Urbanomics

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 26 Sep 2026 06:46:28 +0000

1. China's effect on solar power in a graphic.

At the turn of the millennium, solar panels cost $5-$6 per watt of generation capacity. Today, they sell for around 12 cents per watt, a level described as “offensively cheap” by Dave Jones, co-founder of think-tank Ember. That reduction is entirely the result of an explosion in China’s production capacity, which, according to research firm Wood Mackenzie, stands at roughly 1.36 terawatts, even as Beijing tries to rein in output to combat price deflation.

And rooftop solar generation is causing a loss of good customers across utilities, triggering a 'utility death spiral'.

Shoprite, Africa’s biggest supermarket group, says the company could “power an entire suburb” with the panels it has been installing on its roofs and trucks in South Africa and Namibia since 2015. But what has been good for Shoprite, which now has around 43MW of peak capacity at its disposal and is looking at battery storage, constitutes a problem for state power utility Eskom. It estimates that rooftop solar panels and batteries, mostly installed by businesses and wealthier customers in response to years of rolling blackouts, were responsible for around 7 per cent of the 11.7 terawatt-hour reduction in its electricity sales for the year ending March, compounding a sharp fall in industrial use exacerbated by high prices.

The lower revenues come as Eskom needs to fund the upkeep of the grid, which allows households to export electricity during the day, and the power stations that fill the generation gap when it’s dark or cloudy, or when power stored in batteries is insufficient to meet demand. “Everyone who has rooftop solar in any major city, they are still connected to the grid,” says its chief executive, Dan Marokane. “Three weeks ago . . . the whole country had to rely on Eskom generation for three days,” he adds, due to prolonged cloudy weather slashing output from rooftop panels... In Australia, operators of the high-voltage transmission system have grappled with too little demand as consumers draw power from their rooftop panels rather than the grid. Very low demand can make it harder to run certain power plants needed to keep the whole system stable.

2. AI is transforming warfare, and the Russia-Ukraine war is the testing ground for these technologies.

AI technology has changed how the war in Ukraine is fought. At the start of the conflict it could take 20 minutes to identify a target and launch a strike. Now that process can take less than two minutes, sometimes just seconds... When militaries talk about AI, they are not talking about a single system. They are referring to software being used at different stages of warfare — collecting and processing data, helping commanders identify and prioritise targets and allowing drones to keep operating when communications are jammed. AI-enabled software can process “mass data at a scale, a speed that human staff officers can’t do”, says Anthony King, professor of war studies and director of the University of Exeter’s Strategy and Security Institute. Rather than altering the sharp end of a conflict, King says the primary function of AI has been to improve “situational awareness and intelligence”. The technology can help commanders make battlefield predictions, from the sustainability of a campaign to the rate at which munitions are being depleted.

3. What are the fiscal costs of immigrants?

The UK's comparatively low rates of tax and social insurance contributions for low-paid workers plus a relatively flat state pension mean that people (immigrant or otherwise) who do small amounts of paid work or remain on low incomes contribute little to the exchequer but still benefit from robust state support. In Germany or France’s fiscal systems, someone with the same weak employment and earnings patterns would generate much larger receipts from tax and social insurance due to the flatter tax regime, and would receive a comparatively smaller pension since these are linked more tightly to lifetime earnings.

The result is that in order to be a net fiscal contributor over their lifetime, the average couple arriving in the UK at age 30 needs the primary earner to have a salary at the 55th percentile of the overall earnings distribution, compared to the 45th in France and 28th in Germany. This is according to a new working paper on the fiscal impacts of immigration in different European countries by Usama Polani, a researcher at the Stanford Institute for Economic and Policy Research. Put another way, for immigration to be financially beneficial to the state, the UK needs to attract migrants with much higher pay and rates of employment than its peers.

4. The government seeks to restructure the governance of the storied Indian Statistical Institute (ISI).

The ISI Bill 2026 seeks to repeal the earlier ISI Act 1959, changing the institute’s status from a registered society to a body corporate. This would replace its 1,800-plus-member general body and 33-member board with an 11-member board, with seven members aligned with the government and four representing ISI... The new board will be leaner by a factor of three: the President of India will be the visitor and will appoint the chairperson as well as four experts of her choice, joined by two representatives from Mospi. The four remaining members will come from ISI... The academic council, which discusses general syllabi, the number of students to be admitted, and new courses, has so far comprised all ISI professors, representatives from all constituencies, and the director as chairperson. The new bill changes that. Under it, the academic council is reduced to a small body, mostly made up of government representatives. The dean of studies is not a part of this council in the proposed bill.

5. Oil prices over the last fifty years.

Oil production is also less concentrated in the Middle East. The US is now the world’s largest producer, ensuring it will not have a supply shortage, and Canada, Brazil, Guyana, Venezuela have all increased production during the Iran crisis. More importantly, a barrel of oil matters less to the global economy than it used to. Oil’s share of global energy demand has fallen below 30 per cent from a peak of 46 per cent half a century ago. At the same time, the amount of energy needed to produce a unit of GDP has fallen by more than a third since 1990. Ben May, head of global macroeconomic research at Oxford Economics, says the inflationary impact of the Iran war has been dulled because “we went into the crisis with favourable oil supply” at a time when overall economic demand was “steady rather than spectacular”. When the war began, by contrast with the 1970s energy shock, the world had strategic reserves, an oil glut and growing supplies of liquefied natural gas, and a sophisticated trading system in which thousands of tankers criss-crossed the globe.

6. NYT has this investigation of how online gambling giant DraftKings is using algorithms to target gamblers who are likely to lose the most.

So in 2023, DraftKings took customer betting records and built a machine learning model, a form of artificial intelligence that seeks patterns in data, to answer the question: Who was more likely to respond to promotions by gambling — and losing — more?... DraftKings makes money when gamblers lose money. And the model sought to identify those it could get to lose the most. It scored each customer based on their habits: The higher the score, the more money a gambler was likely to lose for each promotion offered... DraftKings has continued to hone its methods, using data science, to target losing gamblers with promotions that encourage more betting, according to six former employees who worked on them.

At the same time, four other former employees said, DraftKings has stalled or squashed efforts to use similar technology to predict who might develop a gambling problem based on their betting activity... documents show how the model... analyzed dozens of data points for each gambler, including how frequently they played, their daily account balances and how much they typically lost compared with how much they bet. It also incorporated another model that calculated how likely a user was to stop gambling. This betting data may also contain signs that a person is headed for trouble. Yet when employees developed a machine learning model that would have assigned users “risk scores,” the company sidelined it, according to two former employees who worked on that project...

Promotions, which take on forms like a free bet, a “profit boost” or a deposit bonus, play a vital role in DraftKings’s business: The company brought in around $8.7 billion in gross revenue from sports and casino gamblers last year, and gave out about $3 billion in promotions, according to research by Citizens Bank... they were effective because they take advantage of gamblers’ psychology. “I feel I’m getting free money,” he said, “but really it’s dragging me back in.” Several gamblers told The Times that promotions fueled their addictions....

In 2018, when the Supreme Court ruled that states could legalize online sports gambling, it ushered in a new era in which betting has moved beyond casinos and racetracks. Professional sports games are now saturated with celebrity advertisements, encouraging people to wager on their phones. DraftKings and its rival FanDuel dominate this new industry, which has expanded into online casino games and, more recently, prediction markets. DraftKings says it has 11 million customers, compared with five million in 2022.... Silicon Valley firms spent years analyzing every digital interaction to predict what will keep users clicking on advertisements. Now, as companies like DraftKings have made gambling accessible to millions on smartphones, they too have collected an extraordinary wealth of data.

7. The imposition of the 0.4 per cent MDR fee on UPI transactions of more than Rs 2000 has generated intense debate. Janak Raj has a very good article.

8. Some facts about the SpaceX business model assumptions.

Analysts have the company delivering revenues of over $650 billion, with an operating profit of over $335 billion by 2031. The company itself is projecting revenues of $1 trillion by 2030 (that is 25 per cent of India’s current gross domestic product). The models have the company generating no free cash flow through 2031, with capex of over $1.76 trillion from 2026 to 2031. Total annual capital expenditure for listed Nifty500 companies in India is about $100 billion. Such is the scale and ambition of SpaceX.

9. The cost differential between imported and domestically manufactured solar cells is significant, and assumes importance in light of the restrictions on the use of imported cells for grid-scale solar plants.

The ALMM List-II mandate requiring domestically manufactured cells for utility-scale projects from 1 June 2026 tightened cell supply and lifted prices... The shift to domestic sourcing can sharply increase costs for projects that were originally bid on the assumption that imported cells would be used... Sudharman Ezhil, director and CEO of Natrinai Ventures (NGE Green Energy), said the cost difference between a domestic-cell plant and a non-DCR plant is currently at least ₹70 lakh to ₹1.2 crore per MW. "On a 50 MW project, that is ₹35–60 crore that was not in anyone's bid model," Ezhil said. According to him, projects bid before mid-2025 assumed imported cells at ₹14–15 per watt. The same module using a domestic cell now costs ₹24–25 per watt, he said. "That alone moves the total project cost by 15–20%," Ezhil said. He said the issue is not limited to cost. "Cell manufacturing is far more complex than module assembly, process control, wafer quality, yield, and India's listed cell capacity is a fraction of its module capacity," he said. Developers are therefore dealing with both higher procurement costs and uncertainty over the long-term performance of newly listed domestic cell lines. Projects awarded at tariffs of around ₹2.50–2.60 per unit were bid when costs were lower. Once a power purchase agreement is signed, developers have limited ability to pass on higher project costs through the agreed tariff... The domestic content requirement (DCR) premium alone could increase utility-scale tariffs by ₹0.25–0.40 per unit, even before the cost of storage is included.

Are we saying another round of defaults, restructurings, and consolidation in the solar industry?

10. China ramps up gold imports in efforts to diversify its reserves.

China has spent a record sum importing more than 1,000 tonnes of gold this year as the central bank and local investors pour cash into bullion amid rising geopolitical tensions abroad and poor returns on local assets. The world’s second-largest economy spent $158.8bn on gold in the first eight months of the year. That compared with spending of $96.5bn for all of 2025 on 886 tonnes of gold... Chinese investors are increasing gold purchases as part of broader efforts to diversify their assets. Chinese holdings of US Treasuries fell to $618bn in July — the lowest level since August 2008...

Domestic investment options in China are more limited since the country’s property market began collapsing in 2021. The benchmark CSI 300 index is down 1.8 per cent for the year and is still more than a fifth below its peak in early 2021. Meanwhile, yields on Chinese government bonds are close to record lows.

11. The yen carry trade, which has been an important driver of cross-border capital flows and a major buyer of US Treasuries, apart from contributing to keeping down the value of the yen, may be reversing after nearly three decades.

The yen carry trade is the term for when hedge funds and others use Japan’s currency to access low-cost financing to make bets in markets across the world. For almost 30 years, investors have borrowed the cheap, stable yen in order to fund higher-yielding investments elsewhere, exploiting differences in interest rates and, in particular, the fact that until this month the central bank benchmark rate had not risen above 1 per cent since 1995. But every so often, those differences threaten to shrink, or the value of the yen shifts with unexpected speed. Investors exit carry trades and dump the acquired assets — fuelling spectacular spasms in global markets from emerging economy debt and Nasdaq stocks to cryptocurrencies and luxury property. For this reason, the health of the global economy is deeply connected to the state of the yen, making the carry trade a proxy — albeit an opaque one — for risk...

Even though its true size is extremely hard to gauge, the current value of the carry trade may far exceed $2tn, making it probably the biggest it has ever been, the world’s regulators heard from the experts in Tokyo. The concern that the cheap yen may be anchoring US Treasuries and may have helped inflate a bubble in AI-related shares, they added, leads the list of worries. Many strategists now say that one of the top risks for the year is the danger that the carry trade unwinds... In previous reckonings of the carry trade, the overseas investments of Japanese companies were rarely considered... According to data from Citi, the total outstanding Japanese stock of foreign direct investment, incorporating equity capital, reinvested earnings and debt capital, reached ¥384tn in 2025, meaning it has increased from 20 per cent of GDP in 2014 to more than half today. Citi estimates that non-financial corporations in Japan now hold more overseas assets than banks, pension funds and insurance companies...

For years, the speculative carry trade and the enormous underlying outflow of corporate Japan’s investment created downward pressure on the yen. Now, analysts are wrestling with the prospect of that being reversed - even if many believe that Japanese households and companies are too conservative to move with speed. The mere fear of such an outcome could start a carry trade unwind in motion as investors rethink how safe their current positions really are... A sharp carry-trade reversal, or a massive but gradual repatriation of Japanese capital taking advantage of decades-high yields on domestic bonds, could prove extremely painful to Bessent and other finance ministers across the world. During its era of rock-bottom yields at home, Japan has been a reliable source of demand to absorb record levels of rich-world sovereign borrowing.

12. Anthropic's spectacular pre-IPO valuation run up.

Founded in 2021, the creator of Claude hadn’t even produced a dollar in revenue until 2023. By August, it was making around $65bn on an annualised basis, although such unofficial numbers should be treated with kid gloves. This growth seems to have come as a surprise to Amodei too. Only 18 months ago, Anthropic expected its revenue in 2027 to be just $12bn. Now, some investors predict a revenue run-rate of $320bn by the end of next year. They are not impartial, of course. But if they are right, then $2tn would represent a valuation of just seven times its 2028 sales. That’s a little less than Microsoft, according to LSEG. SpaceX, meanwhile, trades at 16 times that year’s revenue. Take that as the benchmark — they are both companies with wild aspirations and charismatic leaders — and Anthropic could in future be worth $5tn.

13. Big Tech guarantees are surging and risks spinning out of control. Morgan Stanley analysts estimate $3.1 trillion in guarantees issued by the seven hyperscalers and chipmakers.

Big Tech companies are rapidly expanding their use of guarantees to back debt for AI data centres and chips, issuing up to $300bn in commitments in less than a year while recording little of that exposure on their balance sheets... These arrangements, under which tech companies guarantee a minimum future value for chips or data centres, join a growing set of creative financing structures embraced by Big Tech to accelerate the AI infrastructure boom... They typically backstop debt that is issued not by the tech companies themselves but by special-purpose vehicles that own the infrastructure, allowing the tech groups to lend their financial strength to the deals without needing to fully book the liabilities. The rise of guarantees adds a layer of exposure if Big Tech’s multitrillion-dollar bet on AI does not pay off because of disappointing usage, an oversupply of computing power or the failure to build sustainable business models around the technology... Their introduction to AI financing has unlocked cheaper financing for projects with these guarantees, which typically price at just a 100 to 150 basis-point premium to the guarantor’s own debt... Because the guarantor only covers the gap between the sale price and the guaranteed value, residual value guarantees “get more efficient balance-sheet treatment than a typical payment guarantee.”

Public policy for domestic semiconductor design and components in general

noreply@blogger.com (Urbanomics) — Wed, 23 Sep 2026 02:09:57 +0000

India is spending scarce fiscal resources to support domestic semiconductor chip design startups. These startups and their innovations are most likely to remain stranded unless this support is supplemented with a market access strategy. This is the binding constraint to their scale-up.

I have articulated this in multiple posts on this blog. This provides a policy framework for public funding of innovation; this looks specifically at catalysing the chip design market; this describes how large domestic corporate groups can be roped into catalysing domestic manufacturing; and this provides a template for the most promising opportunity in smart meter manufacturing. However, given its importance, I think the issue merits one more post.

India now has a stable of chip design companies, including the nearly 25 startups that were funded under the Design Linked Incentive (DLI) scheme. They have designed chips of various kinds, and at least some are at stages of deployment, if not commercial scaling.

True, they still need to get their tapeouts to be of good enough quality, build internal capabilities to be ready with version updates, and generally ensure that the chip fabrication and supply chain are standardised and de-risked. While the chip design startups must work on getting these right, this work also requires the visibility of a scaling pathway.

But such deployment and scaling require Original Equipment Manufacturers (OEMs). But unfortunately, India’s domestic OEM landscape in electronics is barren. And foreign OEMs will not risk disrupting their well-entrenched chip supply chains by experimenting with an Indian chip design firm. There are too many uncertainties associated with such supplier shifts. We therefore have a demand-side binding constraint on the scaling of chip design startups.

So the only option to enable scaling is to create the conditions for OEMs to adopt these chips. There are two strategies in this regard. One is to mandate the use of domestically designed chips, at least some share of it, in those products sold in India. The other strategy is to incentivise the same with some industrial policy support.

I have articulated such a policy in detail here. It is a combination of both strategies. It involves mandating a progressively increasing share of the chips used in their products to be domestically designed, and supporting such product manufacturing with a Production-linked incentive (PLI).

This approach is easier to adopt effectively in products that are B2G or B2B in nature. Smart meters for electricity consumers, set-top boxes and fixed wireless access devices, surveillance cameras, drones purchased by defence agencies, etc., are examples. The relative simplicity of B2G and B2B markets can be leveraged to formulate market-shaping policies.

This strategy would be useful for the indigenisation of other components and sub-assemblies too, ranging from compressors to transceivers. Mandate and incentivise the use of a progressively increasing share of components from domestic firms.

This would emulate the Chinese playbook through which they have come to develop a vast ecosystem of domestic component manufacturers and OEMs. The Chinese smartphone OEMs like Huawei, Xiaomi, Oppo, and Vivo were instrumental in the emergence of domestic chip design firms. India will have to develop both the OEMs and component makers.

This would require a high level of state capabilities in both designing the policy and calibrating and closely monitoring its implementation. But more critically, it would require a very high degree of inter-departmental coordination among the departments and ministries in the Union government. For example, smart meters would involve collective ownership and close coordination across the Ministries of IT, Power, and Finance, and financing agencies like REC and PFC. This would require a genuine breakdown of silos within the government.

Separating infrastructure construction and O&M, and mitigating the risks

noreply@blogger.com (Urbanomics) — Mon, 21 Sep 2026 02:04:07 +0000

This post revisits a contentious strategy in infrastructure finance: separating the contracting of construction and operation phases (as against life-cycle contracting).

This blog has long held the view that, given the inherent time and cost overrun risks associated with the construction phase, which cannot be borne by private investors, and the much lower cost of public finance, infrastructure assets should be created with public financing. Once the construction risk is shed, the asset should be transferred to private operators through long-term concessions to fund their operation and maintenance (O&M).

As early as 2013, we had advocated this two-stage strategy in a co-authored oped:

In the first stage,a professionally managed special purpose vehicle (SPV) could be established to construct the project using short-term bank loans or through takeout financing by a consortium of banks. This may require the government to provide some form of guarantee or credit enhancement. Once the construction risk is offloaded,short-term loans can be swapped for long-tenor debt. Private participation can be introduced either through long-term concession grants to operate the entire project or parts or it,or by outsourcing certain services. Another strategy would be to capitalise the assets by taking the SPV public.

Let the state bear construction risk cheaply, then sell the de-risked operating asset to patient capital. In other words, use public finance to create infrastructure assets, and then fund their lifecycle using private capital.

But it can be argued that this creates two problems. One, public financing comes with the risk of compromising on the design and quality of construction. Second, this risk is worsened if construction and O&M are separated.

Clearly, we have a financing dilemma. The most appropriate risk allocation and lower cost of public finance trade off against the problems arising from the separation of construction and O&M.

How do we reconcile the dilemma?

If there is one constant that infrastructure construction globally teaches us, it is that cost and time overruns happen over and over again, and are therefore unavoidable. Given the uncertainties involved, most often beyond the control of contractors, it is unfair that this risk be borne by them. Only the contracting agency of government can bear this risk. Further, it is unavoidable that financiers will hedge for those risks and price the capital accordingly, saddling the asset with prohibitive life-cycle costs. It is also virtually impossible to write contracts with such risk allocations that absolve the construction contractors.

In the circumstances, the only option left is to assume the construction delay risks on the public balance sheet and finance the asset from the budget, and then monetise the asset.

So if we make a conscious choice for public finance, how to mitigate the risks? How do we reconcile the apparently conflicting requirements of using public finance to construct infrastructure assets and ensuring life cycle quality?

This is a contractual matter, albeit one that is challenging but not insurmountable. The construction contract between the state and the contractor must do the alignment work that ownership bundling would otherwise do. It should specify construction design and quality conditions, validated through independent technical audits at transfer, with financial penalties for any shortfall to be clawed back from performance guarantees. Further, instead of waiting till the end, an independent engineer, appointed jointly but reporting to the grantor, should have enforceable sign-off rights at key construction milestones before disbursements are released. Done carefully, this shifts the incentive problem from ownership to contract design, which is solvable with the right institutional capacity.

All this requires a state with strong enough technical capacity to write demanding output specifications, enforce defect liability, and audit asset condition through the operational period. The bundled PPPs are an admission that since the state is weak and therefore cannot do the above, it must outsource the incentive problem by making the private party bear the whole lifecycle, even with the higher funding cost.

This fatalism is the wrong long-run equilibrium, also because bundled PPPs, as we have seen, are prone to renegotiations, which themselves require high state capability. Accepting that the state must always bundle to avoid quality risks locks in a model where public borrowing costs are foregone forever, because the state never builds the contract-writing and monitoring capabilities to hold separated delivery accountable.

The better path is to treat the separation as a governance and capacity challenge, invest in that capacity, and capture the financing advantage of public capital as a permanent feature of the model rather than conceding it to the private sector in perpetuity.

This is the standard approach followed historically in countries like Germany, Japan, and Singapore. The canonical example is Germany’s Autobahn model, followed by the National Highways Authority of India (NHAI), where the federal government finances motorways cheaply through public borrowing, while construction is let to private contractors under demanding output specifications with long liability tails. It is just as applicable to many infrastructure segments, such as urban infrastructure.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 19 Sep 2026 06:49:53 +0000

1. A fascinating article by Ed Conway documents how a cod fish caught off the Scottish coast travels 30,000 nautical miles to Rotterdam, Shandong, China (for manual deboning and skinning), and back to the UK, where it is breaded and sold as fish fingers.

