Sunday, June 18, 2017

Weekend reading links

1. Is telecoms the latest millstone around the neck of India's battered banks? A significant share of the Rs 4.85 trillion debt owed by telecom firms is showing strains on the back of a bruising battle following the splash made by new entrant Reliance Jio with its more than six months of promotion free data and voice plan that captured 70 million consumers in no time. The interest cover of telecoms sector firms came down from 1.1 times to an alarming 0.3 times by end-December 2016.

The telcos, excluding Jio, have been lobbying the government for a bailout package that involves demands for major cuts in various statutory dues like spectrum charges and interconnect charges, as well as extending the payment schedule for spectrum from 10 to 20 years. A Group of Ministers of the government has been constituted and it met recently. Consider this,
The total revenue of Indian telcos declined for the first time since 2008-09 in the year ended 31 March 2017, thanks to Jio, according to brokerage CLSA. It fell to Rs1.88 trillion from Rs1.93 trillion the previous year... Cellular Operators Association of India's (COAI's) recommendations include reduction of the spectrum usage charges, licence fee, a five-year moratorium on deferred spectrum payment against two years at present and a 12% goods and services tax rate against the proposed 18%... In 2017-18, telcos will have to pay Rs53,000 crore as interest and Rs28,000 crore to the government for spectrum already bought. The industry’s aggregate earnings before interest, tax, depreciation and amortization (Ebitda) will come to only about Rs50,000 crore. Telecom companies paid Rs78,000 crore to the telecom department in 2016-17 alone by way of recurring licence fees and other charges, according to the Union budget of 2017-18.
And this,
Jio claims that it has been funded by 6 times as much equity as debt. By contrast, Bharti Airtel has raised 33 times more debt than equity since 2010. Not just that. Almost 70% of the incumbent trio’s gross debt is on account of what they owe the government. Thanks to these deferred payment liabilities, which are for purchase of spectrum at irrationally high prices, technology upgrades have taken a hit. Still, with Rs1.4 trillion to recover from the top seven mobile operators (excluding Jio) for airwaves, New Delhi has a stake in making sure nobody goes under.
Based on Trai’s data for the March quarter, analysts at Kotak Institutional Equities estimate that Reliance Jio may have paid other services providers as much as Rs1,500 crore for calls terminating in their networks (caveats/assumptions below). For perspective, Reliance Communications Ltd, with a somewhat similar subscriber base, reported gross revenues of Rs1,653.7 crore for the March quarter to Trai, which is nearly as much as what Reliance Jio spent on only one of its many expense items. Reliance Jio is estimated to have had an average active subscriber base of around 70 million in the quarter, which translates to an outgo of more than Rs70 per subscriber per month on just interconnection usage charges. Note that even after the company announced that it will start charging its subscribers, its revenue per subscriber per month is only around Rs100 for its flagship plan. So while Reliance Jio may have started charging for its services, its tariffs still appear to be way below levels where they make economic sense. Analysts at CLSA Research said in a recent note to clients that the company’s current tariffs are at a 66% discount to full tariffs. 
Two observations. One, doesn't all this irrationality - excessive spectrum bids, competitive tariff lowering, and Jio's scorched earth policy - raise questions about the effectiveness of markets? It does appear that not only too little but also too much competition can result in market failures. Two, various numbers ranging from $20-30 bn have been bandied around as the investment made by Jio, and that too in 4-5 years. These are seriously large numbers by standards of India economy. Has someone probed the veracity of these numbers?

2. Politico pokes holes at China's assumption of the "leadership" of the global climate change agenda by taking over from the US. It claims that China is the largest polluter and continues to build thermal plants both at home and in much greater numbers outside.

Three observations. One, China's biggest contribution to the global climate change agenda may have been an unwitting one - its massive industrial policy to promote renewables has dramatically driven down costs and has single-handedly made renewables achieve grid parity with thermal. In simple terms, the renewables boom across the world has been largely subsidised by China! Two, China cannot be faulted for selling thermal plants abroad since that is exactly what every other country in its place would have done, and what the US has done for decades by exporting polluting industries, selling weapons etc. Three, no country, including the US, has ever exercised genuine self-less leadership in climate change. The self-declared US "leadership" of climate change has largely been driven by selfish national interest.

3. FT has the latest in the Chinese economic engagement with Africa,
In 2000, China-Africa trade was a mere $10bn. By 2014, that had risen more than 20-fold to $220bn... Over that period, China’s foreign direct investment stocks have risen from just 2 per cent of US levels to 55 per cent, with billions of dollars of new investments being made each year. China contributes about one-sixth of all lending to Africa, according to a study by the John L Thornton China Center at the Brookings Institution. Certainly, China has been attracted by Africa’s abundant resources: oil from Angola, Nigeria and Sudan, copper from Zambia and the Democratic Republic of Congo, and uranium from Namibia. In recent months, Chinese companies appear to have made an effort to corner the market for cobalt, crucial for the production of electric car batteries, with multibillion-dollar purchases of stakes in mines in Congo, the world’s biggest producer... the emerging China-Africa relationship goes well beyond commodities.
Chinese development assistance to African countries come with one crucial difference - eschew political interference. Whereas western donors and multilaterals have sought to assist African countries with anti-poverty program assistance, the Chinese have preferred to assist with investments in infrastructure and resource extraction, which have the potential to alleviate constraints to economic growth.

