NGO Mercy Corps started a healthy street food business for children called Kedai Balitaku, or My Child’s Café in April 2009. It started with a $120,000 donation, has since spun off into a for-profit company. The idea was that once people have access to healthy foods at very cheap prices (same as those of the unhealthy foods available elsewhere), they will prefer such foods over their traditional ones, atleast once a day. Creating a buzz around such foods, by careful marketing helps. An article by Tina Rosenberg in the Times describes KeBal,

"KeBal sells niche street food. Its clientele is children — and it focuses on those 5 years old and younger. The most popular meal is a chicken, rice and vegetable porridge, which costs the going rate of 20 cents. The leading snack is a 10 cent gelatin pop. Such pops are a common snack but they are almost always made with artificial fruit flavors; KeBal’s are made with real mango, strawberry, melon or other fruits. The menu also includes meatballs, macaroni and cheese and shu mai dumplings. The carts use food-grade materials and vendors get regular health inspections from KeBal’s management.

Nutritionists designed the menu, but just as important as what went into the food was convincing mothers to buy it and children to eat it. The advertising firm Saatchi & Saatchi donated the design of the visual brand and a marketing strategy aimed at children. The carts have bright colors and play music. Four dolls on the cart represent different food groups and are named for benefits of good nutrition — Strong, Smart, Lively and Taller. The cart also has built-in toys teaching shapes or colors that kids can play with while they wait. They display hand-washing messages and have jugs of water with soap so vendors can wash dishes and children can wash before they eat. The food is displayed at a child’s eye level. The Times column writes,

The food is prepared by KeBal employees in a cooking center, which starts work just after midnight to make food to sell to eight vendors, who begin their routes around 5 AM. The vendors take the risks and keep all the profit on the food they sell. KeBal is about to open a second cooking center, and is planning to have six by the end of the year, each providing food to at least eight vendors. Next year, as soon as Indonesian franchise law allows, KeBal will also start selling cooking center franchises. By 2013, the company hopes to own 21 cooking centers and have 10 more owned by franchisees. That will allow it to feed 6,000 children daily and take in projected revenue of at least $2 million a year."

An approach that mirrors KeBal, catalyzed with initial government or some non-government foundation support, and initiated in different cities across the country, has the potential to be a major intervention to improve nutrition levels in countries like India. The menus will have to be customized to meet local food requirements and locally available healthy foodstuffs.