2. AI solves the Navier Stokes equation breakdown.

Scientists plug in numbers to the NS equations to derive accurate answers for the behaviour of moving fluids. But the NS equations can sometimes return apparent nonsense, predicting things like infinite velocity and zero volume (called a “singularity”)... Can it be proved that the NS mathematics don’t allow infinite velocity? Or alternatively, can it be proved that this can happen in some theoretical cases, weird as that may seem? Mathematicians refer to this possibility as a “breakdown” in the “existence and smoothness” of NS. .. NS is one of the seven famous Millennium Problems that were listed in 2000. The Clay Institute offers a prize of $1million for a proof that, one way or another, addresses four specific conditions for NS.

On Tuesday, September 8, OpenAI announced that it had found a solution to the NS problem by using a new AI model after 88 hours of intense computation involving 10,000 AI agents and 17 hours of verification. The agents exchanged 3 million messages and used 130 billion output tokens, which amounts to costs of well over $10 million. OpenAI claims its AI resolved two out of the four statements in the proof demanded by the Millennium Prize and that, indeed, infinite velocity is theoretically possible under certain conditions.

3. Brilliant description of the Dauphin discount, applied when a founder-owner hands over the reins to his entitled but not similarly competent children.

4. There may have been an inflation regime shift in the US in the last few years. Consumer prices overall have risen more than 30 percent since the beginning of 2019. That’s two and a half times as much as they went up from 2012 to 2019.

Prices have risen sharply across the board.

5. US inflation clearly owes to the Iran misadventure.

6. Benn Steil has one more reason for the rising US bond yields.

The interest rate demanded by investors to absorb this debt appears not to be a straight linear function of its growth. Instead, more debt seems to accelerate the rise in the rate demanded. The reason lies in who buys the debt. Nineteen years ago, 76 per cent of US Treasury bonds were held by price-insensitive investors, such as central banks, who bought them more or less reflexively according to their stable reserve-management policies. Today, they hold only 43 per cent. The majority is now held by price-sensitive investors, such as households and investment funds, which demand greater returns as government debt grows and inflation erodes their purchasing power...

The twin problems of surging Treasury supply and stagnant foreign official demand will be exacerbated further still if new Federal Reserve chair Kevin Warsh ploughs forward with his stated ambition of reducing the central bank’s security holdings. The last episode of Fed balance-sheet reduction saw the share of Treasuries held by price-sensitive investors soar by 17 percentage points over 2022 to 2025, while the so-called term premium — the extra compensation demanded by investors to hold long-term debt — rose by 1.1 percentage points. Given the continued increase in price-sensitive investor dominance, further Fed balance-sheet reduction could see yet sharper rises in the price of long-term US debt.

7. VC wealth multiplication.

Founders Fund, for example, turned a roughly $600mn investment in Musk’s rocket, satellite and AI group into a stake worth more than $50bn at the company’s initial public offering, according to PitchBook estimates.

8. More on the collateral benefits of Aliko Dangote's business activities (HT: Adam Tooze).

Africa’s richest man, Aliko Dangote, wants his drivers, cooks and security guards to own a share of the continent’s largest refinery. At a signing ceremony in Lagos, Nigeria, on Monday, 7 September, Dangote Petroleum Refinery and Petrochemicals (DPRP) free establishment zone launched the formal process for what is expected to be Africa’s largest public share sale, aiming to raise ₦2.15trn ($1.4bn). The offer comprises 4.1 billion ordinary shares at ₦525 per share, with a minimum subscription of 10 shares. It opens on 14 September and closes on 13 October. “There is no segregation of who can own the share. We want every human being living on the continent to be part of this action,” says Dangote, president and chief executive of Dangote Industries Limited. “This is why we have called it the IPO for the people.”

He said the offer, which opens on 14 September and closes on 13 October, is designed to allow “drivers, cooks, servers, our managers, everybody” to own a stake in the refinery. The IPO is targeting about 10 million retail investors, according to FirstCap Limited, one of the parties to the transaction. “This transaction is not just about the size of the offer; it’s about the significance and how it’s going to shape retail investment in Nigeria’s capital markets,” said Ukandu Ukandu, MD/CEO of FirstCap, describing the deal as digitally driven and built for mass participation. “Family members, security guards, drivers, colleagues, schoolmates, community members are all encouraged to participate.” Dangote described the raise as less of a financing exercise than a wealth-distribution one, calling the ₦2trn target “too small” and “a meagre amount” relative to the group’s needs. He said the proceeds are earmarked for the refinery’s expansion.

9. Tiruppur facts of the week.

Its knitwear exports rose from $3.3 billion in 2020-21 to $5.3 billion in 2024-25 (TEA, 2026). The cluster accounts for about 68 per cent of India’s knitwear exports and supports the livelihoods of more than a million workers, around 70 per cent of them being women. Within roughly 20 km, yarn, knitting, dyeing, printing, stitching, finishing, packaging and dispatch are woven into one production ecosystem. Nearly 20,000 units operate across different stages, from knitting, dyeing and printing to garmenting and ancillary activities. This is the ecosystem effect where firms specialise, workers specialise, and thousands of jobs are created around a common market.

10. India's affordable housing market facts.

The preference for midsize housing priced between ₹45 lakh and ₹90 lakh fell to 21 per cent in H1 2026, from as high as 35 per cent in H1 2021. Similarly, preference for housing priced below ₹45 lakh declined from 27 per cent in H1 2021 to 18 per cent in H1 2026. “This is also mirrored in supply, with affordable housing’s share of new launches across the top seven cities declining from 26 per cent in H1 2021 to just 8 per cent in H1 2026,” says Anuj Puri, chairman of Anarock.

11. KP Krishnan makes very important points while questioning the RBI's recent FCNR (B) scheme which attracted $136 billion.

The capital flow of $136 billion is brought in by providing currency hedging to commercial banks at no cost. A forward guarantee on the exchange rate creates a contingent liability for the state. If macroeconomic fundamentals guide the exchange rate to ₹110 per dollar in three years, the RBI will pay ₹15 per dollar. This is a cost of approximately ₹2 trillion... Such tricks have been done before. India Development Bonds 1991 raised an estimated 0.6 per cent of gross domestic product. Resurgent India Bonds of 1998 raised 1 per cent, and India Millennium Deposits 2000 raised 1.2 per cent of GDP. The 2013 FCNR(B) exercise raised 1.4 per cent of GDP. The 2026 FCNR(B) raised 3.5 per cent of GDP. The scale, the opacity, the complexity have gone up. ... The daily inflow and outflow across India’s borders is $11 billion. The global daily trading volume on the rupee is $140 billion. Throwing just $2 billion a day at the problem for 250 days will burn through $500 billion.

We should instead take one step back and ask the foundational question: All this drama is in return for what? Recent research by Hande et al. (2026, https://bit.ly/4dlXP5d) indicates that the natural annualised volatility of the USD/INR exchange rate, without intervention, is approximately 7.5 per cent a year. The apparatus of intervention generates a realised volatility of roughly 5 per cent a year. We suffer fiscal risk, distorted monetary policy, instability, and constraints on financial development, which impact the people through inferior economic growth. In return, we get a 2.5 percentage point reduction in currency volatility, which benefits a small set of business users.

12. This is a staggering statistic on IPOs

Anthropic’s investors are expecting the company to reach a valuation of $2tn when it goes public in the coming weeks. Add in SpaceX, which began trading at $2tn after its IPO in June, and OpenAI, which is considering raising money privately at $1.2tn ahead of a public listing next year, and these companies alone could be worth well north of $5tn. Now compare that with the entire history of IPOs from 1980 to 2025. The 3,365 tech companies that went public in that period were worth a combined $4.1tn when they started trading, according to data compiled by Jay Ritter, emeritus professor at the University of Florida’s Warrington College of Business.

13. The return of conglomerates, but with overlapping national strategic goals.

In China, Huawei has gone from an empire with two business lines to a local champion with 70 per cent of sales at home in five divisions. Chinese car companies own their supply chains — BYD operates ships. To defuse sovereignty fears abroad, they are willing to forfeit control, using licensing and joint ventures. India’s Reliance and Tata have re-embraced nation building across industries, from cola to air defence. Even in America, Amazon and Alphabet have become conglomerates that own parts of their supply chains, such as chip design. SpaceX’s strategy is to be a techno-national champion with up to nine divisions, from asteroid mining to tourism. In the pursuit of state-endorsed AI, OpenAI has gone further than Amodei, offering Uncle Sam an equity stake. US pharmaceutical companies want new drugs invented in China, but geopolitics makes takeovers impossible. Instead, there is a surge in licensing. Bristol Myers Squibb and Pfizer have made bets worth up to $26bn. In Europe, some firms are diversifying to plug strategic holes. The parent of Lidl, a supermarket, does data centres. Renault is expanding into military drones. Governments are trying to dilute US tech companies’ control over their local subsidiaries.

14. Gig work platforms are a form of unemployment insurance, and are now running the risk of being disrupted by the likes of autonomous vehicles and robo-delivery agents.

Gig platforms have indeed become a safety net for people who have fallen out of — or struggled to access — the formal labour market. A report by the World Bank in 2023 estimated there were between 154mn and 435mn online gig workers globally, representing between 4.4 and 12.5 per cent of the global labour force. Among the advantages of this development, according to the report’s authors, are that it “helps manage income shock” and “serves as unemployment insurance”.

China is perhaps the best example of a country in which gig work has served as a labour market shock absorber. Amid a prolonged construction downturn and the increasing automation of manufacturing work, the number of people who work as food delivery or ridesharing drivers in China increased by 10mn in two years to reach 53mn in 2025, according to estimates by the China New Employment Forms Research Center, a Beijing think-tank.

15. A very good oped by Boddu Srujana raises the important point about what UPI has done for its users, especially those in the informal sector whose services are now captured in the formal net. She writes,

This system has made India’s informal workers extraordinarily visible to banks, lenders, the state and to the platforms that manage their labour, without making them correspondingly secure... A worker who has been absorbed into a real-time national payments system is traceable and taxable, still has no pension, no enforceable minimum earning, and no institutional means of bargaining... The JAM trinity — Jan Dhan, Aadhaar, mobile — was to deliver subsidies with less leakage. UPI extended that logic to everyday commerce by enabling a vegetable vendor not to worry about carrying cash, with payments settled in seconds rather than requiring a trip to a bank that takes hours. But this is not the same as securing income and financial inclusion. As operationalised in India, it has functioned as a substitute for the much harder political project of labour formalisation...

A worker’s UPI trail has become the raw material for an entire private lending and “alternative credit scoring” industry, sitting atop a public rail, useful to someone who lacked collateral, but built with little meaningful consent. The same logic now governs platform work. UPI-enabled instant settlement is what allowed gig and delivery platforms to scale... it has done so by making these workers legally almost unclassifiable — employee or contractor — and by subjecting them to algorithmic discipline such as ratings and incentive structures, without any corresponding algorithmic right to contest a rating or know why an account was switched off.

16. Finally, some FDI facts about Indian states.

Nearly 82 per cent of all FDI equity inflows into India went to just six states or Union territories — Maharashtra, Delhi, Karnataka, Gujarat, Tamil Nadu, and Andhra Pradesh (including Telangana) — from January 2000 to March 2026... Among sectors, services had the highest share at 16.37 per cent in gross FDI equity inflows from January 2000 to December 2025, followed by computer software and hardware (15.62 per cent) and trading (6.55 per cent). Financial services accounted for the largest share within the services sector.

And several questions about the value of EoDB and Business Reform Action Plan (BRAP) rankings in determining FDI flows.

States such as Maharashtra, Delhi, Karnataka and Tamil Nadu fared poorly in the Ease of Doing Business (EoDB) rankings released by the government in different years over the past decade. For instance, Delhi and Tamil Nadu featured outside the top 10 in 2015, 2016, 2017 and 2019, while Maharashtra and Karnataka’s best performance in these four years was the eighth rank... On the other hand, states like Madhya Pradesh, Chhattisgarh, Jharkhand, Rajasthan and Telangana had relatively better rankings but considerably lower FDI inflows to boot... None of the top FDI receiving states was in the top two categories in the latest ranking of 2024. Experts say EoDB and BRAP rankings are not the prime reason behind FDI inflows. Instead inflows reflect states’ infrastructure, access to ports, prosperity and presence of industrial networks.

Disaggregating India’s savings and its risk capital challenge

noreply@blogger.com (Urbanomics) — Fri, 18 Sep 2026 00:00:00 +0000

Does India have a problem of risk capital deficiency? More specifically, is there a disproportionately greater bias towards public markets among India’s savers, especially among high-net-worth individuals (HNIs)?

I blogged here, arguing that India suffers from a deficiency of risk capital to finance the formation and growth of small and medium enterprises (SMEs). After that, I received some pushback, pointing to the spate of SME IPOs in recent times.

I had been thinking of digging up the numbers and seeing how they stack up. In this context, I came across this review of a book by Ameer Shahul that argues that private equity is damaging India’s health care. While I’m sympathetic to this argument, the point that is relevant to this post is the dominance of foreign investors in these PE deals. I had blogged hereabout PE in India’s hospitals.

I used Claude to look deeper into India’s numbers on risk capital, how they compare with global peers, and what their trends have been.

The headline story is that India does not lack risk capital, but it channels it into liquid public markets, leaving the control of market segments like essential-service assets, and the value created in the private phase, largely to foreign capital.

The decomposition goes something like this. The Gross Domestic Savings (GDS), contributed by households, the private sector, and governments, gets distributed between physical (primarily land and gold) and financial (deposits, risk capital, and pension/insurance). Risk capital, in turn, gets further distributed between public (stocks and mutual funds) and private (alternative investments) markets. Business formation requires a deep pool of the risk capital flowing into private markets.

So, let’s start with the GDS. Clearly, India is second only to China in domestic savings as a share of GDP, though given its fast growth ambitions, it must increase this share. The problem is that over 40% of household savings are invested in illiquid assets.

More disturbingly, 54% of the financial savings go into deposits, and just 13% goes into any kind of risk capital investments. On the positive side, 33% goes into long-term investments like insurance and pensions.

However, as a percentage of GDP, these numbers on financial savings pale in comparison to even its emerging market peers. Risk capital assets (public and private markets) make up just 10% of GDP.

Interestingly, among corporates, financial investments and dividends and buybacks have been rising at the expense of capex, in both absolute and relative terms.

Back to household savings. Within the basket going into securities, as the CRISIL/IVCA/360 ONE Unlocking Domestic Capital report informs, what goes into private markets, the genuine risk capital, is a tiny sliver. And this is a big problem. The envelope of capital available for business formation is truly small.

Let us disaggregate the risk capital basket further. Whereas roughly ₹1.5–2.0 lakh crore a year flows to private markets through domestic LPs in AIFs, much of that is private credit, real estate, and Category-III (hedge funds, private-public hybrids) rather than genuine growth equity. So domestic public-equity inflows run at four to five times domestic private risk capital, and foreign investors still supply much more private risk capital (₹3.0 lakh crore) than Indians do.

All this means that we have a very interesting situation where, while foreigners are net sellers of listed equity, they remain the dominant suppliers of private capital. In stark contrast, domestic money flows the other way.

Indian HNIs park around 15% of portfolios in alternatives, the same as global HNIs. The gap opens for the segment that actually anchors private markets, the ultra-UHNW investors and family offices who allocate 40–50% to alternatives, with private equity typically the single largest bucket. In contrast, Indian UHNIs hold more real estate and gold than global peers and route their alternatives into yield and public-linked structures. In other words, Indian private wealth under-supplies illiquid equity risk, not alternatives in general.

This scarcity of private risk capital makes India, with its very large foreign investor base, very attractive for foreign Global PE and sovereign funds put roughly $15.5bn into Indian healthcare over the past five years, with hospitals taking about 68% of it. For example, Blackstone holds around 80% of KIMS Kerala and 73% of Care Hospitals, and Temasek holds about 59% of Manipal. The domestic exceptions are the listed, promoter-anchored chains like Apollo and Medanta/Global Health. Much of the foreign PE inflows are actually SWF/pension capital. In education, it is the K-12 market that is attracting the attention of foreign PEs.

Banking is a counter-example where heavy foreign capital and domestic control coexist perfectly well. This is also because a sectoral regulator caps ownership, screens holders, and enforces diffusion.

India’s risk capital challenge starts with unlocking the roughly two-thirds of household savings that sit in real estate and gold, and further increasing the share that goes into risky capital investments, specifically private risk capital markets.

So how have been the trends over time?

Encouragingly, the share of household financial savings going into public equity and mutual funds has grown from 15% to 23% over the 2019-25 period. Thanks to mutual funds and SIPs, the number of individuals investing in capital markets has risen nearly fivefold since 2020 to around 135 million. This has been a truly transformational change, a genuine big-bang success.

For context, domestic institutions poured a record ₹8.5 lakh crore into equities in FY26, of which mutual funds supplied ₹6.4 lakh crore, while foreign portfolio investors were net sellers of ₹1.8 lakh crore. That domestic flow is driven by SIPs, which came at around ₹28,464 crore a month (or about ₹3.4 lakh crore a year) across 9.7 crore accounts. Further, in a reflection of the trend of exodus of foreign capital from the equity market, the domestic institutional ownership of NSE-listed stocks crossed foreign ownership in 2025 (roughly 17–19% versus FPIs’ 17–18%) for the first time.

On the private capital side, for a long time, even for Indian GPs, the majority of capital raising came from foreign LPs. As an illustration, 85% of the funds raised in India’s largest PE fund came from foreign LPs. Large control buyouts remain predominantly foreign. However, encouragingly, Indian LPs have been stepping up. Foreign LPs’ share of AIF fundraising by Indian GPs has been declining, now contributing only about a third of the total capital raised.

In the aggregate for all private capital raising too, Indian investors are stepping up. The CRISIL/IVCA/360 ONE Unlocking Domestic Capital report shows that domestic investors have now surpassed foreign investors in fundraising by Category I and II AIFs. The share of domestic investors as a percentage of gross funds raised across them has touched 52.7% by June 2025.

The good thing is that the domestic private pool, especially the AIF commitments, is growing fast. AIF commitments climbed from roughly ₹6.4 lakh crore (Mar 2022) to ₹8.3 (Mar 2023), ₹11.3 (Mar 2024), ₹13.5 (Mar 2025) and ₹16.94 lakh crore by March 2026, a near 30% CAGR, with Category II (PE/RE/credit) about three-quarters of it.

The report also disaggregates the changes in the destinations of private capital investments over the 2020-25 period. Startup and growth capital are useful for business creation and growth, whereas buyout capital reflects confidence in acquiring established businesses. They come mainly from the AIF I and II universe. The growing shares of private investments in public equity (PIPE) (mainly by the family foundations of HNIs) and private credit are matters of concern.

The graphic below consolidates everything into one figure. It is clear that domestic capital, whether retail, institutional, or HNI, overwhelmingly favours public markets over private capital markets. HNIs too favour liquid public equity, credit, and real estate. Even the ultra-HNIs tend to avoid illiquid growth equity.

One important channel for private risk capital is institutional investors. As we saw, at 26% of GDP, the share of household financial savings going into pensions and insurance funds is 2.5 times that going into all kinds of risk capital.

But if we look at domestic private market flows, while the actual flows into growth equity is itself small, the share coming from institutional investors is tiny. Of the domestic capital going into private markets (AIFs), roughly 70% is individual (HNIs, UHNIs and family offices) and only about 30% is institutional, and even that institutional slice is mostly corporate treasuries and government seed funds, not the long-horizon pools that anchor private markets abroad. In this too, India stands as the mirror image of every mature market.

As an illustration, EPFO, the country’s largest retirement fund with about ₹24.8 lakh crore of assets, has nothing invested in AIFs, despite being permitted up to 5% of incremental flows. The same is the case with NPS, with about ₹14.4 lakh crore. Whereas life insurers are allowed up to 3% and general insurers up to 5%, less than 1% of their limit has been invested. It is estimated that LIC alone could put in ₹1.3 lakh crore if it used its full headroom. The institutional share comes mainly from government-backed funds-of-funds (SIDBI, SRI Fund, NIIF, NABARD, BIRAC and others), which have ₹24,293 crore committed. The pension–insurance–endowment complex that dominates private markets elsewhere is missing.

Globally, institutional investors form the private-market LP base. In the US, university endowments like Yale invest roughly 30–40% in private equity and venture, and the US, Canadian, and Dutch pension funds and insurers are enormous private-market LPs. The CRISIL report says that US family offices allocate 54% to alternatives, US pension funds have gone from 9% to 14% in private equity over 2021-25, and OECD pension funds across 15 jurisdictions average about 22% in alternatives, up from 12% in 2001. In stark contrast, India’s own pension and insurance systems hold more than ₹110 lakh crore of assets, almost none of it in private markets.

The likes of China and Israel closed exactly this gap by mobilising domestic pension and insurance capital to anchor their private ecosystems.

Because the anchor institutions are absent, the domestic private pool is thin and individual-funded, which is exactly why even the largest Indian GPs still raise ~85% of their capital abroad. Building the institutional LP base and deepening the private capital pool requires institutional investors to shed their risk aversion and start utilising their permissible limit for alternatives. This should be followed up with gradual reforms to SEBI accredited-investor and co-investment regulations, and gradual loosening of PFRDA/IRDAI mandates.

Apart from the substantive requirement of such private risk capital to sustain the country’s high growth aspirations, the global geopolitical risks and the likelihood of capital wars make these aforesaid reforms imperative.