4. India may be adding solar generation capacity at a rapid clip, but the capacity is not translating into actual generation. While renewables capacity rose 134% over past five years, actual generation increased by just 60%. In fact 33% fossil-fuel free capacity contributed just 20% of actual energy generated.
Inadequate evacuation capacity and reluctance of state distribution companies to buy the renewable power has been the major reasons for the lag in actual generation.

5. Harish Damodaran and R Jagannathan attribute the farm distress and the eruption of farm loan waivers across Indian states to the demonetisation. Harish points to a generalised fall in farm produce prices and explains how demonetisation hurt the farmers,
Much of the produce trading in India is cash-based and financed through a chain of mandi intermediaries, processors, input dealers and retailers. While difficult to establish, anecdotal reports suggest that this traditional agro-commercial capital was dealt a body blow by demonetisation. The collateral damage from it has been a haemorrhaging of liquidity from the markets. With the trade, which used to previously buy and stock up whenever prices fell, no longer active — it neither has the cash, nor the confidence now — the produce markets are suddenly without an important source of liquidity... One does not know how long it would take for formal finance, banks, commodity trading houses or organised retail, to fill the void left by traditional agro-commercial capital whose transactions were largely in cash. Till that happens and liquidity truly returns, the ultimate sufferer is the farmer, evidence of which is visible in mandi prices and restive hinterlands.
He points to the sharp fall in prices of onions, tomatoes, potatoes, garlic, fenugreek, and grapes. Interestingly all of these are horticulture crops which do not enjoy the protections like insurance and support prices. They also form an increasing share of the total crop production and have been found to exhibit a much higher price volatility.
Mitigating this price volatility risk falls on the government. In the absence of insurance or minimum support price, the government needs to figure out a way of addressing the challenge. 

6. As Janet Yellen begins the roll back of the Fed balance sheet, which rose from $700 bn in 2008 to $4.5 bn today, uncertainty looms large. Consider these - Fed owns 15% of US government debt, 25% of mortgages not owned by agencies like Fannie Mae, and a third of the long-term government bonds. The Fed's current plan is to gradually let these securities expire and shrink the balance sheet by half over the next 3-5 years. 

The uncertainty though is about how the markets will react. Will the gradual withdrawal of the mortgage bonds spook the markets and drive up yields, thereby hurting mortgage holders? Or will the early expiry of short-term bonds ahead of long-term bonds flatten the yield curve? No amount of theory can help answer these questions. It is critically dependent on the uncertain emergent dynamics of market reaction to the Fed actions.