The global crisis of falling student learning outcomes

noreply@blogger.com (Urbanomics) — Wed, 16 Sep 2026 03:28:06 +0000

The results of the latest round of the three-year OECD PISA school learning outcomes survey of 15-year-olds in 38 OECD countries and 53 other places provide firm evidence that what people have been suspecting is true — technology, turbocharged by AI, may be detracting from learning.

It finds scores declining worldwide, with fifteen-year-olds in high-income countries falling roughly 1.5 years behind their 2015 counterparts in literacy, knowledge, and reasoning skills. The declines are pronounced in literacy and numeracy.

The East Asian countries remain at the top of the charts in all three subjects, as they have been since the beginning. Performance has declined across the board since 2015, with Turkey being an exception.

The Economist writes

The latest scores on PISA tests of reading, maths and science, released on September 8th, are the worstsince the tests, administered by the OECD, began in 2000… In 35 rich countries that take part in the tests, a typical 15-year-old now reads no better than a 14-year-old did a decade ago… PISA scores began drifting downwards around 2012. The evidence is growing that tablets, mobile phones and other such screens are distracting youngsters from their studies and diverting them from hobbies, like reading books, that instil the ability to focus… And precisely because AI will increase the temptation for people to outsource difficult cognitive tasks, schools have an extra duty to help pupils exercise their brains and acquire the hard habits of thinking. Failure to furnish them with the basic building blocks of a well-developed mind, such as literacy and numeracy, is inexcusable.

The report points to a decline in key skills like drafting or critically evaluating texts at the expense of skim reading and limited understanding.

The connection between passive technology consumption and lower scores was “compelling”, even though the study did not provide direct evidence of cause and effect, said Andreas Schleicher, director for education and skills at the OECD… Reliance on AI, the survey found, tended to produce worse scores in science for both pupils and education systems, with 37 per cent of students prioritising “common sense” over scientific reasoning… That will serve them ill in the AI age, when “reflection and complexity” will be all the more important… With those skills “declining rapidly”, young people now “read faster” than in 2018, but “less accurately”, he explained… Schleicher linked the decline in the latest scores to the dominance of distracting short-form videos on platforms such as Instagram and TikTok, as the report suggested that “digital distraction” is harming education across the world.

Andreas Schleicher, OECD’s long-standing Director of Education, points to possible explanations.

Reading, the gateway to all learning, has declined sharply. Between 2018 and 2025 performance fell in three-quarters of the countries. Across the OECD, it was down by 25 points—more than a year of learning. Much of this decline happened between 2022 and 2025. The biggest surprise is who fell furthest behind. It was not the most disadvantaged students, but those from wealthy families, which points to a much broader challenge than inequality alone…
Most troubling is the deterioration of the very skills that matter most in the AI age: evaluating information, making connections across multiple sources and thinking critically about what we read. Since 2018, the number of instances in which students rush through texts and give quick but incorrect answers has almost doubled… We cannot say for sure, but falling levels of reading for enjoyment and the shift towards digital reading—skimming social-media feeds and rapidly processing information—may be reducing the ability of students to engage with complex texts and data… when personal devices are used for leisure during school, student performance falls sharply. This raises questions about whether devices such as smartphones, designed to maximise a user’s attention, are compatible with sustained academic attention.
… students who use chatbots for tasks such as summarising texts tend to get lower scores than those who don’t, and are more likely to report lower levels of intrinsic motivation for learning… we do not get fit by watching sports, but by doing sports. In the same way, learning is always about cognitive struggle. Rather than make things easier, we need rigorous, focused and coherent learning environments that make students stronger. In PISA, both individuals and countries perform better when students believe that success is about hard work rather than talent, and when they see failure as an opportunity for growth.

Schleischer also points to an increase in the number of test-takers classed as “hasty readers” who blast briskly through the literacy assessment while getting many of the answers wrong.

The report found that those who used AI “almost every day” (and thereby effectively off-loading cognitive tasks to AI) were much less able to summarise or draft texts than those who “almost never” used it.

Conversely, students who used AI daily “to help me learn”, rather than replace thinking, do better than those who use it less frequently.

Schleicher makes important suggestions about better use of AI.

High-performing systems such as China, Estonia, South Korea and Singapore are leading that shift, deploying ai not to give students ready-made answers, but to help them think about the right questions, reason analytically and learn more effectively. Few countries would allow millions of children to receive a new vaccine without first demanding rigorous clinical trials. Yet in education we introduce new technologies into millions of classrooms with remarkably little evidence about their impact, turning students into unwitting crash dummies for tools we do not yet fully understand… Where smartphones and ai are part of the learning environment, their use must be intentional, not incidental. Schools need clear frameworks defining when, where and how ai should be used. For younger learners, it should not be treated like an oracle. That means strong filters. No emotional manipulation. No pretending to be a friend, a confidant or, worse, a replacement for social interaction.

However, there may be more factors at work in the declines than just AI or Covid 19 legacy. Given that the declines precede both, one argument blames the proliferation of smartphone use, with its endless content causing distraction and reducing mental bandwidth. There is a large body of well-established research on this. Jonathan Haidt has documented the problems of the anxious generation.

Another more structural explanation could be the changes in pedagogical aspects over the last couple of decades. In many countries, the disciplined processes of delivering content, rigorous assessments, standardised tests, and strict school governance have been relaxed in favour of less stressful and more joyful learning environments, lower-stakes testing, less insistence on attendance, and others like no-detention policies. Progressive ideologies have been a driving force behind many of these shifts.

Finland, once the top-performing poster child for school learning outcomes and a must-visit pilgrimage location for education policymakers, is an instructive example. Its top position in PISA for long was thought to be underpinned by its relaxed testing, limited testing, and play-based learning. But it has suffered among the steepest declines and has now fallen to the middle-rung.

John Burn-Murdoch points to possible reasons.

During the 2000s education officials flocked to Finland — the top performer in Pisa scores of the day — to learn from what it was getting right. They saw a system that prized flexibility and autonomy for pupils and a curriculum prizing “transferable skills” like critical thinking while placing less emphasis on core subjects and standardised testing or performance rankings. Glowing reports were written, and the Finnish model spread. There was one problem: even as these visits were taking place, Finnish scores were in a sustained slide. Today, its results are little better than the average country, and many argue its exceptional performance — which peaked around 2000 — owed more to the conventional comprehensive approach it had used in previous decades.

Finland’s experience mirrors those in other countries with similar shifts to less rigorous teaching methods, like Sweden in the 1990s and Scotland’s Curriculum for Excellence of 2010.

Progressives too easily dismiss the value of traditional teaching, but facts are the building blocks of critical thinking and tackling repeated algebraic problems, for instance, hones abstract reasoning.

These declines sit alongside the impressive performance of the UK, which held on to traditional methods and even improved on them.

Recent results in the UK support this theory. Scotland, Wales and Northern Ireland went down similar routes to Finland during the 2010s, shifting away from established curricula and towards more broadly defined learning outcomes, scrapping school league tables and some standardised tests. By contrast, England doubled down on the established curriculum with strict guidance on the content schools must cover in core subjects, alongside the use of league tables with performance measures that made the rankings harder to game. Fifteen years on, England’s results have held up, propelling it into the top ten internationally, while in Scotland, Wales and Northern Ireland they have plummeted… Schoolchildren in England report the same levels of happiness or pressure as those in Scotland and Wales, and no difference in mental health.

This is a good description of what the UK did right starting about 15 years back.

The nation made its curriculums more fact-filled (some prefer to say “knowledge-rich”) at a time when policymakers elsewhere had been waxing lyrical about instilling vague soft skills. It made exams more rigorous, deprioritised coursework (on which it is easy to cheat) and toughened inspections. Politicians also sought to steer schools away from newfangled styles of instruction that are fashionable but untested, and back towards methods that are more dyed-in-the-wool… Twenty years ago children in Scotland outperformed their peers south of the border. Now they tend to do worse—even though school spending per pupil is much higher. Scotland’s critics blame a modish curriculum, as well as a lax approach to discipline.

Echoing this, The Economist article calls for a return to the boring basics of schooling that were shed as abstract ideas of social justice and concerns about mental health took hold.

Places that have avoided declines deserve more attention. Britain is one. In 2009 its pupils scraped into the world’s top 30 in maths and reading. Now they sit in the top ten. Some of this stems from a return in England, under a previous Conservative government, to old-fashioned things such as rigorous exams, tough inspections and fact-filled curriculums.

Burn-Murdoch points to another example of a similar approach, from the poorer southern states like Mississippi in the US, which have overtaken their wealthy counterparts like California.

Improvements have been especially pronounced among the lowest-scoring children. There, as in the UK, the most common explanations are Mississippi’s adoption of evidence-based classroom methods including teaching phonics at an early age, and its emphasis on accountability, from school rankings to requiring that children be capable readers before they progress.

Burn-Murdoch’s summary of the confluence of factors is apt.

In many countries, the past decade has seen a dangerous combination of weakening standards and reduced rigour in education. This has happened just as the rise of digital distractions and shortcuts has made these skills especially important for young people to develop the knowledge and abilities they will need in an uncertain future.

All this is critically relevant for developing countries like India. There is a widely held perception that Edtech tools, now supercharged by AI, can be transformative in overcoming large antecedent foundational literacy and numeracy deficiencies. On one side, this is reflected in the proliferation of Edtech platforms that are sold commercially and their extensive use in coaching for competitive entrance examinations. On the other hand, there is the increased use of digital equipment and Edtech solutions in public schools, including in primary schools.

While there is at least some semblance of market testing (though its value may itself be questionable) in the case of the former, it is the latter that is vulnerable to the problems that the PISA scores highlight.

The New Education Policy (NEP) 2020's technology chapter advocates using technology to improve education quality, expand access, and offer personalised learning experiences, and introducing AI and coding from Class 6 onwards. However, it does not say anything about AI-governance frameworks — clear rules on when/how AI is used, the role of teachers in mediating the use of Edtech, no emotional-companion framing for children, and no evidence generation beforewide deployment. They say nothing about generative-AI use inside classrooms, screen-time limits, or the phone-ban-style rules that are now becoming the norm across the West. This is a big gap that must be filled at the soonest.

On the pedagogy, India dallied with the failing model before reverting to the boring conventional approach. First, the Right to Education Act had the controversial no-detention policy, which soon became politically appealing. Then the New Education Policy advocated several features of the progressive approach - competency-based assessment, reduced rote learning, “joyful” and flexible learning, holistic progress cards.

Fortunately, the operationalisation of the Foundational Literacy and Numeracy (FLN) program, NIPUN Bharat, has been more conventional in hard, timeline-based targeting of every child attaining foundational literacy and numeracy by the end of Grade 3. The decision in December 2024 to roll back the no-detention policy for Classes 5 and 8 is another step in the right direction. Interestingly, the ASER 2024 recorded the first broad-based improvement in rural reading and math in two decades, most likely an outcome of the FLN focus rather than any technology push.

Finally, the success of countries like the UK and the US states like Mississipi highlight the importance of doing the basics right. Mississippi and other southern states focused on reading, curriculum coverage, standardised tests, holding back children scoring in the lowest level at the end of third grade, remedial instruction, teacher and administrator trainings, and parental engagement. The UK did “rigorous exams, tough inspections and fact-filled curriculums”.

Interestingly, in all the several articles I have come across about these successes, I have struggled to find any mention of Edtech as a contributor. This tallies with Lant Pritchett’s four part smell test on the relevance of development interventions, and his argument that “none of the high performing educational systems in the world achieved their baseline greatness or resolved their learning crises through Edtech”. Instead, they focused exceptionally well on ensuring every child learns to read and do basic math early, aligning curriculum with actual student learning levels rather than overambitious and elitist standards, and supporting teacher capability, motivation, and practical accountability.

India’s focus on FLN is an important first step. But it must be implemented with rigour and quality, and sustained. This must be complemented with teacher capability development, building school management and leadership capabilities, and parental and school accountability. These are boring and hard stuff, where quality is of essence, and also demands long-drawn and persistent struggle.

As I have blogged here and here, Edtech, while useful to some limited extent, may actually be becoming a big distraction. It may be distracting both the policymakers from making the correct choices and implementers from putting in the hard yards on persistent engagement on the basics. It may also be distracting teachers from focusing on their core work.

I will argue that if school systems in India put in even a fraction of the efforts and resources it is putting into Edtech on improving teacher capabilities and school leadership through training and coaching, the results could have been transformational. We need a single-minded focus on these, including the adoption of innovative approaches, if we are to achieve significant improvements in learning outcomes.

A detailed and practical agenda for school education reform is laid out here.

Capital wars to follow trade wars?

noreply@blogger.com (Urbanomics) — Sun, 13 Sep 2026 23:30:00 +0000

Are we entering an era where the competition for cross-border capital flows is no longer determined by market dynamics, but by the imperatives and whims of governments? More specifically, are we looking at capital wars? What does this mean for countries like India?

I blogged here last week arguing that financial repression and inflation will be a feature of advanced economies, especially the US, in the years ahead as they grapple with the massive stock of public debt. I also blogged here arguing that capital flows could be the next target for economic nationalism as countries compete to boost domestic investment and also keep rates low. Finally, I had written about the possibility of such a capital-flows squeeze while evaluating the early months of the Trump Presidency.

Consider the situation. On the one hand, countries are competing with each other to attract investments (domestic and foreign) in industry and services and mobilise capital for investing in infrastructure. This becomes even more important when faced with weakening economic growth. On the other hand, they must expand the pool of capital available to keep a lid on interest rates. The massive debt pile and the pressure on bond yields make this exigent.

This can have only one outcome — a tussle to retain capital at home and also compete aggressively for foreign capital. Monetary policy must invariably become subordinated to this objective. Capital wars are only a step away.

In fact, it may already have been triggered. Donald Trump has announced his intent to wage war against the bond markets, and his Treasury Secretary, Scott Bessent, has threatened traders betting against the yen, saying memorably, “I’m the house now”! These are clear clarion calls, and the pressure on the dollar and the US Treasury bonds can only rise in the years ahead.

While Trump 2.0 may have expedited these measures, there cannot be any doubt that these pressures were building up for a long time and have now come to a head. To this extent, the policy choices on financial repression are inevitable and will continue with any administration in Washington, albeit in subtler ways.

And this capital-focused nationalism is not unique to the US. Even sober countries like Japan, Canada, and the UK have called on domestic investors to keep capital at home.

Further, as Benn Steil has pointed out, another reason for the rising pressure on US bond yields is the changes in the profile of its holders. Whereas in 2007, 76% of the US Treasury Bonds were held by price-insensitive investors like central banks, today they hold just 43%, with the remaining being held by price-sensitive private investors like households and investment funds who demand greater returns as debt grows and inflation erodes purchasing power. The share of the latter will only grow over time, and the pressure will increase if Kevin Warsh goes ahead with his intention to further pare down the Fed’s securities holdings.

Martin Sandbu points to a very good analyst note by David Skilling of the Landfall Strategy Group on how the capital wars are likely to play out. He says that US fiscal challenges make financial repression and fiscal dominance increasingly likely, and the situation is complicated by the softening foreign purchases of US Treasuries and rise of US bond yields. He describes this as a regime shift in the international financial system.

There will be a US preference for imposing financing costs on foreign investors…Aggressive, transactional ‘America First’ measures to coerce foreign capital to finance US government borrowing are increasingly likely, an international form of financial repression… The US has required investment commitments as part of tariff negotiations with several countries. As US financing pressures grow, expect more coercive, scaled-up measures to be deployed, explicitly linking purchases of long-dated US Treasuries to US security guarantees, access to US tech, swap lines, and so on.
These US measures will cause tension with countries in Asia, Europe, and the Gulf that are implementing policy measures to deploy more domestic capital at home. Capital wars are the consequence, as increased US demand for capital intersects with a constrained supply. Coerced foreign investment is the likely near-term direction of US policy travel.

He points to three illustrative scenarios that highlight the uncertainty on the effectiveness of these measures.

Consider three illustrative scenarios: A ‘US-led tribute system’ scenario in which the US creates a financial/security/technology bloc, securing significant inflows into long-dated Treasuries that reduce yields materially. A ‘ruptured alliances’ scenario in which US partners resist US coercion and actively diversify, including reduced purchases of Treasuries. In ‘global fragmentation’, other countries (e.g. BRICS+) also reduce US exposure, causing higher yields and a weaker USD.

The graphic below is instructive insofar as, even as foreign Treasury purchases have declined sharply, US equities and corporate bonds have remained very attractive and have been sucking in foreign capital.

Further, as the US debt surges, investors are revising the unambiguous safe haven status of US Treasuries. This is reflected in the rising term premiums, the extra return demanded to hold long-term bonds instead of rolling over short-term bills.

So what does all this mean for India?

It goes without saying that all this poses formidable challenges to the Reserve Bank of India (RBI) and policymakers in India. India, being a capital-deficit country reliant on foreign capital to meet its capital needs for both investment and to achieve balance of payments, is especially vulnerable.

For one, the competition for capital means that there is likely to be a smaller pool of FDI available. This would be as much true of mature direct investments as of venture capital flows. In the case of the former, the wave of reindustrialisation and reshoring will be the imperative, and in the case of the latter, strategic considerations in a geopolitically hostile world will assume significance.

Second, foreign portfolio investments (FPI) are likely to become more fickle than earlier, with the added threats of recurrent ad hoc measures to restrain capital at home. The ambush sales of European bonds engineered by the US Treasury to mobilise resources (without selling US Treasuries) to prop up the yen are only a teaser. While Indian markets are already gradually integrating with the global financial markets and are vulnerable to sudden stops and capital flights, what makes the future different and more challenging is that now these episodes can be triggered by conscious policy choices of decision-makers in places like Washington.

Third, the result of any reductions in FDI and FPI will invariably be felt in the domestic bond markets in terms of rising cost of capital. As Skilling writes and the graphic on the rising term premium above shows, the reduced foreign demand for US Treasuries will put upward pressure on US yields and increase the global risk premium. The higher risk-adjusted returns on long-term US debt mean that investors will demand a higher return for investing in India and elsewhere. This will have a cascading spillover pressure on India’s domestic cost of capital and interest rates.

Fourth, all this will not make RBI’s monetary policy any easier. It will now have one more constraint to deal with, thereby eroding its policy autonomy. The US domestic policy actions, which are already having significant spillovers globally, will now have an even greater impact. Even strong domestic economic fundamentals cannot insulate India from the contagion of sudden stops and capital flight in response to US actions. RBI may have to keep defensive measures during these episodes.

Fifth, capital flows are certain to become another instrument of economic diplomacy, one where India has fewer levers. The US is likely to use this extensively, even weaponise it. At the least, there will be episodes of high activity, to the detriment of capital-deficit countries like India. Imagine a trade negotiation or a bilateral geopolitical support that is tied to India buying and holding a defined amount of US Treasuries. Holding US Treasury Bonds will now compete with purchases of Boeing aeroplanes and defence equipment as forms of diplomatic coercion, direct or subtle. The Mar-a-Lago Accord proposal, mooted by Stephen Miran and Robert Lighthizer to swap foreign holdings of US Treasuries for some form of perpetual bonds, must be seen as a precursor.

In a world where foreign capital becomes constrained, boosting domestic savings will become a matter of highest priority. This must be tied to the deepening and broadening of India’s financial markets. In this context, the resilience of the Indian stock markets in the face of a massive exodus of FPIs in the last three years, due to the robust inflows from the sharply increased pool of domestic investors, is a case in point. This will raise the bargaining power of domestic capital. Policy actions on both areas will be important.

On a positive note, the capital wars also provide India an opportunity to become an attractive alternative investment destination for the foreign capital that seeks to avoid the US for strategic reasons. This attractiveness will rise and make India stand out provided it gets its act in order and is able to sustain high growth rates. India could emerge among the few large, relatively fast-growing economies with deepening domestic capital markets.

India must also strive to move gradually from being a country that needs foreign savings to one that generates enough productivity and external earnings to finance an increasing share of its own investment. This means shifting from the cheap labour focus to one which aims at boosting capital productivity by delivering more of the same with less capital. This must be supplemented with significant expansion of exports.

In other words, capital wars increase the premium on countries that can mobilise domestic savings, attract the right foreign capital, and deploy both at high productivity. India’s focus should be to convert its enormous household savings pool into productive domestic capital formation while simultaneously building an economy capable of generating more external savings through exports.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 12 Sep 2026 02:07:45 +0000

1. A bond market story of the last two weeks has been the rise of the 10-year Japanese government bond yield above 3% for the first time since September 1996, following a weakening yen and an unprecedented bilateral market intervention with the US Treasury to shore up the currency.

The market expects a rate hike by BoJ from its current 1% to prop up the yen and also quell rising inflation. However, this would clash with the commitments of Prime Minister Sanae Takaichi for fiscal spending to boost the economy.

The pressure on yen and rising bond yields are also a matter of concern for the US, since it could trigger repatriation of the massive Japanese investments in dollar assets, including the holding of US Treasury bonds.

Japan is the top foreign holder of US government debt, with more than $1tn, much of it held by financial institutions... market concern that Japan’s enormous pension funds and life insurers, nursing tens of billions in paper losses on their bond holdings, could shift their investment strategies as yields at home become more attractive... Citi’s Takashima said life insurers had been waiting for yields on 20-year JGBs to hit 2.5 to 3 per cent but were still not buying at scale as they feared that prices could drop further.

2. This is an excellent article on baby diaper manufacturing in India. The two costliest items are not manufactured in India and are imported.

Further, there's an inverted tax structure.

At the 56th GST Council meeting on 3 September 2025, diapers were moved from 12% to 5%, effective 22 September 2025... But SAP sits under HSN 3906, taxed at 18%... Output at 5%, inputs at 12% to 18%... input tax credit piles up faster than it can ever be set off against output tax. The credit is not lost. It is refundable under Section 54(3), and from 1 October 2025 the government began granting 90% of such refunds provisionally. But refundable is not the same as available.

Diapers are covered under PLI, and it is ending up supporting contract manufacturers who import SAP.

Until an Indian chemical major commits to commercial SAP capacity, every rupee of PLI is subsidising the assembly of imported chemistry. We are building the world's fastest converting industry on someone else's molecules.

In this case, the PLI should target the SAP manufacturing in India. Supporting contract manufacturers to make what they are already doing does not require PLI. It underlines the point that PLI needs to focus on domestic value addition and not merely investment and sales. This requires more detail-based policy making.

3. Tata Capital Healthcare Fund appears to be doing what public innovation funds ought to be doing, de-risking new market segments in healthcare.

TCHF is not really in the business of spotting the next unicorn and riding it to a listing. It is in the business of manufacturing acquisition targets. It finds a chronic, non-negotiable demand, dialysis, cancer, joint replacement, wraps a proven clinical model in Tata credibility, scales it into Bharat where nobody else will do the asset-heavy work, de-risks the operations, and hands a finished, cash-generating, regulation-cleared asset to a global consolidator or a domestic roll-up desperate to enter that exact niche...

TCHF works because of a stack of things that have nothing to do with money: extreme sector focus, operational depth, brand-as-regulatory-passport, a structure that insulates it from its own parent, and the patience to build assets strategic buyers are forced to buy. Take any one away and the model wobbles... The winners in corporate venture will look... more like TCHF: narrow, patient, operationally heavy, and quietly building things the giants of their industry will one day have to acquire.

Jayant Mundhra's Substack is excellent.

4. Is AI exposure driving students to pivot away from Computer Science?

Also on AI, the latest PISA student learning outcomes survey findings show uniform declines in reading and math.

The new report shows that reading scores across the OECD have fallen by 25 points and maths by 22 points since 2018. “Given that 20 score points is roughly equivalent to a year of learning, this implies that a majority of 15-year-old students across the OECD in 2025, on average, were performing at a level typically expected of 14-year-olds,” according to Pisa. Schleicher linked the decline in the latest scores to the dominance of distracting short-form videos on platforms such as Instagram and TikTok, as the report suggested that “digital distraction” is harming education across the world. “We cannot say for sure, but skimming social media feeds and rapidly processing information may be contributing to worsening ability and motivation to engage with complex texts and data,” the report said.

5. US labour-capital share of output - rising corporate profits amidst falling wage share.

Pre-tax earnings hit an annualised $4.8tn in the second quarter, or 18 per cent of national income, according to Bureau of Economic Analysis data, the highest share since the aftermath of the second world war. Employees’ share from wages and benefits fell to 60 per cent, the lowest level since the 1950s... Bumper returns largely benefit richer Americans, who receive much of their income from investments, while middle- and lower-income households rely more heavily on pay cheques. Inflation has also outpaced wage growth, causing real hourly earnings to fall by 0.2 per cent in July versus a year earlier.

6. A global whisky glut, or whisky loch, amidst rising consumption in India.

The amount of whisky maturing in casks has soared from less than 400mn litres a decade ago to around 1.4bn litres this year, or 389mn cases — enough to meet current consumption levels for three years, according to Martin Purvis and Duncan McFadzean’s Commercial Spirits Intelligence newsletter. That has caused many of Scotland’s distilleries to curtail output by more than a third, insiders say... Today’s glut is the result of increasing production during the 2010s, which led to an excess of casks maturing during times of global economic uncertainty.

7. California, the bastion of liberalism, struggles to build.

A high-speed rail line that voters approved in 2008 but that has yet to lay a track. A large housing project outside Los Angeles and the redevelopment of a Navy yard, both in planning stages for decades. The state has arguably the nation’s worst housing crisis, with rent and home prices that far exceed the national average. The high cost of living, combined with strict environmental and land-use regulations, has led to a steady migration of companies and residents to less expensive states. The main problem, Mr. Metcalf continued, is that California’s overlapping regulatory processes, scattered among state and local agencies, make it nearly impossible to approve — or even outright deny — a project. Even when the governor or state legislators get behind an idea, local governments often have effective veto power. Delay becomes the normal course of nonaction.

8. London's experience in reducing knife crimes.

Knife crime rose dramatically in Britain from 2017, especially among teenagers... Hospitalisations for “assault by sharp object” have fallen by a third in London since their peak. Knife-related homicides have shrunk by a half. Last year teenage homicides in the capital fell to their joint lowest level (similar to 2012) in almost 30 years... As English politicians scrambled for answers during the 2017-19 “epidemic”, Lord Sadiq Khan looked to Scotland. In the previous decade Glasgow, once labelled Europe’s murder capital, had achieved impressive reductions in violent crime. One reason was the roll-out of the Scottish Violence Reduction Unit (VRU), which aims to prevent violent crime by bringing the police, schools, hospitals and sports clubs together to identify at-risk children and direct them away from crime. Between 2008 and 2018 Scotland’s VRUs were credited with bringing about a 38% fall in homicides and a 43% drop in attempted murders and serious assaults—many of them knife-related.

Lord Khan announced England’s first VRU in London in 2018. Today there are 20 such units across England and Wales, covering areas that account for 80% of all knife crime. A recent Home Office review found that England’s VRUs caused a 12% fall, since 2019, in hospital admissions for violent assault among the under-25s. That is modest compared with Glasgow, but the Home Office looked only at the national average. Violent crime has fallen most in cities like London—dense urban areas where the model is easiest to implement.

9. The state of gender empowerment.

In India violence against women is so normalised that nearly 40% even of women think a husband is sometimes justified in beating his wife. In Mali the figure is nearly 70%... In South Asia only a third of women are in the labour force; in the Middle East and north Africa, only a fifth are. Since 1990 the share of labour income that accrues to women has risen from 35% to 44% in liberal France; in patriarchal Pakistan, from 1.5% to a still-woeful 9%. Removing the barriers to women working would raise income per person by a fifth in many countries, estimates the World Bank—a bigger economic benefit than avoiding a typical civil war...

Yet even the most sexist laws can be scrapped, as Saudi Arabia has shown. Before a series of reforms that started in 2011, women there were barred from all but a handful of jobs and not even allowed to drive. Now they are free to work, drive and shun the hijab if they choose. The share of women in the labour force has nearly doubled since 2010, from 18% to 34%. That is startling progress for a kingdom many thought hopelessly stuck in the past—even if there is still a long way to go.

Deregulation - chainsaw Vs the wood-splitting maul

noreply@blogger.com (Urbanomics) — Fri, 11 Sep 2026 09:12:07 +0000

I have been thinking about deregulation. I find myself recalibrating priors.

There are perhaps two kinds of it we see globally. At one end is the loud, politically driven chainsaw approach of the likes of DOGE and Argentina’s Javier Milei. At the other end is the cautious tinkering at the margins (à la using the wood-splitting maul) that is the feature of deregulation efforts driven by bureaucracies.

The latter can only get you so far, and there is a need to strike the right balance, or sometimes even verge towards the chainsaw.

Before we dive deep, the FT has an excellent long read on Javier Milei’s extraordinary deregulation efforts in Argentina, which is now focused on freeing up the oil and gas and mining sectors to make them the engines of Argentina’s economic growth.

More specifically, he is intent on exposing the corporatist economic structure of Argentina, centred around Buenos Aires, and established by the populist policies of Juan Perón to a sharp burst of foreign competition.

First, on the nature of deregulation.

In April, Congress passed a law that could provide a major impetus to the mining sector by reducing what the government says were excessive restrictions on projects near the country’s many glaciers... Martín Pérez de Solay, head of the mining conglomerate Glencore in Argentina, says the country has seven mining projects under way that are “world-class” and believes the country could bring on new annual supply of 1.5mn-2mn tonnes of copper over the next decade — about a third of the output of neighbouring Chile, which is the world’s largest producer. The boom in oil and gas is already under way. The US government estimates that Argentina has the second-largest reserves of shale gas in the world, most of it in the Vaca Muerta formation in the Neuquén Basin in the south of the country. Investment is accelerating sharply, partly as a result of a new legal framework introduced in 2024 that provides tax breaks and other incentives. Wood Mackenzie, the energy consultancy, estimates that the pipeline of new projects now exceeds $100bn. “Argentina is on the cusp of a shale revolution,” it says, comparing the atmosphere to west Texas in the early 2010s, at the start of the US shale boom.
Exports in mining, energy and agriculture have already increased to record levels under Milei, beginning to ease the dollar shortage that has underpinned Argentina’s chronic economic instability. Federico Sturzenegger, the minister for deregulation and one of the architects of the plan to liberalise the economy, says that the cumulative impact of recent investments will allow Argentina to triple its exports in the next five to six years... Sturzenegger says that access to cheap energy from shale oil and gas will lead to a new “industrial boom”, which could include sectors such as fertilisers and petrochemicals.

And it could have profound long-term consequences, including shifting the geographical centre of the country’s economy.

The sectors Milei champions are in some cases more than 1,000 miles away — mining in the far north, or oil and gas production to the south in Patagonia. The government talks about millions of workers moving out from Buenos Aires to outlying provinces in the coming decades... Buenos Aires, where almost 40 per cent of Argentine voters live... In the long run, he estimates that about 4mn people will leave the Buenos Aires area over the next 30 years — with 2mn decamping to the oil and gas region in Patagonia and another 2mn heading for the mining region in the north. “In the second half of the 20th century, there was a big migration from the interior to Greater Buenos Aires at a time when Argentina was one of the most closed economies in the world,” he says. “This process is exactly the opposite; it opens up the economy and generates competitiveness from exports and the population gradually reverts to the interior.”

However, the deregulation, being more like a shock therapy, is also resulting in the hardships and problems its critics have long predicted.

The excitement among resources companies, however, is mirrored by rising pessimism among the domestic-facing industries that employ millions of Argentines. Manufacturing, construction and retail have all contracted or stalled under Milei even though economists surveyed by the central bank predict the economy will grow 2.1 per cent in 2026. According to government figures, about 3,400 manufacturing businesses have closed since late 2023 — more than 10 per cent of the total. In the formal labour market, over 240,000 jobs have been lost, a fall of nearly 4 per cent, although this drop has partly been offset by growth in the informal labour market where employees have minimal protections.
Textiles have been one of the hardest-hit industries, as Milei’s tariff cuts open Argentina to a flood of cheaper foreign clothing, including via Chinese e-commerce sites such as Shein and Temu... manufacturers... claim the currency is overvalued in order to curb inflation; others say Chinese producers are using Argentina as a dumping ground for their surplus output... The owner of a large textiles business in Buenos Aires says the government has set companies like his up to fail by opening them to competition from imports without dismantling the high taxes and cost structures put in place under the protectionist Peronist model... Martín Rappallini, head of the Argentina Industrial Union, says that Argentine companies face an annual tax take equivalent to 56 per cent of the formal economy, the highest burden in Latin America... Real wages have failed to fully recover from a sharp drop in 2023, when inflation surged into the triple digits. Disposable incomes have fared even worse as Milei has scrapped subsidies for energy, water and transport, falling 17 per cent in real terms since early 2023.

Clearly, Milei has bitten the bullet with deregulation. There are none of the standard hesitations of bureaucracy restraining the political choice that has been made. Frederico Sturzenegger, an economist-politician with considerable government experience, is carrying out the Milei mandate.

There will be costs, with its suffering and losers. Milei may not even survive to fight the next battle. But it can be legitimately argued that when a system is entrapped in a very bad equilibrium, restrained by powerful entrenched interests, it is unlikely to do any more damage than business as usual to break free and deregulate extensively.

India is not Argentina. But there are enough pockets of well-settled bad equilibria that survive only due to a systemic preference for the status quo arising from lack of political appetite and bureaucratic restraint, itself perpetuated by a lack of stakeholder demand and accountability and poor quality of public debates and actions on the associated issues. While bureaucracy gets the blame for all the ills, there are others equally or more culpable. Chalta hai at worst, tinkering at the margins at best, has been the norm.

I can think of a few areas where taking the chainsaw (as against the tinkering using a wood-splitting maul) is the need of the hour. These are just randomly picked top-of-head-recall examples, and there will be many others, even more relevant or important.

A first-order deregulation measure would be to prepare a negative list of activities from which the government should stay away. It was a leap of faith two decades back when state governments in India decided to stop purchasing their own vehicles, recruiting drivers and Class IV employees, and generally outsourcing services. They were brave decisions then. The same appetite, to a much higher degree, must now be summoned to exit other areas. What good can be achieved for government agencies to be entrusted with the development of land and real estate, or develop solar and thermal power generation, or use public funds to compete with private investors, or generally make anything that is widely available in the market? Pure public goods, demonstrated market failures, and strategic considerations must be the only reasons for governments being directly involved in activities.

One of the highest-impact areas for reform would be a wholesale deregulation of urban planning norms. This would involve significantly easing (or increasing) development control limits, allowing much greater flexibility to landowners and developers, generally avoiding micromanagement with tight prescriptions, and proportionality in regulation depending on the nature of the property and use. This would entail radical upending of the prevailing paradigm of urban planning, a task that goes far beyond the imagination of even the most progressive of domestic planners and policy makers.

On the ease of doing business, the real disruption can happen only when we make the process of starting, expanding, diversifying and closing a business, exporting goods, etc., essentially automatic unless a genuine public-risk threshold is crossed. This would entail essentially culling several gatekeeping rules, or at least confining the rigorous gatekeeping only to a small set of prioritised categories. Deregulate extensively for all but the subset of higher-stakes categories, thereby making life simple for the vast majority.

Another deregulation would be to dramatically reverse the inverted duty structure on inputs and outputs that inflicts serious costs on manufacturing and trade. This structure makes manufacturing and exports uncompetitive, entraps industries in bad equilibria, creates numerous perverse incentives, and also ends up creating distortions in areas like the utilisation of GST tax credits.

More specific areas of doing business in a globalised world deserve radical overhauls. In gatekeeping areas like food safety, product standards, communications security, etc., where our own regulatory regimes have struggled to keep pace, it may be more appropriate to embrace global standards through the likes of mutual recognition agreements. The only caution should be to ensure that they do not discriminate against domestic stakeholders.

Human resource management within the government is another area which requires radical deregulation. The tightly prescribed one-size-fits-all recruitment rules are a relic of a bygone age, and must be revised wholesale to be made fit-for-purpose in the age of AI and disruptive changes. Even with all its risks, the recruiting entities must be given significant flexibility to formulate these rules as per their requirements. In general, the procurement rules are aimed at the median circumstances and stymie the growing long-tail scenarios. It is precisely the opportunities lurking in these long-tail scenarios that have the highest transformative potential, which are now blocked out by these procurement rules.

Two specific industries where deregulation can have potentially transformational impacts are in the areas of clinical trials and other processes for drug development, and in oil and gas exploration. In both cases, the outcomes of all policy engagement to date have generally been disappointing. It therefore stands to reason that it cannot get any worse with deregulation.

Arguably the most disruptive deregulation would be to delegate functions, funds, and functionaries to local governments. Decentralisation across levels of government can be transformational. This will certainly create abuses and excesses, but will lay the foundations for positive long-term change.

More generally, as an agenda for those interested in taking forward effective and sustainable deregulation, here is a project.

I can think of six fundamental principles that are the heart of regulation, and the shift required in them. They involve moving from the process of permissions to one involving registration, ex-ante approval to ex-post accountability, one-size-fits-all rules to risk-based regulation, government inspections to self/third-party certifications and audits, protecting incumbents to protecting competition, and regulating inputs and processes to regulating outcomes.

Instead of expending energy articulating principles, holding workshops, and writing opeds, it may be useful for those interested in getting governments to deregulate to prepare drafts of specific regulations that incorporate these new paradigm principles and make them available in a transparent manner (indicating the changes as proposed) as the agenda for engagement with policymakers and for public debates. Thanks to the likes of Claude, the task becomes easier, though getting the details reasonably credible is still a painstaking process of discussion and iteration. In a large country like India, all it takes is for one among several governments to make the leap of faith on deregulation.

I’ll blog on this at a later occasion.

In all these cases, there will be an avalanche of protests and stiff opposition. There will be scaremongering of all kinds that would restrain even the boldest of bureaucrats. Hell might break loose in some cases. In electoral economies, the political economy of such costs can be daunting, as Milei is finding out.

For sure, the costs will be real when looked at from narrow and limited time perspectives. But it is the medium- and longer-term that should be of interest. There will be capture by vested interests, exploitation, corruption, wastage of public resources, and abusive practices. But they are unlikely in the aggregate to be worse than the slow-moving dysfunctional train that we have now.

In a famous essay, The Principle of the Hiding Hand, Albert Hirschman articulated the hiding hand principle as a form of beneficial ignorance that helps planners start projects they would otherwise have avoided due to uncertainties and risks. He points to the power of unseen creativity that would emerge to solve these unexpected challenges. Likewise, it is required to trust the hiding hand to make the leap on deregulation and be prepared to address the egregiously bad outcomes that invariably emerge.

While at it, it is pertinent that there are also areas where taking the hammer on enforcement is equally required. Tukaram Munde’s strident ongoing enforcement of food safety law is a case in point. Excesses and apparent disproportionality of enforcement are par for the course with such endeavours in ultra-permissive systems. Here too, the wood-splitting maul is inadequate, and the chainsaw is necessary for any meaningful dent in the problem, even with its collateral costs.

Update on the emerging AI economy

noreply@blogger.com (Urbanomics) — Wed, 09 Sep 2026 02:01:14 +0000

This post compiles a few articles on AI’s emerging impact on the economy.

If the chatter is to be believed, AI is eating the economy. One striking graphic on the importance of AI firms came from John Mauldin’s weekly newsletter.

Nowhere is AI’s role in economic growth more pronounced than in the US, contributing more than a third of US corporate investment.

Of course, the most salient manifestation of the outsized role of AI is in the stock markets (notwithstanding some pullback).

The McKinsey Global Institute identified 18 arenas of future growth, in which they placed what they described as the AI foundation, consisting of three industries - semiconductors, cloud services, and AI software and services - at the top.

They mapped the economic profit across the chip and compute value chain, with profits being concentrated in chip designers, foundries, cloud providers, and now memory.

In what could have serious implications for competition, the report highlights the ever-tightening linkages downstream of the chip value chain. These linkages also raise entry barriers across the ecosystem.

It identifies nine omniscalers - Alibaba, Alphabet, Amazon, Apple, Huawei, Meta, Microsoft, Samsung, and Tesla - as investing and dominating across the 18 arenas. The average omniscaler participated in six arenas and is rapidly expanding and deepening across and within arenas.

These omniscalers generate more cash and invest more than others in the same arenas and those in other industries.

Both in terms of market capitalisation and revenues, US firms dominate across the 18 arenas.

In revenues, US firms generate over 50% of the revenues in these arenas, with those in the Greater China area (China and Taiwan) contributing 30%. Another threat to competition is the adjacency of arenas and the possibility of the omniscalers and other dominant incumbents in an arena also shifting to an adjacent arena.

While AI dominates investments and equity markets, especially in the US, there is also growing interest in sectors that are by nature insulated from interest in sec AI development.

Josh Brown, chief executive at Ritholtz Wealth Management in New York, has coined the term Halo, for Heavy Assets, Low Obsolescence, to signify sectors which have business models difficult for any AI model to replicate.

These can be capital-intensive electric utilities, miners or oil companies, groups such as Italy’s Enel, or Rio Tinto and Shell in the UK… Halo businesses combine substantial physical capital with long-lived economic relevance. That means they should have sustainable business models in a world where “AI bots” could not just replace people but also any software programming and intellectual property previously thought to complement this new transitional technology… Commodities, for example, had already begun to attract interest from investors last year, helped by the weakness of the dollar.

Across the world, asset-heavy sectors like utilities, mining, and energy have been good investments, with their MSCI All Country World price indices outperforming the broad world index, even before the Iran war began in March.

On a historical scale, where does the ongoing AI capex stand, as of now?

The Economist has an article that points out that the ongoing AI capex boom may well be the largest investment surge in history. The biggest US technology companies that spent $450 bn on AI infrastructure in 2025 are expected to spend $900 bn this year, and another $1.4 trillion in 2027!

However, as the folks at a16z show in a blog post, while the AI-related arenas are dominating today and the capex surge (so far) is unprecedented, they are not in the same league as the railways or finance were in their respective periods of dominance in the nineteenth century.

One caveat here is that the 1900 economy was basically textiles, iron, coal, steel, and tobacco, the rails to transport them, and the banks to finance them, whereas today these sectors are a tiny fraction of the output.

In fact, even the $5 trillion estimated to be spent on AI and AI-related infrastructure by 2030 pales in comparison to that made on railways.

By 1890 railway companies in the US alone had issued about $5bn worth of bonds. Adjusting for inflation that equates to about $180bn in today’s money. However, this understates the enormous scale of the undertaking, because the US economy was much smaller then. In 1890, $5bn was about one-third of America’s GDP, so the investment spree was arguably the equivalent of spending over $10tn today. It also resulted in an epic, generation-defining crash. In 1873, Jay Cooke & Co, the premier investment bank run by America’s dominant financier at the time, suddenly collapsed under the weight of unsold railway bonds. This caused a giant financial crisis and ushered in what was long known as the Great Depression, until the even larger one in the 1930s.

There are already questions being raised about the viability and sustainability of the AI capex surge. This is most salient in the valuations of the primary AI firms, which have pulled back sharply in recent months and lag many broader market indices this year. The Economist article discussed above has some very interesting revenue numbers about what would be required to justify such massive capex.