7. Amazon springs a surprise by gobbling up upscale grocer Whole Foods for $13.4 bn, marking its entry into brick-and-mortar retail to complement its e-commerce business. Farhad Manjoo has a nice take on what Amazon will do with Whole Foods,
Shopping for food is broken. Both the in-store experience and the many attempts at online delivery — from Webvan to Instacart to Amazon’s own service, Amazon Fresh — have failed to create the sort of seamless buying experience we enjoy with nonfood e-commerce... Mr. Bezos is a committed experimentalist. His main way of deciding what Amazon should do next is to try stuff out, see what works, and do more of that. 
So the best way to think of this deal is to look at Whole Foods as a kind of guinea pig for Amazon — a pricey, organically sourced one, perhaps, but a guinea pig all the same. Amazon almost certainly doesn’t know yet how exactly Whole Foods will fit into its long-term plans. You can expect it to make few dramatic changes to Whole Foods in the near future. Instead, Mr. Bezos and his team will most likely spend years meticulously analyzing and tinkering with how Whole Foods works. They will begin lots of experiments. When something works, they will do more of that, then more, and then even more. They may take over the world all the same — and, in the process, probably usher in big changes to large swaths of the economy, affecting everything from labor to urban planning — but they’ll do it in ways we won’t be able to predict now.
8. Nice interview of Dani Rodrik by John Judis. I agree with this characterisation of Trump,
Like most everything with Trump, I think there is a significant element of truth in the causes that he picks up. He is addressing some real grievances. But then the manner in which he addresses them is completely bonkers. So in the case of Germany, I do think Germany is the world’s greatest mercantilist power right now. It used to be China. China’s surplus has gone down in recent years, but Germany’s trade surplus is almost 9 percent of GDP. And they are essentially exporting deflation and unemployment to the rest of the world... it is not a trade problem. It is a macro-economic problem. The solution is to get German consumers to spend more and save less and the German state to spend more and to increase German wages. It is not the trade policies of the US or any other country that is going to be able to address this issue. It is similar to the way Trump has picked up grievances about how trade agreements have operated in the United States. These agreements have created loses, and grievances that have not been addressed, and I think there is a lot of truth to those kind of things, but I don’t think he has any realistic way of dealing with those things.
He outlines three rebalancing requirements for the world economy,
One is moving from benefiting capital to benefiting labor. I think our current system disproportionately benefits capital and our mobile professional class, and labor disproportionately has to bear the cost. And there are all sets of implications as to who sits at the bargaining table when treaties are negotiated and signed, who bears the risk of financial crises, who has to bear tax increases, and who gets subsidies. There are all kinds of distributional costs that are created because of this bias toward capital..
The second area of rebalancing is from an excessive focus on global governance to a focus on national governance. Our intellectual and policy elites believe that our global problems originate for a lack of global agreements and that we need more global agreements. But most of our economic problems originate from the problems in local and national governance. If national economies were run properly, they could generate full employment, they could generate satisfactory social bargains and good distributive outcomes; and they could generate an open and healthy world economy as well... the problem now is not that we are insufficiently globally minded, but that we are insufficiently inclined to pursue the national interest in any broad, inclusive sense... if you have well functioning markets, you need to embed them in institutions of governance. Markets aren’t just created on their own... We have national political systems that provide stabilization, regulation, and legitimation. Now what happens when your markets are global? Who is going to provide those supporting institutions?... Nationally we have democratic institutions for deciding who benefits from markets and how resources and income are to be distributed. Internationally, all we have are tool shops and arrangements whereby trade lawyers and technocrats decide on a global agenda without any of the legitimacy or authority that you have at the national level... In fact, there is no other single global reform that would produce larger overall economic benefits than having more workers from poorer nations come and work, for a temporary period, in rich country markets.

The third area for rebalancing is that in negotiating trade agreements, we should focus on areas that have first order economic benefits rather than second or third order. When tariffs are already very small, you do not generate a lot of economic benefits by bringing them down further. When you restrict governments’ ability to regulate capital flows and patent/copyright rules, or when you create special legal regimes for investors, you do not necessarily improve the functioning of our economies. In all these areas, global agreements generate large distributional effects — large gains for exporters, banks or investors, but also large losses to rest of society – and small net benefits, if any at all. In other words, past agreements addressing trade and financial globalization have already eked out most of the big efficiency gains. Pushing trade and financial globalization further produces tiny, if not negative, net gains. One major unexplored area of globalization where barriers are still very large is labor mobility.
The importance of a generous social safety net as a pre-requisite for trade and financial liberalisation is underlined,
At some point, the United States could have done what Europe did in an earlier stage in this history when Europe became an open economy. That is to erect very generous social insurance and safety nets. The kind of insecurities and anxiety that openness to trade creates can be compensated or neutralized by having extensive social policies, and that’s what Europe managed to do. Europe is much more open to trade in the United States. Yet to this day, trade remains uncontroversial in Europe. When you look at populism in Europe, it’s not about trade at all. It is about other things, it is about immigrants going to reduce the welfare state... In Britain, the Brexiteers wanted to leave Europe in part so that they could pursue free trade policies unencumbered by Brussels. The issue of trade and import competition was largely neutralized as a political issue in Europe by the tradeoff of a generous welfare state. When the United States became an open economy in the ‘80s and ‘90s, it largely went the other way. We didn’t try to erect a stronger safety net. If anything, the safety net was allowed to erode. That I think was a major wrong turn and we are paying the price for that now.
And about saving capitalism itself,
I think the change comes because the mainstream panics, and they come to feel that something has to be done. That’s how capitalism has changed throughout its history. If you want to be optimistic, the good news is that capitalism has always reinvented itself. Look at the New Deal, look at the rise of the welfare state. These were things that were done to stave off panic or revolution or political upheaval. I don’t want to overdramatize but I think in some ways we are at the cusp of a similar kind of process. You have the populists at the gate, and the centrist political figures and the powers behind them are looking for ways of maintaining the system, and I think they realize they need to make adjustments.
8. Finally on the farm loan waivers. Business Standard estimates the total farm loan waiver  bill till 2019 elections could be Rs 3.1 trillion ($49 bn) or 2.6% of GDP! The report puts this in perspective,
A waiver of this scale could pay for the 2017 rural roads budget 16 times over or pay for 443,000 warehouses or increase India’s irrigation potential by 55% more than the achievements of the last 60 years.
The loan waivers in UP and Maharashtra are confined to small and marginal farmers, those with less than 2 hectares. But of the 32.8 million such farmers in the eight states where there is demand for such waivers, only 10.6 m have access to institutional credit. This makes the efficacy of loan waiver in alleviating farm distress questionable.

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