A rough calculation finds that covering AI capex through identifiable AI income requires revenue on the order of $2.5trn per year, more than tech’s entire combined revenue today. Only a small minority of consumers seem willing to pay for personal AI subscriptions, so the real money will have to be made from selling to enterprises…For AI revenues to soar, more firms will have to use AI (what economists call an increase at the “extensive margin”) and use it more deeply (the “intensive margin”)… If, say, a third of firms across the OECD club of mostly rich countries adopt AI, then to generate $2.5trn of AI revenues the firms would have to spend about $100,000 a year on average.

Against this requirement, the actual revenue estimates are in the range of just $150-200 bn!

Further, the signs of uptake and growth are not very promising, especially given the multiples of growth required.

In May, economists at the Census Bureau… found that about 33% of people now use AI at work, down from a peak of 46% in mid-2025… Researchers at the Bundesbank find that about half of German firms using AI do so for 5% of working hours or less. Ivan Yotzov of the Bank of England and his colleagues estimate that the average American executive uses AI for 1.7 hours a week—enough time to create a decent PowerPoint presentation, but not much more. For these dilettantes, free or ultra-cheap AI models are often good enough. Official data from Britain suggest that close to half of businesses using AI do not pay for it, presumably making do with the free tier of an American model or an open-source Chinese one… The median firm’s monthly spending per worker in June, however, was $10.66. Intuit, a software firm which tracks small and medium-sized businesses in America, Britain and Canada, reports that about one in ten has paid for a dedicated AI tool.

Furthermore, while the capex till date has been mostly driven by the large free cash flows of the omniscalers, it is now increasingly reliant on debt, drawn from risky segments like private credit markets. As a result, the four Big Tech firms are all expected to register their first deficit in years.

And all this comes at a time when the richer world's citizens appear more wary of AI than those in the developing world.

And this

According to the Annenberg Public Policy Center, 61 per cent of Americans now oppose one being built in their backyard. The politics of the upcoming midterm elections reflect this, with candidates from both parties trying to portray politicians who favour the building of data centres as in hock to big corporations.

As a result, the regulatory free run that the AI industry has had, especially in the US, also thanks to the Trump administration, may be ending. It now stands on the substance of the technology to demonstrate its value proposition to drive the multiple-fold growth (and that too in a manner that accommodates the concerns of the political economy) required to justify the massive capex commitments. And interest rates are rising, and debt service costs are mounting. All this makes things even harder.

Some thoughts on Chinese manufacturing dominance and deglobalisation

noreply@blogger.com (Urbanomics) — Sun, 06 Sep 2026 23:30:00 +0000

Richard Baldwin has multiple blog posts that mine the data to add nuance to the Chinese manufacturing dominance, which, while undoubted and growing, includes some important subplots.

For one, rapid productivity gains have widened China’s competitiveness gap but also reduced manufacturing employment, though it appears to be reversing slightly or stabilising since 2019, with Xi Jinping’s push toward high-technology industries and the Make in China 2025 campaign. But while manufacturing employment has been declining in the advanced economies, it has been rising in the emerging economies (excl China).

The rise in emerging economies is especially pronounced since the pandemic. It has also been inching upwards in the advanced countries too.

Putting both together, Baldwin makes the case that since 2013, while China has been shedding manufacturing jobs, losing about an eighth of its base, emerging economies have been gaining and advanced economies have plateaued. However, with 134 million factory workers, China has twice more than the advanced countries combined.

Among the gainers in this giant manufacturing jobs reallocation, Vietnam, Nigeria, and Indonesia lead. Nigeria and Pakistan are surprising candidates. India has been a notable laggard. Together, the developing countries added 22 million.

China’s export-supported factory employment is down 16% since 2013 and its share of the world total has fallen from 37% to 30%… China’s factory employment is now doing what the advanced economies’ did decades earlier: shrinking as productivity rises and as labour-intensive stages migrate to lower-wage locations.

This decline in Chinese manufacturing employment comes alongside a steeper decline in its manufacturing value added as a share of GDP. Its manufacturing GDP share has fallen over 15 years, from a peak near 32% in the mid-2000s to under 25% today.

However, declines in manufacturing employment and share of value addition do not mean China’s dominance and vice-like grip on manufacturing is on the way down. Far from it. In fact, China’s manufacturing merchandise exports as a percentage of world GDP have been rising, even as they have declined for the rest of the world.

In fact, the percentage has nearly doubled in the same period. It has also risen for Vietnam and India. The advanced countries have been the clear losers.

So, what explains this apparently contradictory trend of deindustrialisation in employment and value addition, co-existing with the doubling of global manufacturing export share?

The answer appears to lie in productivity. Over two decades, the price of a unit of China’s manufacturing value added fell by nearly half, which explains the whole of the decline in value addition by manufacturing.

It reflects the most consequential fact about Chinese manufacturing: Chinese goods are getting cheaper at an astounding pace. Fast enough to distort the whole economy, maybe even the whole world economy. That price collapse is also why the Chinese are such fearsome competitors globally. It is why the rest of the world’s industry feels squeezed, and why politicians are responding with plans to hobble Chinese exports.
… there is a China-specific factor that is driving down manufacturing prices even faster. In China they call this competition “involution.” If you think the competition is tough outside of China, you should see it inside the country. China experts talk about the ruinous internal scramble in which too many domestic firms, egged on by rival local governments, drive down prices until nobody makes money.

This comes out clearly if we map the nominal and real price shares of manufacturing value addition. Since about 2014, the manufacturing sector has grown at the same real rate as the economy as a whole.

The Chinese economy has made much more with a smaller set of resources.

There is no doubt that the expansion of the Chinese manufacturing sector has been an era-defining phenomenon. The rise can be seen in the red line in the chart below. Real manufacturing output in 2025 is more than six times its 2005 level. That’s amazing. That’s the China shock 1.0 and 2.0 in a nutshell. Over the same twenty years, the whole economy (the grey line) grew only four-and-a-third times. So, manufacturing did outrun the economy. But only up to the mid-2010s.

Finally, he disputes the oft-cited deglobalisation argument. He points out that while the global manufacturing trade ratio fell by 2.6% in the 2008-22 period, it rose slightly by 0.3% if we exclude China.

The main contributor was China’s GDP growing faster than its manufacturing exports.

China’s manufacturing exports boomed, but its GDP boomed more. China’s share of world manufacturing exports rose from 11.5% in 2008 to 19.3% in 2022. China’s share of world GDP went from 7.2% to 17.9%. Exports relative to China’s own GDP fell from 24.2% to 16.0% as it morphed into a normal mega-economy and became its own best customer.

Another driver of this was the reshoring of supply chains into China. However, this deglobalisation by China did not mean similar trends elsewhere. The rest of the world expanded the global value chains in their manufacturing.

China’s domestic value-added share fell from 83% in 1995 to 72% in 2004, as the processing-trade boom stuffed Chinese exports with imported parts. It then climbed steadily to 81% by 2022. From the 2004 trough, that is nine percentage points of genuine input localisation… For the world excluding China, the domestic value-added share moved the other way: 68.7% in 2008 to 66.4% in 2022. Everyone else’s manufacturing exports became slightly more dependent on foreign inputs, not less. If you special-case China, there hasn’t been any localisation of manufacturing. The domestic content share has not risen and seems to be continuing to fall.

It would be useful to disaggregate the value addition destinations of the manufacturing exports of countries excluding China. It will not be surprising that a significant share of that value addition is coming from China.

So, not only is China increasing the localisation of its own manufacturing, but it is also capturing a greater part of the value addition of its trade partners’ exports.

Baldwin also points to how global export volumes continue to rise unabated, thereby contradicting talk of deglobalisation. He says that world trade never stopped growing, but only stopped outgrowing the world economy, pointing to a deceleration but not a reversal.

None of these nuances and qualifications take away from the reality of the world economy’s China problem. Its manufacturing dominance and export dumping is among the biggest problem facing the world economy.

China inverts the conventional wisdom of a large developing country in its development trajectory being a large importer of goods and services. Instead, even as its own market remains largely walled off, it has become a massive exporter of components and goods spanning the full spectrum of sophistication.

China also contradicts the orthodoxy of developing countries vacating lower-skilled industries and moving up the value chain as they develop. Apart from some limited vacation of space, as discussed above, China has uniquely retained its competitive advantage across the value chain of industries. Its competitive advantage spans across sectors, supply chains, and value chains.

This has also meant that even as the world has globalised supply chains, China has ended up increasing its localisation. As mentioned above, this means that China’s manufacturing dominance is boosted by both the localisation of its own manufacturing and by capturing an increasing share of the rest of the world’s supply chains.

All this has meant that China neither offers its large consumption market nor vacates any significant part of the manufacturing landscape for its trading partners. Further, it wants to use the rest of the world as a dumping ground for its heavily distorted manufacturing industry. Furthermore, it is now showing an increased willingness to weaponise its manufacturing dominance not only for national security and strategic reasons, but to also prevent efforts to diversify supply chains away from the excessive dependence on China.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 05 Sep 2026 08:31:42 +0000

1. Excellent essay by William Dalrymple about the East India Company, drawing parallels with Big Tech today.

By the end of the 18th century, the East India Company had created a vast and sophisticated administration in India and built much of the London Docklands. Its annual spending in Britain — around 8.5 million pounds — equaled about a quarter of the British government’s total annual expenditure. In India it collected taxes, minted coin, administered justice, ran its own courts and diplomatic service, flew its own flag, negotiated treaties and made war on sovereign states, all in pursuit of increased dividends. An international corporation that began trading spices ended up transforming itself into a colonial superpower... For much of the 18th century it was staffed with as few as 35 people, in a building five windows wide. Yet in India the East India Company owned a private army that by 1803 numbered some 200,000 men — roughly twice the size of the standing British Army. Its stock was a pillar of British public finance, and its profitability and solvency were matters of state...

Its lawyers and lobbyists and parliamentarian shareholders slowly and subtly worked to use its immense wealth to influence and subvert legislation in its favor. In 1693 the company was discovered to be using its shares to buy influence with prominent members of Parliament and ministers. The following parliamentary investigation, the world’s first corporate lobbying scandal, found the East India Company guilty of bribery and insider trading. After that, the company became more subtle and instead backed candidates favorable to its policies. It arguably invented corporate lobbying, that alchemy by which the interests of a company somehow magically become the policies of the state. Around one in 20 members of Parliament sat on the East India Company’s board, and more than a fifth of the company’s directors sat in Parliament at some point; about 40 percent of members of Parliament were shareholders.

2. The Netherlands is Ground Zero for electricity grids that are hitting capacity constraints to evacuate the renewable capacity becoming available.

Since July 1, the grid operator has frozen new connections in Utrecht to avoid power cuts... Fewer housing projects can be developed, while plans to electrify local industry and install faster chargers for electric vehicles are on hold. Utrecht’s predicament could become the norm across the EU unless governments learn from its example and invest heavily in grids to support the bloc’s shift from fossil fuels to cleaner technologies... The EU’s fifth-largest economy has more solar panels and electric charging points per person than any other country in the region... But its failure to invest fast enough in pylons, cables and substations to support the transition means the queue of companies waiting for a power connection increased from 12,000 to 15,000 last year. Only 700 companies received a connection in 2025... Ember research suggests that in countries such as Austria, Poland, Portugal and Romania, there is enough grid capacity for less than 10 per cent of the renewables projects planned by 2030.

3. The FCNR(B) deposit scheme inflows in perspective.

Gross inflows on the current account are at $1.1 trillion a year. On the capital account, those are $1.7 trillion a year. Put together, we are getting inflows and outflows of about $2.8 trillion a year or about $11 billion a day. A comparison against conditions in the 2013-14 currency defence is instructive. At that time, gross inflows were $0.55 trillion and $0.52 trillion on the current and capital accounts, respectively, i.e. $4.3 billion a day. Today’s India is 2.6 times bigger. The FCNR (B) stratagem relies on using public money to defend the rupee. The state subsidises foreign borrowing to attract dollars. This tool requires large-scale borrowing to make a material difference against a gross external flow of $11 billion a day. A commensurately large fiscal cost falls upon the exchequer. The Ministry of Finance will choose how much it is willing to spend in exchange for this round number.

And its total cost could exceed $10 bn for the RBI

Under the Foreign Currency Non-Resident (Bank), or FCNR(B), program, the central bank agreed to shield banks from losses if the rupee weakens, through a favorable currency-swap facility estimated to cost 3 per cent-3.5 per cent a year. It will also need to absorb some of the extra cash pumped into the banking system as banks exchange the dollars they raised for rupees. The two operations could cost as much as ₹1.2 trillion ($12.7 billion) over five years, according to an analysis by Madhavi Arora, economist with Emkay Global Financial Services.

4. The rise and rise of bond yields.

5. India cash transfer schemes facts.

The Sixteenth Finance Commission estimates that unconditional transfers by states increased from ₹73,099 crore in 2018–19 to ₹2.63 trillion in 2023–24 and are at ₹4.14 trillion in 2025–26. Large-group cash transfers alone are projected at ₹.96 trillion, accounting for 47.4 per cent of all unconditional transfers, up from roughly 16 per cent in 2018–19. Social-security pensions have also risen in absolute terms, from ₹44,453 crore to a budgeted ₹1.58 trillion, but their share of unconditional transfers has fallen from 60.4 per cent to 37.9 per cent; the share going to farmers has similarly declined from about 24 per cent to 14.7 per cent. This implies that states are not merely expanding welfare but are shifting their composition towards broad category-based payments that claim an increasing share of fiscal space.

6. Europeans pull out their gold reserves from the US.

The Dutch central bank has shifted more than 78 tonnes of gold from New York to London in a politically sensitive move, citing “increasing geopolitical unrest”. The transfer follows calls from European politicians and taxpayer lobbyists to repatriate gold reserves from the US, warning that an unreliable American government under President Donald Trump may otherwise seize them amid growing transatlantic tensions... The move follows a similar decision by France, which removed all of its gold from the New York Federal Reserve between July 2025 and January 2026. François Villeroy de Galhau, the governor of the French central bank at the time, said then that the move was not politically motivated. Gold last year overtook US government bonds as the world’s largest reserve asset, according to ECB data, but some central banks are becoming increasingly skittish about storing gold in the US.

7. Interesting trends in gold prices.

For the first two decades of this century, a 1 percentage point move in US real rates typically coincided with a roughly 14 per cent move in gold in the opposite direction. That relationship ended in February 2022, when western governments froze Russia’s foreign exchange reserves. Reserve and asset managers globally were left confronting a simple question: if $630bn held in Treasuries, Bunds, gilts and other bonds could become inaccessible overnight, what constituted money? Their answer was gold. Emerging market central banks and sovereign funds have since increased gold allocations from 5 to 7 per cent of reserves in 2022 to 11 per cent today, still short of the 26 per cent held by developed-market peers. Between March 2022 and October 2023, US five-year real yields rose more than 4 percentage points. Based on historical relationships, gold should have fallen about 55 per cent; instead, it rose 7 per cent. Over the following two years, real yields fell less than 1 point while gold rallied 110 per cent. Gold is now far more responsive to falling real yields and less sensitive to their rise.

8. Early evidence of job losses in India's IT industry.

9. Shyam Saran describes the efforts being made by China to circumvent the US-controlled SWIFT and other cross-border financial flows management systems.

The mBridge project is a network of the central banks of China, the Hong Kong Monetary Authority, Malaysia, Thailand, the United Arab Emirates, and Saudi Arabia, who have linked their central bank digital currencies (CBDC) on a blockchain ledger system pioneered by China, to allow virtually instant cross-border financial transactions. The pilot phase of mBridge is now over and its commercial launch is imminent... mBridge does away with the correspondent banking system... mBridge enables escape from sanctions... One should consider mBridge as only one component of the Chinese efforts to achieve the internationalisation of its currency, the yuan. There are parallel institutional and procedural tracks.

One is the Cross-Border Interbank Payment System (Cips), which provides both an inter-bank messaging system like SWIFT and a clearing and settlement system. It does not seek to supplant SWIFT, but provides an efficient alternative, taking advantage of China’s role as the world’s largest trading nation and increasingly as a significant source of investment. It makes sense for partner countries to opt for yuan-designated transactions to avoid exchange risk. Increasingly Cips also avoids sanctions risk since, unlike SWIFT, it is not subject to US or Western regulation and control. This is why both Russia and Iran now use Cips almost exclusively for their cross-border financial transactions.

10. Excellent op-ed by Ajanta Krishnamurthy about the premiumisation of everything we consume.

A biscuit is no longer a biscuit. It is handcrafted, slow-baked, perhaps even inspired by some grandmother somewhere. The packet is brown, the lettering is tasteful and the quantity inside is just enough to make you wonder whether you have accidentally bought stationery. The same thing has happened to the rest of the kitchen and, increasingly, the bathroom. Detergent has become laundry care. Pickle is a small-batch preserve. Tea is a single-estate experience. Ice cream is slow-churned. Salt has become strangely ambitious. It can be Himalayan, smoked, pink, infused, mineral-rich, and important enough to deserve a place at the table. Water has perhaps had the greatest career transformation. For most of our lives, water was the one thing nobody had to explain. You drank it. You asked for more. Now there is water that sounds like a minor European aristocrat, comes in a glass bottle, is alkaline, and costs enough to make you briefly consider dehydration.

Improving ‘decision velocity’ in bureaucracy

noreply@blogger.com (Urbanomics) — Thu, 03 Sep 2026 02:31:27 +0000

Shashi Tharoor has a review of a new book, Decision Velocity: Rational Abdication, the Fear Tax, and the Road to Viksit Bharat, by retired IPS officer OP Singh. Singh describes a phenomenon of not taking decisions, or ‘rational abdication’, which imposes a “fear tax” that is extracted in the form of unconscionable delay. Tharoor writes

Singh’s “Fear Tax” is the price society pays when decision-makers conclude that the safest course is not to decide at all. It is the outcome of a sclerotic system where, for the desk-bound officer, the risk of a decisive signature far outweighs the perceived safety of a prolonged silence. As Singh so eloquently demonstrates, our current accountability frameworks audit the traceable action with inquisitorial rigour, yet remain blissfully indifferent to the absent decision. Hence, it’s safer not to act at all…
We have inherited, and subsequently ossified, a colonial-era machinery designed for control, not for velocity. In such a framework, a file that moves is a file that invites scrutiny; a file that rests in a dark corner of a cabinet is a file that poses no threat to its custodian. The result is a Kafkaesque reality where the paralysis of the pen is too often mistaken for the prudence of the professional. This is not merely an inconvenience; it is a profound failure of the social contract. When the state abdicates its responsibility to act, it does not merely delay a project or a permit; it stifles the latent potential of a citizenry waiting for the basic friction of governance to be removed.

Tharoor offers some suggestions.

We must move from an obsession with compliance to an obsession with outcomes… We must evolve our oversight mechanisms to distinguish between honest mistakes (the byproduct of necessary risk-taking in a complex environment) and true negligence. A system that does not tolerate the possibility of a wrong decision will rarely produce a right one.
Furthermore, we must incentivise administrative courage. This involves creating "safe spaces" for decision-making, where the rationale for action is documented and respected, and where the institutional culture shifts from "How can I avoid this?" to "How can this be made to happen?"

There cannot be any argument about these. The challenge is to operationalise tolerance of honest mistakes and creation of “safe spaces”.

The operationalisation of these cannot happen by diktat or homilies. Instead, it requires building them into bureaucratic routines and institutional processes. The former involves changing norms within the government on taking risks, accepting failures, and even celebrating risk-takers. The latter involves wiring the institutional processes to accommodate these.

I can think of three process safeguard reforms.

An important nudge in this direction would be to amend the Prevention of Corruption (PC) Act to clarify that no public servant shall be subjected to any enquiry, inquiry or investigation under this Act, nor prosecuted, solely based on an opinion, advice, recommendation or decision recorded or taken by him in the discharge of his official functions, unless there is independent material to show that the act was actuated by a corrupt motive or by the expectation or acceptance of an undue advantage. It should also be clarified that an error of judgment, or an unintended, unsuccessful, or sub-optimal outcome of such a decision, shall not constitute such material. This would go beyond the procedural safeguard provided by Section 17A of the PC Act (whose scope is currently not yet settled and awaiting a Supreme Court bench verdict) and provide a substantive threshold.

Another would be to amend the Right to Information Act and insulate the contents of deliberative processes (opinions, advice, recommendations, notings, drafts or inter se deliberations recorded by the public servant) from any investigation or be made inadmissible in prosecution proceedings, unless there is evidence that the act itself was done with a malafide or corrupt motive. The US Freedom of Information Act insulates the deliberative process as a safe space from any scrutiny. This would allow people to express opinions freely without hedging for future recriminations.

A third would be to amend the guidelines on performance audit by the Comptroller and Auditor General (CAG) of India to explicitly make the auditors accountable for examination of honest mistakes and unintended failures before making their performance audit comments. It should be clarified that audit shall assess a decision based on the information, circumstances and options reasonably available to the decision-maker at the time the decision was taken, and not with the benefit of hindsight or of facts that emerged subsequently. Where the decision was within the competence of the decision-maker, followed the prescribed process and consultations, was supported by reasons recorded at the time, and was one that a reasonable and prudent official could have taken on the information then available, the auditor should treat it as an honest exercise of judgment and let it rest.

These enactments must be complemented with efforts to change the norms on such decisions.

In this context, an important perspective is to view decision-making through the lens of public and private benefit. Many of the delayed decisions or undecided issues involve the likelihood of private benefit. Consider the following three norms and their implications:

1. There is a tendency to view public interest and private benefit as mutually exclusive and conflicting. Further, since the ethos of bureaucracy is the protection of public interest, any resultant private benefit is considered a matter of concern.

2. There is a belief that denial of private benefit equates to protection of public interest. However, in many cases, this is not true. On the contrary, it is the opposite - it ends up with a back-ended public loss.

3. There is also the instinctive association of private benefit with corruption. This naturally stigmatises any act that results in private benefit.

These norms overlook the reality that private benefit can co-exist with public benefit.

The aforesaid norms are most deeply entrenched among auditors and investigative agencies. They tend to view public actions resulting in private benefit with extreme suspicion.

For example, it is common to see decisions on procurements and contract management delayed due to these hesitations. Officers are regularly called upon to propose decisions on changes in technical specifications, qualification norms, condonation of delays and time extensions, waiver of liquidated damages, contract terms during renegotiations, and so on. All of them, even when justified, end up invariably benefiting some or other contractors, often also causing an increase in expenditure. This opens the decision to be scrutinised as having caused both private benefit and public loss.

These entrenched cultural norms are reinforced by the circumstances. Compromises on public interest and promotion of private benefit through corruption have become pervasive. This complicates matters and allows righteousness, biases, and prejudices to enter the audit, investigative, and prosecutorial processes.

In the circumstances, the challenge is to create a culture that destigmatises actions that confer private benefit, without letting it become permissive enough to encourage corrupt practices. This is hard! Most often, there are no shortcuts to doing the hard work of creating the conditions.

Resolving the public debt pile facing the developed world

noreply@blogger.com (Urbanomics) — Wed, 02 Sep 2026 02:27:21 +0000

Public debts have soared among advanced economies, with the US leading the way. Their sustainability is now a big risk and casts strong headwinds on economic growth.

The repercussions are already being felt in the sovereign bond markets, including in the safest of assets, the impregnable US Treasury markets.

The response, especially the recent actions of the US Treasury, arguably even encroaching into the Fed’s domain, to prevent bond yields from rising are extraordinary. It first announced a temporary swap of the Bank of Japan’s Treasury holdings for dollar cash to pre-empt any liquidation to generate the dollars required to prop up the Yen, and followed up with an announcement to double the purchases of Treasury bonds. More are likely to follow in the months ahead, especially with a President who has announced his intent to wage war against the bond markets.

Chris Giles has an excellent description of America’s ongoing debt surge.

The most relevant measure of US federal government debt, that held by the public, has risen from $3.4tn in 2000 to $32.3tn now, or a rise from 33.7 per cent to more than 100 per cent of GDP in just over 25 years. More importantly, the burden of servicing that debt has doubled, from 11 per cent of tax revenues in 2000 to 21.5 per cent in the first 10 months of the current fiscal year… With the US on a path to continue running deficits close to 6 per cent a year, even at full employment, the debt-to-GDP ratio is set to rise every year, increasing the call on tax revenues to service that debt and the pressure on the Fed to lower interest rates…
Since 2000, when the federal government ran a surplus of 2.3 per cent of national income, primary public spending (excluding net debt interest) has risen from 15.5 to 19.9 per cent of GDP. All of this increase can be accounted for by spending on services for an ageing population — social security, Medicare and veterans’ programmes. On the tax side, revenues have fallen from 20 per cent to 17.2 per cent of GDP over the same period, partly a result of a cyclical peak in revenues at the end of the last millennium and partly the result of tax cuts. First came the Bush tax cuts, which were made permanent on a mostly bipartisan basis during the Obama administration, and then came the 2017 Trump tax cuts… It does not need to eliminate the deficit, but does need to put debt back on a downward path, which almost certainly requires a balanced primary deficit — a metric that excludes net interest costs — something the US has not achieved since 2007 and not on a sustained basis since the 1990s.

The combined debt held by the public and federal agencies in the US now touches $36 trillion. The US interest bill has doubled to more than 3% since 2021, and the fiscal deficit is running at nearly 6% of GDP with little prospect of declining anytime soon.

America does not stand alone. Since the Second World War, as welfare states took hold, public spending as a share of GDP has risen steeply across the developed countries. Further, since the seventies, public debt as a share of GDP has been on a similar upward trend.

Welfare spending has been rising, and subsidy policies have ratcheted up since the global financial crisis.

This increase in public spending and borrowings is a political choice made in response to rising expectations from governments among the electorate.

For measure, in the US, net positive mentions of government support — covering welfare and protectionism — in Democratic and Republican party manifestos have trended higher since the early 1970s, based on calculations from the Manifesto Project’s database. In particular, these mentions have surged since the GFC. This suggests politicians are increasingly pitching policies that extend state assistance to appeal to voters. In the UK, the National Centre of Social Research reported in 2023 that expectations for government to keep prices under control, reduce income differences and provide industry with the help it needs to grow all reached a record, based on the British Social Attitudes survey. Indeed, curbing support hasn’t been easy for governments either. Britain’s Labour party was forced to reverse over £5bn of planned cuts to welfare spending. French politicians are also struggling to agree on how to cut expenditure, given the inevitable pains on the public.

A similar expectation cycle has been set off in the financial markets on monetary policy under the watch of technocratic central bankers like Ben Bernanke and Mario Draghi. These cycles have come to reinforce each other.

A May 2024 paper by John Cochrane and Amit Seru, senior fellows at the Hoover Institution, concurs. It argues that the expectation of central bank support whenever conditions deteriorate inflates stock prices, fuels leverage and, in turn, raises risks of a self-reinforcing monetary policy intervention and taxpayer-funded bailouts. Central banks have also been cautious about unwinding their QE holdings too quickly, fearing market convulsions. This has left their balance sheets elevated, creating a structurally higher liquidity base in the financial system that props up valuations and market activity today.

The rising indebtedness has close historic parallels. In an FT interview, Thomas Piketty pointed to the experiences of European countries in the 19th and 20th centuries.

We have a long history of public debt in France and Britain. Britain had more than 200 per cent of GDP of public debt in the 19th century. In the case of France . . . after each of the world wars, it was between 200 per cent and 300 per cent. The good news is that we’ve always found ways to get rid of it, and in each of the three instances I’m referring to, through different mechanisms, it went down to very little — less than 20 or 30 per cent GDP in a few years. It was never repaid, in effect, as opposed to the British solution in the 19th century, where it took basically one century of budget surplus between 1820 and 1914 to reduce the public debt coming from the Napoleonic War period…
The British approach of the 19th century corresponded with a very aristocratic political system where basically one tier was in power and they wanted taxpayers to reimburse them. Was it the best way to prepare the country for the 20th century? I’m not completely sure, because in effect there was more money put into interest payments than money invested in education. And Britain lagging behind in education with respect to the US or even with respect to Germany or France in the 20th century is the number one explanation for a British decline. I would not recommend doing the same in the future… The most successful experience with large public debt is probably Germany after [the] second world war, where they had this exceptional tax on private wealth which raises a lot of money. This contributes a lot to the reduction of the public debt without any inflation. Of course they were traumatised by inflation in the 1920s, so they didn’t want inflation anymore. The other way, of course, is through inflation, which is a wealth tax on the poor, typically.

A major reason for the surging debt stock since the turn of the millennium has been external wars. It has been estimated that the total cost and future obligations of the post-9/11 wars are about $8 trillion in 2021 dollars, excluding future interest costs on the debt. To put all this in perspective, “the US defence budget in 2025 was over $900bn, equivalent to 35 per cent of total global defence spending and more than three times the defence budget of China, the next most powerful military actor.”

Despite this, the dollar has continued to hold reasonably steady. The exorbitant privilege has ensured the dollar's status as the world's pre-eminent reserve currency and the Treasury market's role as the world's safest haven asset, thereby allowing the US access to unlimited global capital at a low cost. While there are no competitors to the dollar on the horizon, the Treasury's safe-haven status is facing competition.

For one, the central banks, which accumulated reserves by buying up 63% of the extra debt issued by G-7 governments in 2008-21, are now unwinding their balance sheets by running down the dollar component of their reserves. They are instead pursuing alternatives like gold, commodities and the more liquid currencies of smaller developed countries like Switzerland. As William White has pointed out, this has created vulnerabilities.

Indeed, a report by the European Central Bank showed this week that gold had now replaced US Treasuries as the world’s top reserve asset. By the end of last year bullion accounted for 27 per cent of all global central bank reserve assets, up from 20 per cent a year before. Treasuries fell from 25 to 22 per cent over the same time. This leaves a gap that has been substantially filled by hedge funds, mainly American owned but often counted as foreign investors because of their bases in tax havens such as the Cayman Islands. Many own Treasuries as part of highly leveraged “relative value trades”, financed by short-term borrowing that has to be constantly rolled over.
William White, former chief economist of the Bank for International Settlements, points out that this works well — until it does not. White argues that the purchase of government debt by non-bank institutions such as hedge funds depends in turn on their access to short-term financing such as the repo market. He adds: “Should any disturbance interrupt that access, as in March 2020 [during the Covid-19 pandemic] or April 2025 [when Trump announced swingeing tariffs], an intense deleveraging spiral could easily follow.” Recent shocks from hedge fund margin and collateral calls have made the Treasury market more fragile and a potential source of systemic risk.

And there’s more.

White also worries about fiscal dominance — a phenomenon in which the central bank cannot raise interest rates to meet its inflation target because of the punishing servicing cost of high, short-term public debt. This in turn undermines price stability. Another possible concern is financial repression, where the government forces banks and other financial institutions to buy its IOUs at below-market interest rates.

And with bond yields rising, the debt service costs are increasing. One estimate puts an additional $34 bn in financing costs by the end of the first quarter of next year for G7 nations. And this will only rise.

Debt reduction can be achieved, as has happened in the post-war era in the UK, France, the US, etc., and more recently in Greece (more on it later).

It requires that both the stock and flow of debt must be brought down. The former requires that the rate of economic growth (g) must exceed the rate of growth of debt (or the interest rate, r) for a long period, and the latter requires ensuring that the primary balance is positive.

One can think of some scenarios under which the debt reduction can materialise. The ideal scenario of growth driven by a productivity surprise (say, AI) may be too optimistic, given the need to sustain real GDP growth (g) in the 3-4% range against a real interest rate (r) at 1-2% and the ageing demographics and falling labour force participation rates. Fiscal consolidation resulting in primary surpluses is another possibility, though the very high mandatory spending plus interest (now at 75% of the budget and heading to 80% by 2036) means that austerity alone can only be a marginal contributor.

There is no historical precedent of grow out of debt at this debt level without either financial repression or fiscal consolidation alongside. The 1990s US surpluses under Clinton were a one-off combining Bush’s 1990 and Clinton’s 1993 revenue measures, the peace dividend, and the dot-com boom’s capital gains windfall.

Then there are the scenarios of Fed-led financial repression, with moderate or high inflation. However, the inflationary path requires that the debt is long duration, new issuance reprices only slightly, and the social and political consequences are managed. But the US Treasury’s weighted average maturity is only about six years, which sharply limits this pathway to debt reduction, and there may be no political tolerance for sustained inflation beyond, say, 3.5%. In any case, repression and inflation will be important factors eventually in the years and decades ahead.

They were important contributors to bringing down the debt-to-GDP ratio after the War, and the recent increase in bond buybacks announced by the US Treasury Secretary Scott Bessant are the early steps in a long period of financial repression.

This brings us to debt restructuring and haircuts, which are unthinkable for the US given that the US dollar is the reserve currency. There is also the possibility of a consolidation forced by a crisis (à la Greece), though it looks unlikely for now and may lie 10-15 years ahead.

Finally, the option of muddling through, stabilisation without meaningful reduction, is a very strong likelihood for the foreseeable future. Through a combination of mildly negative r-g through soft repression, containing primary deficits, and occasional tailwinds and reforms, debt-to-GDP can stabilise at 110-130%. Japan has run this combination for over two decades with 220-260% of GDP without any crisis, and Italy has done so at 130-140%.

For debt reduction, the US and others may find Greece an unlikely example. From a peak of 212.6% in 2021, by the end of 2025, Greece reduced its debt-to-GDP ratio to 146.1%, and it is estimated to decline to 125% by the end of the decade.

This spectacular record-breaking drop of nearly 67 percentage points within a four-year window has been achieved through a combination of strong GDP growth post-pandemic (4-5% real growth), early repayment of its financial rescue packages, negative real rates from the inflation shock, maintaining a primary budget surplus of above 2%, and concessional EU financing.

This combination of factors is unlikely for advanced countries like the US. In the circumstances, the best hope is a trend of moderate inflation (say, 3%), repression to keep interest rates down, some reversal of the accumulated tax cuts, and some expenditure reduction, all of which will only stabilise the debt at about 120-130%. This would create the conditions for deeper reforms on both the revenues and expenditure sides after a forced crisis sometime in the later part of the next decade.

A scenario which cannot be dismissed is one where the erratic policies of the Trump administration, combined with rising inflation, a supply shock (of the kind in Iran), and an AI-equity market meltdown, spook the bond markets, resulting in a significant spike in bond yields. This could, in turn, force the US Treasury into biting the bullet on revenue and expenditure-side reforms.

In the meantime, the bare minimum to calm the markets would be to at least ensure that the debt-to-GDP ratio is stabilised by bringing the fiscal deficit under control. But wars and Trump 2.0 policies work in the opposite direction.

Some thoughts on the Hyderabad model of urban growth

noreply@blogger.com (Urbanomics) — Sun, 30 Aug 2026 23:30:00 +0000

This is a long read, triggered by a recent article in The Economist lauding Hyderabad’s vertical growth-enabling policy.

It is an opportunity to think more broadly about the drivers behind Hyderabad’s spectacular urban growth over the last three decades, one with few precedents in India. Also, to avoid drawing the wrong lessons from the city’s success in economic growth and real estate development, this post will provide some qualifications. It will point to the role of the government, the political economy and the role of large developers, and the consequences of deficient urban planning. Finally, it will offer some comparison between the Hyderabad model and those of Gurgaon and Shenzhen.

The Economist article lauds Hyderabad’s vertical growth and the enabling policy of the government.

Hyderabad, unique among India’s cities, abolished fsi in 2006. And then, miraculously, life went on. NIMBYs foretell all sorts of doom the moment anyone talks about building anything. They warn of Gothamesque ghettos with gridlocked streets, dry taps and overflowing sewers. Nonsense. Today tall residential blocks line the highways in Hyderabad’s western suburbs and traffic still flows faster than in most major Indian cities. Dozens more towers, including the Trump ones, are sprouting in a neighbourhood called Kokapet that was not long ago full of custard-apple orchards and is now a forest of construction cranes.
There are two reasons Hyderabad has not descended into dystopia. One is its 160 km-long orbital motorway, the first bit of which opened in 2008 and is now an arterial road in the new skyscraper belt. The other is that abolishing the arbitrary cap on FSI did not mean the abandonment of all rules. Regulations covering minimum street widths and required setbacks still apply. Aviation authorities impose restrictions around air-traffic funnels. The effect is that developers can build high only if they have a large enough plot next to a wide enough street somewhere far enough from an airport. Markets decide the rest. The cost of construction rises with height, so a builder’s decision about how much to pay for land and how tall to go rests on whether potential buyers of flats will cough up enough to make the project profitable. That has prevented a housing bubble.

For a start, Hyderabad’s spectacular urbanised growth over the last three decades owes primarily to government actions. Four, in particular, stand out.

1. The spurt of IT services industries locating to Hyderabad provided the economic anchor to sustain the spectacular property development that followed. Its emergence owes all to government policies. From having nothing apart from a small software cluster at Mythrivanam, the spectacular boom in the IT industry was catalysed by the conscious efforts of the then government of Andhra Pradesh in the mid to late nineties. It established the 158-acre HITEC City at Madhapur through a PPP between APIIC and L&T, with Cyber Towers being the iconic building. The then Chief Minister, Mr Chandrababu Naidu, toured the US and Singapore extensively, wooing software firms, and his efforts culminated in Bill Gates's visit in 2001 and the announcement of Microsoft’s largest R&D centre outside Redmond. It was followed by GE and ICICI and a flood thereafter and continues to this date, expanding to all kinds of sectors and innovations. The Cyberabad brand took off.

Starting with a few hundred in the early nineties, Telangana state’s IT employment has moved from 0.4 million in FY14 to about a million in FY25, and 85–90% of that sits in the western Hyderabad corridor.

2. The state’s IT services push was supported by the Andhra Pradesh Infrastructure Investment Corporation (APIIC)’s model of acquiring land, developing trunk infrastructure (transport and utilities), and leasing/selling with clear titles through a single window at concessional rates to incoming firms. This too, like with the ORR, had its set of controversies and scandals.

Apart from the L&T HITEC City, APIIC developed the initial 100-acre Financial District at Nanakramguda, and several others. HMDA has been the price-discovery mechanism for the entire premium belt through its periodic auctions that have unlocked vast extents of government lands. The high premium commanded by these auctions is also because the state layout provides serviced plots with clear title. This is closer to a Chinese SEZ-style state land-lease model than to Gurgaon's private-land-assembly model.

3. The Outer Ring Road (ORR) has been transformational to the urban growth in the western part of the city. Notwithstanding all the controversies on the alignment finalisation, land acquisition, contracts, and tolling, the Hyderabad ORR should count as a totemic example of high growth-catalysing infrastructure investment in India’s history. It unlocked value by enabling the vast hinterland of barren and rocky lands to become productive centres. It was a truly visionary project when conceived in the early 2000s and even when its execution started in 2005.

The ORR enabled orbital and radial access to the city, thereby resetting the commute dynamics and unlocking vast barren lands, reducing times by multiples. It is no surprise that every land price in the corridor is capitalised against ORR access time. HMDA’s designation of a 1-km high-density buffer on either side of the ORR effectively unlocked about 316 sq km of premium-development-eligible land, the value created from which dwarfs the ₹6,700 cr cost of the road itself.

The ORR did the work of several economic growth crowding-in instruments, and produced the pattern of intense capitalisation of access to it, and (on the flip-side) the neglect of everything it does not touch.

4. The last enabler, the subject of The Economist article, is the deregulated development control regulations, specifically the unlimited FAR adjoining wide roads brought in by the GO Ms No 86 of 2006. In fact, even among the DCR, the GO’s success was only in its deregulation of the FAR. The high FAR manifests in the most salient aspect of Hyderabad’s real estate growth, the skyline of massive high-rises.

Even with all the above, it also critically required the enterprise, vision, and risk appetite of a handful of local real estate developers (My Home, Rajapushpa, Aparna, etc.) who hoarded large land banks in anticipation of the developments since the late nineties and early 2000s in the run-up to the boom. Only large real estate developers could afford to take the risks that lock up huge upfront capital and endure the vagaries of business cycles.

However, it has managed to escape the market concentration that characterises markets like Gurgaon. The nature, scale and pace of development have also ensured that while a dozen developers account for the bulk of Grade-A supply, and the top three alone control about 64 million sq ft of upcoming pipeline, there is a long tail of over 30 mid-tier local names.

Such entrepreneurship could also flourish only in a political economy and social milieu which condoned the often questionable overlapping of public and private interest, and deep-rooted corruption. Governments changed, but the underlying model and ongoing work continued unhindered. It is a very good example of Mancur Olson’s stationary bandit at work.

The combination of the 158-km Outer Ring Road, an unlimited-FSI building regime, a hospitable IT policy, and a handful of developers with 2000s-era land banks has added roughly a mid-sized city's worth of office, housing and vehicles to a 200-square-kilometre arc of west Hyderabad in about a decade-and-a-half. The public sector supplied the foundation. The private sector built on it. What emerged are pockets of car-dependent, single-use, higher-income, gated communities, with limited mass transit or affordable housing.

This brings us to the issue of urban planning.

Here, apart from the single instrument of unlimited FAR in the development control regulations, it is notable that the state fell short on the critical aspects of urban planning - master-planned mixed-use, walkable street grids, timely metro and mass transit access, transit-oriented density transfer, affordable housing, and vibrant public spaces and community life (apart from those in the gated communities). Even the unlimited FAR has its set of problems.

However, it can also be argued that more than state failure, these outcomes were the result of private incentives and the political economy overwhelming urban planning imperatives. The reality of developers with large land banks near the ORR and their close relationships with both politicians and bureaucrats trumped all other factors.

In any case, they have had several undesirable long-term consequences. Here are a few.

1. Residential real estate development has almost completely taken the form of high-rise gated communities and villas, all serving the upper middle-class and above. Affordability has been the casualty.

The sub-1000 sqft supply is a mere 2–4% of the west corridor’s pipeline, versus 13% for Hyderabad city and 18% at the all-India top-7-city level. Apart from public housing under various government schemes, it will be a big surprise if there is even one development of housing in the 600 sqft range and below, catering to the lower-income class. The corridor’s default product is a 1,500–2,200 sqft 3 BHK, forming half of everything built, and easily catering to the upper-income class.

This is a resounding nod to the reality that even in the most deregulated contexts and rapidly growing economic regions, affordable housing and lower-income housing will remain heavily under-supplied. It must be acknowledged as an area of market failure, requiring policy action.

A ₹10 lakh household income supports roughly a ₹65–80 lakh home, which puts everything from Kokapet, Financial District, Gachibowli, Madhapur, and Raidurg out of reach for a typical mid-career IT professional. Even a ₹25–30 lakh household income (senior IT / GCC AVP) is stretched at ₹2 Cr pricing in Financial District. What this means is that the corridor is now selling primarily to senior tech and finance executives, NRI, and dual-earner-tech/finance households. Junior and mid-level tech workers are being pushed to Tellapur/Kollur/Miyapur. Even in these peripheral areas, sub-1000 sqft housing reaches only about 8%.

2. The revenue bias of the state government may have compounded the problems. The massive premiums commanded in the land auctions, coupled with the restrictive DCR (on setbacks and open space requirements), have distorted the real estate market and skewed it significantly upwards. For illustration, at ₹150 cr/acre for Neopolis land, the input land cost alone works out to ₹8,000–10,000 per saleable sqft (assuming 2.5–3.5 FSI usable given the large setback and open-space rules). Add construction (₹3,500–5,000/sqft for a premium tower), financing costs (typically 12–18% of project cost), developer margin (20–30%), and GST and other statutory levies/fees, and the total cost comes to ₹13,500–17,000/sqft. This land economics forces ₹4 Cr and above units. In contrast, in Velimela, where land is still ₹5–10 lakh/acre (not for long, one would imagine), 2 BHKs can come at ₹40 lakh.

In fact, it can be safely said that the entire land-use regime consisting of the ₹150 cr/acre Neopolis land price, the setback rules that make sense only for large plates, the developer economics that require more than ₹80 lakh units to sustain the ORR-belt cost stack, has displaced sub-1000 sqft out of the ORR corridor. The real affordable-format supply in Hyderabad now exists outside the ORR corridor’s western arc, in Miyapur, Bachupally, Nizampet, Kompally (north-west), Kukatpally (central), Uppal, Nagole, LB Nagar, Ghatkesar (east), and Rajendranagar, Shamshabad, Adibatla (south). These are outside the ORR corridor’s western arc. Anarock’s Q3 2025 Hyderabad realty breakdown indicates that 87% of the new supply added was in the premium, luxury, and ultra-luxury segments, priced upward of ₹80 lakh, a figure which rises to more than 95% in the ORR corridor. These are figures that point to a serious housing crisis.

3. This has been despite the HMDA having a 5% of developable area mandate for each of the Economically Weaker Section (EWS) and Lower Income Group (LIG). Builders have the flexibility to construct it on alternative land within a 5 km radius. However, there is not even a single instance of any developer having built physical units using this option. Instead, they have preferred to use the cash-out loophole of paying a shelter fee, which was carved by amending the Special Development Regulations for the ORR Growth Corridor. It allows developers to pay a capitalisation fee equivalent to 1.5 times the basic land value to HMDA. The low basic land value means this becomes a cheap option, one immediately capitalised into the cost of construction.

This must count as one of the biggest missed opportunities of Hyderabad’s ORR-based growth, and adds to the list of planning and policy failures. More importantly, the amendments to the EWS/LIG mandate underline the dominance of real estate developer interests.

4. Also, given the lack of any public transport connectivity linking them, these gated communities are car communities. The very large enclosed boundaries of these communities mean that they are not walkable localities, thereby further isolating the communities and increasing the reliance on cars.

The Phase 1 Blue Line of the metro terminates at Raidurg, on the eastern edge of HITEC City, whereas the next 5–6 km, as in the schematic, contains the highest concentration of new office and residential capex in the corridor, and it has no rail transit at all (though they are included in the Phase 2 corridor of 11.6 km whose work has just started). They are also served sparsely by a fragmented bus network. Even when completed, the configuration and the nature of the development in the area make it sub-optimally useful.

The metro gap is perhaps the single most consequential planning failure of the western corridor. Hyderabad, like others in India, are seeking to fit the metro into a built-form, instead of shaping the built-form around a built or planned metro.

5. Furthermore, they are also not mixed-use developments (the institutions/offices, residences, and commercial areas are distinct), thereby forcing households to commute to buy their groceries and vegetables. To some extent, the basic requirements are met by having small shops inside each gated community selling groceries and vegetables/fruits. But outside of this, all commutes are long and car-based. It is unsurprising, therefore, that, like elsewhere in India, there is not one example of Transit Oriented Development (TOD) among the current stations.

6. The absence of lower-income housing, coupled with the redevelopment and gentrification of even the erstwhile villages, has meant that West Hyderabad must rely on distant areas for various household services. Housemaids, drivers, and other help must travel long distances using autos and bikes to come and work in these communities. Apart from the costs on their lives, this creates their own set of problems (like getting a housemaid early morning or having a driver stay back late, or even their reliability).

7. The “unlimited” FAR also meant that the government has foregone large revenues in the form of sale of purchasable FAR permitted over a base FAR (which comes with the property right). It can, however, be said that its absence has lowered the cost of construction and boosted supply. For now, the foregone revenues have been recovered many times over in various forms of economic activities, thanks to all the complementary actions that confluenced in the region’s development.

All this means that West Hyderabad has made its choice of a pattern of living that revolves around secluded gated residential communities and is car-based, instead of the walkable, mixed-use, mass-transit and outdoor public-spaces-based living that characterises many western cities. There are benefits and costs with each model. But once the choice is made, it is almost cast in stone.

It is also pertinent that while West Hyderabad has developed at this pace, the same planning and development control regulations (DCRs) have had no impact on the rest of the city. Economic growth over the last two decades has largely bypassed the existing twin cities of Hyderabad-Secunderabad and facilitated western suburban expansion. It is hard to think of even one example of meaningful-sized urban regeneration or redevelopment in the remaining parts of the city. It can even be argued that the development of the western ORR corridor has come at the cost of the rest of the city.

This also reflects the restrictive nature of the existing DCRs, despite the unlimited FSI. Very few, or hardly any, plots in the built-up city can avail this unlimited FSI, thereby pushing development outside to the suburbs and benefiting builders. This is one more illustration of the fact I blogged here that reforms to DCRs across Indian states have largely bypassed the built-up city and benefit only the greenfield suburban developments.

How does Hyderabad’s development compare with two similar examples of rapid growth to scale - Gurgaon and Shenzhen?

Unlike Gurgaon, which emerged primarily on the back of private land assembly enabled by the licensing regime of Haryana’s Development & Regulation of Urban Areas Act (1975) and even private infrastructure development (e.g., CyberHub metro), the government had a big role to play in the development of the other two. In Hyderabad, as aforesaid, the government aggregated lands, allocated and auctioned them, while also developing the trunk infrastructure.

Shenzhen is the extreme case of transformation of farmlands, with population rising from a mere 30,000 to 17.6 million in 40 years, and is instructive for its sequencing. It built the metro alongside, not decades behind, the office and housing pattern. Shanghai Pudong transformed farmland east of the Huangpu into finance-and-office from 1990 onward, but again with subway preceding the office boom. Songdo (Incheon) in South Korea is a smaller-scale but similarly planned-from-blank comparison.

Among the three cities, only Shenzhen retained state agency over the density and transit pattern of what it was building. West Hyderabad and Gurgaon both handed the pattern to developers who, rationally, given their incentives, built gated single-use tracts at the highest FAR they could get. The transit, water and sewer bill is what the state pays afterwards.

The best comparison for west Hyderabad is not Shenzhen (which had state agency), nor Gurgaon (which lacked any state trunk infrastructure). It is a distinct third pattern, created by strong state trunk infrastructure, state land assembly and allocation, weak state land-use and transportation planning, strong private densification, and remarkable entrepreneurship and risk-taking, all riding on a booming IT services industry. This third pattern deserves its own space in the Indian urban development literature.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 29 Aug 2026 04:35:53 +0000

1. Good long read in the Indian Express about the ridership deficit facing metro railway systems in India. This is a good website for network maps.

Radhika Shenoy, 28, a working professional in Hyderabad’s Secunderabad, points out that last-mile connectivity is a major challenge when she uses the Metro. “Neither my house nor my office is close to a Metro station. So, taking public transport becomes more expensive than using my own scooter or hiring a cab or auto,” she says... Manvika Shivhare, a 29-year-old lawyer based in Lucknow, says most people she knows never use the 23-km-long city Metro to get round the city, preferring to travel in an auto or two-wheeler instead. “The Metro is useful for going to the Airport, for which it would cost Rs 70, while the auto would take Rs 400. But none of us uses it for our daily commutes, since Lucknow is such a small city.” Shivhare says this won’t change even with the upcoming 11-km-long Line-2, connecting Charbagh Railway Station and Vasant Kunj in Lucknow.

2. India's crude oil imports from Russia rise to more than 2.6 million barrels per day in June and July.

3. The big semiconductor chip companies distort South Korean education priorities and the labour market.

For decades, South Korea’s brightest students gravitated towards medicine, and private tutors focused on helping students gain admission to elite universities. Now, some semiconductor departments sponsored by Samsung and SK Hynix — which guarantee employment after graduation — are attracting growing interest, and cram schools are catering to job seekers pursuing lucrative chipmaking careers. In the 2026 admissions cycle, SK Hynix-linked semiconductor programmes at several leading universities recorded higher application rates than medical schools, whose applicant numbers fell by nearly a third to a five-year low.

Kwon Seok-joon, an engineering professor at Sungkyunkwan University, said generous chipmaker bonuses had altered how students viewed the trade. “For 20 years, medicine was the only path that guaranteed both wealth and prestige in Korea,” he said. “The Hynix bonus broke that monopoly. For the first time, chip engineers are in the same league as doctors when families discuss a safer future.”... In May, Samsung reached a landmark profit-sharing agreement with its 78,000 semiconductor employees, with average payouts expected to approach $400,000 in the memory chip division. Rival SK Hynix agreed last year to distribute 10 per cent of operating profits to workers over the next decade, implying average bonuses of about $500,000 this year based on projected earnings.

4. More evidence of lagging salary growth amidst rising sales growth.

Growth in net sales of 3,057 non-finance companies in the June quarter was 22.18 per cent year-on-year, according to a Business Standard analysis of the numbers from the Centre for Monitoring Indian Economy... Salaries in the June quarter went up at less than half the pace at which sales have grown — at less than 9 per cent... The starkest contrast was in the mining sector, where sales grew 40.83 per cent and salaries and wages 1.04 per cent. Lower growth in wages has likely helped operational profits, where margins had come under pressure because of higher costs of raw materials.

5. Labour market expectations from the PLFS 2023 survey data.

Our job seekers expect up to 40 per cent higher salary than actual earnings reported in the PLFS for the same occupation. Male job seekers, in particular, show greater over-optimism in salary expectations relative to women, expecting almost Rs 8,000 more per month than the actual average earnings for these jobs and Rs 8,500 more per month for salaried jobs. Altogether, salary expectations diverge from reality by more than 30 per cent. When we assess the job aspirations and expectations of job seekers who are below 25 years of age in our sample, we find that expectations are even more skewed – again, more so for young men than young women...

So we set out to inform and expose a random subset of our 3,000 job seekers to the real world and re-surveyed both the informed and the non-informed a year later. Twelve months after receiving information, we find that providing accurate information about job opportunities significantly dampened job seekers’ labour-market expectations of landing their ideal job relative to those who were not informed. Men, in particular, were less likely to report that they were on their ideal career path. This disillusionment is accompanied by a decline in men’s job-search intensity. Thus, as preferred job offers fail to materialise, job seekers adjust their expectations downwards and either remain in the same jobs or drop out of the labour market and enrol at educational institutions.

6. Is fusion energy, the process that energises stars and sun, about to become a reality?

Privately held fusion companies raised $4.5bn over the past year alone, according to the Fusion Industry 2026 report. There are now more than 50 such companies. Last month, General Fusion, a Canadian outfit backed by Jeff Bezos, became the first publicly listed fusion company. These signals hint at an important shift: fusion energy is gradually being perceived less as a scientific challenge and more as an economic one.

7. Made in Switzerland.

Switzerland, where manufacturing still accounts for almost 19 per cent of GDP, twice the contribution from its celebrated financial services industry. The white cross on a red background, emblazoned on products from Heule precision tools to Caran D’Ache pencils, is both a guarantee of quality that is understood worldwide, and a valuable marketing device for Swiss manufacturers... Switzerland has the highest proportion of high-tech manufacturing of any of the OECD’s 38 member countries...

A landlocked country of 9mn people, with few natural resources and some of the world’s highest wages, is not an obvious starting point for a manufacturing success story. But the Swiss made it work. Companies responded to high wages and an appreciating currency by becoming more productive, more specialised, more sophisticated and more expensive, while focusing on global markets rather than their small pool of domestic consumers. “Swiss Made” became shorthand for the result: watches, machinery and precision tools good enough that customers around the world would pay extra for them. One of the results is an economy unusually rich in relatively small companies that dominate particular niches. A study published this summer identified 100 such Swiss businesses, together generating more than SFr40bn in annual revenues. They range from VAT, a maker of vacuum valves used in semiconductor production, to Burckhardt Compression and specialist manufacturers such as Rondo, whose machines shape dough into pastries in bakeries around the world...

That strength is underpinned by an unusually deep apprenticeship system. About two-thirds of young Swiss pursue vocational education and training, most learning partly inside companies — supplying manufacturers with generations of machinists, technicians and other skilled workers. Bern pushed its commitment to open markets still further in January 2024 when it unilaterally abolished all tariffs on imports of industrial goods. The government argued that such protection had become counter-productive: cheaper imported components would reduce costs for Swiss factories embedded in global supply chains... at least 60 per cent of manufacturing costs must generally be incurred in Switzerland and an essential manufacturing step must take place there for the product to qualify as “Swiss Made”.

But protectionism and the appreciating franc are denting the country's competitiveness and manufacturing base.

8. The changing face of economics research. First, the dominant fields of research are changing.

Second, it is reaching out to other disciplines.

A research paper by Tom Harris, an economics PhD student at the London School of Economics, bears this out. Aggregating the literature published in 24 leading economic journals between 2000 and 2025 and NBER working papers between 2021 and 2025, he found the share of papers written by teams spanning different fields had jumped 16 points to 35 per cent between 2000 and 2025, while solo-authored papers fell as a proportion of the literature from 34 per cent to 15 per cent.

Third, economics research is becoming more empirical.

Research from Prashant Garg, a postdoctoral researcher at Bocconi University, and Thiemo Fetzer, economics professor at Warwick University, finds causal claims in economics have jumped. In 1990, 7.7 per cent of claims made in the literature were causal. In 2023, that hit 32.6 per cent. Additionally, papers with more causal claims are more likely to receive citations and wind up in top five journals, the research suggests.

And this turn to empiricism has had not so good consequences.

Results derived from real-world data and experiments are hard to replicate under the same conditions and methodology, with research suggesting that up to 70 per cent of recently examined economics papers contain some results that cannot be reproduced. Sometimes this is simply because the data is broken or otherwise unavailable to other researchers, although other theories abound: pressure to publish, data manipulation, patterns of funding and structural incentives in the academy, for instance. There are also cynical explanations, such as questionable research practices or fabricated data sets.

9. Israel's economic squeeze on Palestine is less reported but adds one more dimension to the genocide.

Israel quickly canceled permits for tens of thousands of Palestinian laborers to reach their workplaces in Israel... Since the start of the Gaza war, unemployment in the West Bank has skyrocketed to 28 percent, more than double the rate before the conflict... Then, in May 2025, Israel started confiscating hundreds of millions of dollars per month in import taxes that it collects on the Palestinian Authority’s behalf. This revenue stream accounts for about two-thirds of the West Bank government’s budget for 2026 of about $6 billion, according to Palestinian officials. That deficit has forced the Palestinian Authority to lower the salaries of 140,000 civil servants and security officers, shorten school weeks to three days and accumulate billions of dollars in debt...

Israel has also erected new roadblocks across the West Bank, stifling the movement of goods within the territory... Israel has also limited the amount of shekels that Palestinian banks are allowed to send to Israeli banks, a crucial process that helps enable Palestinian merchants to buy goods from Israel and the rest of the world. The Netanyahu government permits quarterly transfers of about $1.5 billion from Palestinian to Israeli banks — far less than previous administrations allowed. The restrictions have resulted in about $5.7 billion languishing in bank vaults in the West Bank, according to Palestinian government and banking officials.

10. The public sector dependency in the UK

In Britain 50-60 per cent of the electorate works in the public sector or gets benefits or a state pension, suggesting a tipping point has been hit.

11. India's labour market facts of the week.

A new NITI Aayog report notes that about 87 million people aged 15-29 are outside education, employment or training, while only 8.25 per cent of graduates are employed in jobs aligned with their qualifications.

12. The Economist has an excellent article that points to research about the impact of AI on students. David Stromberg of Stockholm University and Victor Lei and Wu Yanhui of the University of Hong Kong tracked 27,000 pupils aged 12-18 in China, where AI adoption has been fast. Around 80% reported using models such as Doubao and DeepSeek, and the other 20% formed the control group.

After six months, pupils using AI saw their average homework score rise by 18% across all subjects. The time they took to complete each assignment fell from an average of 64 minutes to 45. But come exam time, the same students scored 20% below their classmates who had not called on AI’s help. Homework scores once predicted exam performance; now those who score highest are, perversely, more likely to do worse in exams.

The drop in exam scores was concentrated among students who rushed their homework. Those who used AI but spent as long on assignments as non-users paid little penalty. What matters, then, is how pupils use the technology. Those whose exam results remained strong were not simply copying and pasting answers to save time. More likely they used the chatbots as a personal tutor, perhaps to explain difficult concepts or help solve specific problems.

John Burn-Murdoch says this finding underlines the importance of conscientiousness (or self-discipline) in this modern digital age with all its distractions and access to shortcuts.

Derisking the financing of infrastructure sector segments

noreply@blogger.com (Urbanomics) — Mon, 24 Aug 2026 00:00:00 +0000

A striking feature of urban infrastructure financing in India is the negligible role played by debt, especially bank loans. It should be a policy priority to significantly increase the mobilisation of debt prudently and sustainably for urban infrastructure projects.

In this context, I have blogged here with a proposal to leverage the viability gap funding (VGF) scheme of the Department of Economic Affairs, Government of India, to mobilise bank loans and other debt. The idea is to use VGF to transform the project economics to make it commercially viable for banks to lend to municipalities without a sovereign guarantee and against project revenues. This would be an incentive-compatible form of desirable debt, and also provide a pathway to boost the uptake of the struggling VGF window.

The newly announced Urban Challenge Fund (UCF) of the Government of India is a step in this direction. The ₹1 lakh crore scheme seeks to transition cities toward market-based financing by providing central assistance up to 25% of the total project cost for projects that are able to mobilise at least 50% of the project cost from market sources like commercial bank loans or municipal bonds. The remaining 25% is to come from state and municipal governments.

The UCF should avoid the kind of incentive-misaligned recourse debt mobilised against the municipal general funds and/or with state government guarantees. Instead, it should try to ensure that the debt is non-recourse, mobilised against project revenues and without any sovereign guarantee. This kind of debt ensures fiscal discipline and a sustainable pathway to financing urban infrastructure. The UCF guidelines are silent on this important distinction. In fact, there is a case for a substantial incentive within the scheme itself to nudge cities in this direction.

However, initiatives like the UCF and VGF are unlikely to generate adequate uptake if they are implemented as a regular government scheme, and directly between the central and state governments. For one, the rigid and bureaucratic nature of project appraisals, approvals, program administration, and payment tranche releases is unsuited to finance projects involving private capital. Further, the operationalisation of such financing will require getting a few things right on both the demand and supply sides, which requires a market-making role.

On the demand side, it requires the creation of a shelf of projects that can be structured to access project finance. Developing a good quality pipeline of ready-to-finance projects entails a non-trivial cost and requires a project development fund. The category of projects, like those in water and sewerage, solid waste management, bus transit, electricity distribution, etc., are best placed to benefit.

On the supply side, it requires derisking and increasing banks' appetite, in particular, to finance such projects. Nothing is more effective than a few successful demonstrations of project finance for municipal projects. Today’s commercially attractive infrastructure sectors like national highways, thermal and renewable power generation, parking, etc., got derisked over time through a handful of successes.

This facilitation of the demand-side and easing of supply-side concerns requires active market-making. The infrastructure development finance institutions (DFIs) like National Infrastructure and Investment Fund (NIIF) and National Bank for Financing Infrastructure and Development (NaBFID) are well placed to act as infrastructure investment banks to make this happen by providing technical assistance to develop the project and structure project financing (without recourse to general municipal funds or state government guarantees), mobilising lenders to help achieve financial closure, and contributing the derisking financing layer.

Accordingly, at least a part of the grant allocation for schemes like VGF and UCF could be made available for these DFIs to build a pipeline of projects and finance them. A proportionate share of the Project Preparation and Capacity Building Fund (PPCBF) under the UCF should also be transferred to them. This should be part of an explicit mandate for these DFIs to derisk projects clearly specified sectors for bank and bond finance.

If successful, it would be a powerful example of market catalysis of the kind that is central to the mandate of DFIs.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 22 Aug 2026 13:49:21 +0000

1. Germany used to be the unquestioned global leader in chemicals, machinery, and automobiles. Now, thanks to the onslaught from China, it has fallen on bad times. Sample this on automobiles.

When German companies expand or build factories, it is often in places like Hungary, China or Mexico. The number of cars produced in Germany has fallen 28 percent since 2016, according to the VDA, the German automakers’ association, putting the country well behind China, the United States, Japan and India. Germany could soon also be overtaken by South Korea and Mexico... The German carmakers face an assault on two fronts. In China — the world’s largest car market — sales of foreign car brands are plummeting. And Chinese automakers are making big strides in Europe. In June, Chinese carmakers outsold Japanese carmakers in Western Europe for the first time, according to figures compiled by Schmidt Automotive Research.

China was once a lucrative market for the Germans, accounting for 37 percent of Volkswagen sales in 2019. But after Chinese automakers learned how to manufacture cars through joint ventures with foreign carmakers, the tables turned. BAIC Group, an automaker owned by the Chinese government, has become Mercedes’s largest shareholder, with a stake of almost 10 percent. Chinese companies like BYD and Geely Auto were quicker to develop electric vehicles that were heavily promoted by the Chinese government and are selling briskly in Europe. The Germans took too long to offer appealing electric vehicles. Volkswagen sold 26 percent fewer cars in China in the first six months of the year compared with a year earlier, while Mercedes reported a 28 percent decline and BMW a 20 percent slump.

2. The latest on AI's limitations on vertical use cases, explained with three illustrative use cases.

While A.I. can excel regularly at complex tasks, it can be unreliable when put in charge of an entire job. It can certainly add value to certain areas of the work force, but for now, A.I. still needs a human boss... In our experiment, we deployed A.I. “agents” to act as office workers and found that they were capable of performing some of the tasks we assigned, but not all of them. The agents, which can act autonomously and make decisions based on detailed instructions, excelled at problems they could solve by writing computer programs. But they struggled with understanding the nuances of human language and at navigating user interfaces like the Chrome web browser.

3. Important point about how wealth inequality has come to dominate income inequality as the reason for social discontent.

While wealth inequality has not changed much, the relative importance of wealth compared to income has. The median household’s disposable net worth (net property and financial wealth excluding pensions) in the UK, US, Germany and France has roughly doubled in real terms since the mid-1990s; incomes have grown by only around 30 per cent. The result is that where a generation ago it would have taken about 20 years of savings from the average salary to earn your way from the bottom quarter of the UK’s wealth distribution to the top quarter, it now takes 40. There are similar or even larger upward extensions to society’s economic ladder elsewhere.

This is all the more pernicious since the growing role of passive wealth gains (whether gifted by an asset price boom or one’s parents) relative to income in determining someone’s economic status is mirrored by their growing importance for wellbeing. In the 1990s income rank mattered more than wealth rank for life satisfaction or avoiding distress. Since then wealth has become steadily more influential and is now the larger driver.

4. Ukraine has run out of Patriot air defence systems to shoot down incoming Russian ballistic missiles.

5. Chrystia Freedland on Baumol's disease and public services.

Baumol’s assignment was to determine why in-person classical music performances seemed harder to fund. He found that the snag wasn’t that the musicians were getting worse — it was that the rest of the economy was getting better. It took four musicians one hour of work to perform a Schubert string quartet, exactly the same as it always had done. But four hours of human labour would produce roughly a hundred times as much wheat as it did in the pre-industrial era. For manufactured goods, the multiple is even greater. The same insight applies to taking a two-year-old on a walk in the park, or supporting a mother as she gives birth. As such, Baumol’s disease poses a knotty challenge for the state in liberal democracies because so much of what governments do is more like playing the violin than manufacturing a car.

6. Two points from John Burn-Murdoch's latest on the crisis of social isolation among youth. First, the share of those without any in-person contact during a typical day rose sharply during the pandemic and has not returned back to normalcy.

The least socially connected are increasing their disconnectedness.

7. Rent controls are back as housing prices rise.

Rent controls, where a government sets price limits on rents or annual rent increases for certain types of housing, tend to be effective in their primary objective. A 2024 review of dozens of studies on the policy published globally between 1967 and 2023 found controls were effective in capping rents. The quid pro quo, say their critics, is that they increase rents on unregulated properties and reduce the overall supply and quality of housing in the long term... Of the 38 members of the OECD club of mostly richer nations, 23 already have some form of rent control. Ireland and Austria widened the scope of existing rules this year... In practice, rent regulation can encompass a wide range of measures. Outright freezes, such as in New York, tend to be temporary. More enduring limits can apply to existing or new tenancies, or both, and may apply nationwide or be focused on areas of high rental demand. There are often exemptions, such as for newly built properties, and a variety of yardsticks are used to determine the size of permitted increases...

New Yorkers are the most burdened tenants in the US. Despite decades of regulation, new renters in the city spend an average of 40 per cent of their income on rent. Rent stabilisation — where annual increases are set by a city board based on its assessment of the market, inflation and other variables — is the main mechanism, applying to almost a million units. Households living in rent-stabilised apartments tend to have median incomes lower than overall renter households... In Berlin about 700,000 households, or a third of the total, spend more than 45 per cent of their income on rent, according to the Berlin Tenants’ Association. Like several hundred other high-demand areas in Germany, Berlin is subject to the Mietpreisbremse, or rental brake, a 2015 law that applies to new leases, and the Kappungsgrenze, introduced two years earlier, which limits rises on certain types of existing tenancies. Despite these guardrails, rents have risen almost 70 per cent over the past decade.

Scotland has come up with new rent controls which have evoked interest globally.

The new controls are more precisely calibrated than before; they will apply only to specific areas, last for a maximum term of five years, and limit rent increases for both new and existing tenancies to consumer price inflation plus 1 per cent, up to a 6 per cent maximum. There are some exemptions, for instance properties that are coming to the rental market for the first time.

8. China's investment slump deepens in July.

Industrial output expanded 4.5 per cent in July on a year earlier, official statistics showed on Monday, short of the 4.8 per cent forecast by a Reuters analyst survey and growth of 5.3 per cent in June. Retail sales rose just 0.6 per cent last month, compared with analyst forecasts of 1.5 per cent growth and 1 per cent in June, as the waning effects of consumer goods trade-in subsidies weighed on household spending. Fixed asset investment declined 6.7 per cent for the first seven months of the year on the same period in 2025, deepening from a 5.7 per cent drop in the year to June.

9. On RBI's exchange rate interventions.

Over the last 10 years, across spot and forward markets, the RBI’s net annual currency intervention has averaged about $60 billion, or 2 per cent of gross domestic product (GDP). During FY21 and FY22, when India’s balance of payments generated surpluses, the RBI net purchased $157 billion. That effectively put a floor on the exchange rate. In contrast, the RBI sold a significant $118 billion in FY25, helping restrict the rise in USD/INR from 83.50 to 85.50. Between April 2025 and February 2026, the RBI sold another $37 billion, even as USD/INR moved up to 91. Following the outbreak of the Iran war, the RBI sold a further $37 billion in March 2026 alone, with USD/INR eventually ending the month around 93.50... Such interventions were not necessarily incorrect. But when sustained at this scale and over such timeframes, it inevitably influences currency levels, not just volatility...

The RBI also intervenes in bond markets and modulates banking liquidity to facilitate monetary-policy transmission. During FY26, India’s net government debt across central and state government bonds and Treasury bills grew by ₹17.8 trillion. About ₹10.6 trillion was net purchased by banks, insurers, and pension and provident funds, which have regulatory obligations to buy such bonds. The RBI’s own holdings net increased by the remaining ₹7.2 trillion, thus accounting for a substantial 40 per cent of the incremental government debt... The RBI’s large bond purchases and liquidity operations helped keep rupee-denominated interest rates below levels that might otherwise have been required to attract discretionary savings.

10. Israeli national security minister Itamar Ben-Gvir, a hardline settler previously convicted of incitement to racism, advocates killing Gazans each night.

“I think we should be doing 30 to 40 targeted assassinations per night,” Ben-Gvir said. “Not just those who pose an immediate threat. There are people there who don’t deserve to live . . . They are not even people.” Ben-Gvir also called for the re-establishment of Jewish settlements in the Palestinian territory, saying he envisaged “all Gaza” belonging to Israel and reiterating his previous calls for Palestinians to “emigrate”. “I imagine settlements not just in Gush Katif but throughout Gaza, and encouraging emigration, the more the better,” he said, referring to settlements that were dismantled by Israel in 2005. “And for the terrorists, there should be no emigration. We should just kill them one by one.”

11. Fear of AI is uniting American politics.

Almost three quarters of Americans do not trust businesses to use AI responsibly, according to Gallup. More than 70 per cent oppose having data centres built in their area because of fears about water and electricity inflation. Eighty per cent or more distrust AI for driving, medical advice and corporate hiring decisions. As The New York Times recently put it, fear of AI is the “most bipartisan issue since beer”. That feeling is as strong in the centre as it is on the Maga right and the democratic socialist left. That such fears are often conspiratorial should be no surprise. Paranoia is a natural response to the unknown. Maga’s Steve Bannon calls data centres “weapons labs”. Marjorie Taylor Greene, the former pro-Trump lawmaker, refers to Big Tech as “Skynet” after the self-aware computer system that triggers nuclear holocaust in the Terminator movies. Progressives talk of AI killing US democracy and ushering in a Blade Runner-style dystopia.

12. The big economics story of the recent months is the return of interest rates.

13. For long the World Bank and IFC have tried to get African countries to capture value by investing in the processing of their natural resources. Nigerian billionaire Aliko Dangote is doing exactly that by constructing the world's second-largest petroleum refinery, which has allowed Nigeria to export refined oil to Europe and elsewhere, while also ensuring that Africa's largest crude producer does not need to import refined oil.

His new $20 billion oil refinery in Lagos, which has seen a spike in demand for petroleum products — both in Africa and elsewhere — since the war began in February. Despite having abundant crude oil, Africa still relies heavily on imported fuel... Jet fuel shipments from the Dangote Refinery reached the U.S. market for the first time ever this year, according to the company. The Dangote Refinery was “the world’s single largest exporter of jet fuel” in April and May, said Daniel Evans, a vice president of S&P Global Energy, a market-research firm. Last month, the refinery was Europe’s largest supplier of jet fuel and diesel, according to Devakumar Edwin, a vice president of Dangote Industries. On Tuesday, Dangote Refinery said it had secured $1 billion in financial backing from a Dubai-based investment group to go public on the Nigerian stock exchange. If the listing goes through, it will be Africa’s largest-ever public offering.

14. The rise and rise of America's public debt.

The US’s national debt has hit a record $40tn as borrowing rises at a historic pace... It has grown by $3tn over the past year, its fastest ever pace outside the pandemic era... America’s national debt has surged over the past two decades, rising from less than $6tn (about $12tn in 2026 dollar terms) at the turn of the century as vast public spending during the financial crisis and Covid pandemic exacerbated yawning budget deficits. In the past 10 years alone, the overall debt burden has doubled. Debt held by the public — a key metric monitored by markets that excludes intragovernmental holdings — now exceeds $32tn, roughly equal to the size of the US economy. The Congressional Budget Office, a non-partisan watchdog, expects the debt held by the public to exceed the high of 106 per cent of GDP reached in the aftermath of the Second World War by the end of the decade and hit 120 per cent by 2036.

15. The moderation of Meloni...

As prime minister, Meloni’s cautious pragmatism has dismayed hardline Maga purists such as Bannon, who told Italian media she was “a total globalist” who had betrayed her “fundamental beliefs”. Meloni has paired tough measures to curb irregular migration with higher quotas for legal migrants, helping Italian businesses cope with labour shortages. She has also softened her anti-EU rhetoric and forged effective working relations in Brussels.

... and fall out with Trump.

After Trump’s return to the White House in 2025, Meloni — the only EU leader to attend his inauguration — sought to cast herself as Europe’s bridge to Washington, hoping it would strengthen her hand in Brussels and at home. Instead, Meloni has been tarnished in the eyes of many Italian voters by her close association with an unpopular US president. Trump has imposed high tariffs on EU imports, pressed Nato allies to sharply increase defence spending and attacked Iran — policies deeply damaging to Italian interests. “Her proximity to Trump has failed to give her any appreciable results,” said Riccardo Alcaro, research director at Rome’s Institute of International Affairs, calling her erstwhile friendship an “electoral albatross” as Meloni gears up for a bruising re-election campaign... analysts say Meloni’s difficulties with the White House reflect not only Trump’s personality but a Maga world view that appears to expect near-total subservience from its allies... Maga’s deep-rooted antagonism towards the EU as a political project also made it hard for any leader with a pan-European outlook “to cosy up” to the administration for long.

16. One of the biggest innovations of the 20th century, container shipping.

Seventy years ago it would take at least 10 days for a ship at London Docklands to be emptied and reloaded by around 50 dockers. Pilfering was rife, accidents were commonplace and port business was vulnerable to labour strikes. Then came the shipping container, an 8ft x 20ft steel box that needed increasingly vast vessels to carry an ever-expanding volume of goods... it takes cranes roughly 40 hours to empty and reload a large container ship — around 20,000 steel boxes lifted by 146-metre-high computerised cranes that move two containers every three to four minutes. That efficiency and scale is testament to the unglamorous steel container, an invention that has driven down shipping costs to such a low fraction of total manufacturing value that it has enabled the rapid expansion of global trade over the past 70 years... The box’s dimensions were standardised from 1968 — a step that is “frequently overlooked”, says Brian Slack, a professor in geography and planning at Concordia University, Montreal. Without it, “containerisation would not have been as revolutionary as it turned out to be”...

More than 280mn journeys were made by containers between world markets last year. They bear around two-thirds of global seaborne cargo — about 60 per cent of total world trade, according to UN Trade and Development. More than 7,000 container ships are currently operating. The largest can carry cargo equivalent to a 44-mile-long freight train with, for example, around 120,000 bananas or 10,000 pairs of jeans per box. The average size of the ships has more than doubled since 2000, according to the WSC... To service the demand for goods, shipping lines have ordered larger and larger ships. The current record size for a container ship is the so-called ultra-large container vessel MSC Irina, which has a carrying capacity of 24,346 twenty-foot equivalent containers, or TEUs. The number of new container ships on order is equivalent to around 40 per cent of the current sailing fleet — a record high.

17. Circular trading in China's humanoid robots industry.

China’s humanoid robot makers are generating much of their revenue from selling machines to government-backed training centres — which then collect and sell training data back to the robot makers, raising concerns about actual demand in an industry Beijing is keen to promote.

18. Data centre job creation facts.

At the peak of construction, according to a November 2025 study by the University of Southern California, a data centre in the US needs between 0.7 and 2 workers per megawatt. To build India’s targeted capacity of 10 GW by 2030, that works out to a peak construction workforce of 26,000... In direct employment, a 100 MW data centre supports 120–150 jobs. Take the generous end of that range and India’s 10 GW target yields 15,000 full-time, sustainable jobs. And these aren’t, for the most part, gold-collar jobs. A handful of C-suite roles rake in Rs 1 crore a year. Design and engineering workers make Rs 30–40 lakh. The staff who actually keep the lights on—on-site security and hands-on hardware engineers—earn around Rs 10 lakh. A recent study from the US—the world leader in data centres with an installed capacity of 55 GW—examined the employment records of 770 server farms going back two decades and concluded that the industry overstated their job impact by a factor of three at least. Apply the cut to India’s job-creation estimate and the promise wilts before a single server is switched on.

And who will use it.

Of the 10 GW capacity India intends to build by 2030, only a sliver is meant for the country. The industry estimates that 90–95% will be leased by foreign firms such as AWS, Microsoft Azure, Google Cloud, Oracle, and Meta. Even now, of the roughly 2 GW already installed, barely 30% is used by Indian players.

Leveraging the interdependence to combat China's industrial policy

noreply@blogger.com (Urbanomics) — Wed, 19 Aug 2026 02:29:32 +0000

There is an interesting asymmetry in the way China is covered by the Western media and commentators.

China’s trillion-dollar and rising export surplus and its rapidly growing outward foreign direct investment (FDI) are seen as signs of deepening global dependency. This framing ignores the context of a weakening domestic economy and increasing dependence on exports to sustain jobs and growth (and the social contract between the Party and citizens). It also glosses over the risks to both exports and FDI posed by the rising backlash against China’s mercantilist policies. The Chinese vulnerabilities created by this dependence (on exports) and exposure (of FDI) are rarely discussed.

This perspective stands in stark contrast to the view that bemoans the vulnerability of Western multinationals operating in China and completely ignores the buyer’s leverage on China with its importers. The same fact of deep interdependence is narrated as “strength” when it’s China exporting to the West, and as “vulnerability” to be endured when it’s the West transacting with China. For China’s trade partners, its $3.77 trillion export volume is as much a powerful bargaining chip as it is a dangerous dependence.

In this backdrop, this post provides a framework to think about combating China’s manufacturing dominance.

As I blogged here, experts and commentators ought to explore ways in which the leverage from China’s export dependence and FDI exposure can be used by its trade partners as bargaining chips to protect their interests.

In this backdrop, I used Claude to develop an analytical framework to address this asymmetry. The matrix covers six domains where every lever Beijing pulls has a symmetric counterpart.

The single most underused lever is market access. China’s $ 1tn-plus surplus exists precisely because Western markets absorb the overcapacity its own weak consumers can’t. This is what keeps the factories running and the post-1980 social bargain afloat. That makes access to EU/US demand a bargaining chip of the first order, not a favour to be lamented.

Local production inverts China’s own auto playbook by making the likes of BYD and CATL now dependent on European permits, subsidies and goodwill, and leaving them vulnerable to imposition of the same local-content and tech-transfer conditions China once imposed on Volkswagen and GM.

Brands and ownership are a bargaining chip that are almost entirely ignored. Volvo, MG, Pirelli, Smithfield and GE Appliances derive their value from Western consumer trust and shelf space, which divestiture orders, golden shares and procurement bans can all reach. Data and security concerns confer enough leverage to restrict Chinese hardware out of the Western markets. Capital access through US and HK listings and dollar funding is a vulnerability that delisting and Entity-List tools can throttle. And core technology is the rare-earth lever in reverse, as outlined here.

These are chips to be priced into a bargain. Each carries a cost to the user, and the mirror pairs show symmetry, not exact equivalence in magnitude or legality. The central point is that the dependence is bilateral.

In their use of the bargaining chip, the alliance could emulate China’s rare earth playbook. An FT long read on China’s management of critical minerals trade is instructive.

Cheaply produced Chinese metals are now embedded in the just-in-time supply chains that global industries rely on, but which buckle dramatically when interrupted — as the Covid-19 pandemic, Russia’s full-scale invasion of Ukraine and the closure of the Strait of Hormuz trade waterway have shown. That has given China leverage, which it has increasingly been willing to use: since 2023, it has imposed a series of export restrictions on a wide range of niche metals… Despite the export controls, metals flows have not ground to a halt. Instead, China has created a licensing scheme under which it decides who gets which minerals. The lengthy application process gives authorities detailed information about which metals overseas companies and their contractors are using, and why. Applicants must show that the material is going into civilian, rather than military, supply chains.

Companies, traders and analysts say material has been flowing but at unpredictable paces, with licence approval often slow. “The export control system has evolved from a crisis into a managed system”, though buyers still face “compliance and commercial” challenges, says Kyle Sullivan, vice-president of business advisory services at the US-China Business Council. This embeds new uncertainty into corporate supply chains and risks customers switching to Chinese component suppliers whose metals purchases are not being monitored and squeezed. One executive at a large Japanese user of rare earths says China wants to keep companies in a “neither alive nor dead” state, by supplying them with the minimum needed to avoid a supply chain collapse — which would hit Chinese companies that still rely on materials and components from Japan.

The big difference is China’s intent, willingness, and ability to use these chips in its strategic calculus. I’m not sure whether any of its counterparts in the West currently possess the same three at anything close to the degree present with China. The US can mobilise them if it puts its mind to the task. But it is most unlikely in the current dispensation.

Another challenge is that no one country, including the US, has anywhere like the leverage China has across industries. This means that any meaningful application of a bargaining chip would require effective coordination among a group of countries. This is precisely the point that Rush Doshi and Kurt Campbell made when they argued in favour of America mobilising an alliance of like-minded countries to respond to China’s weaponisation of trade.

Unfortunately, President Trump’s disruption of the Western alliance makes even a collaborative effort very difficult. The only option may be to wait out the regime before serious efforts in this direction.

A graphical summary of India's labour market challenge

noreply@blogger.com (Urbanomics) — Mon, 17 Aug 2026 02:40:55 +0000

I have blogged earlier (see here and here), highlighting the importance of broad-based economic growth and the creation of good jobs as essential requirements for India’s sustained high-growth prospects.

This post has been triggered by two articles. First, a recent op-ed in Business Standard by Kavitha Rao of the NIPFP, which analysed the Periodic Labour Force Survey (PLFS) for the composition of jobs in India and found,

The PLFS classifies information on the composition of workforce into regular workers, self-employed and casual workers and the corresponding wages. The share of regular workers in total workforce was 23.6 per cent in 2025, a little more than half being in government or public enterprises. The self-employed account for more than half (56 per cent), with the remaining being casual workers. The average wage for regular worker was reported to be at ₹22,699, which is higher than the monthly earnings of self-employed ₹14,861, and of casual workers at ₹10,000, assuming a worker works for 22 days in a month. Even among the regular workers, there is considerable variation — over 50 per cent have no written job contract and no social security benefits.
To understand the differences in wages across activities, the survey reports a number of occupation divisions — the ratio of the highest to the lowest wages within regular workers is 4:1. Juxtaposing the highest-wage-earning occupation with casual workers, the differential is 7.4 times, assuming that casual workers get to work 22 days in a month. To top this off, there is a public-sector premium, especially in lower-level jobs. On the other hand, the self-employed category includes a number of unpaid family workers, suggesting significant underemployment in the economy and poor returns to effort. Fewer well-paying jobs and a wage premium for public-sector jobs drive a sharp demand for these jobs.

She also points to the increasingly capital-intensive nature of job creation across sectors, and the convergence of labour intensity in manufacturing with that in services.

Second, The Economist had this graphic on the rising number of graduates and their declining monthly salaries.

Research by the Azim Premji University in Bangalore shows that each year between 2004 and 2023 roughly 5m graduates were added to the workforce; but the number in employment rose by only about 2.8m… Of the young people who report themselves unemployed, fewer than 7% of graduates find permanent salaried work within a year…Education-fuelled aspirations have pushed enrolment in tertiary education to 30% of 18- to 23-year-olds, while the number of higher-education institutions has grown from 6,000 to around 70,000 in the span of 30 years, thanks to a boom in private education… around 45% of Indian graduates have degrees in arts or commerce rather than, say, engineering or medicine. A report by a business body in 2024 estimated that only 55% of India’s graduates were employable.

With this backdrop, I used Claude to dig a bit deeper into the economic growth and labour market. As a framework, broad-based economic growth works at the intensive margin of the labour market to raise disposable incomes, and good job creation works at the extensive margin to expand the meaningful consumption base.

Consider the headline numbers. The employment elasticity of GDP growth has fallen from ~0.4 in the 1980s to 0.26 for 2000–2012 and near-zero by 2019 (RBI 2024 estimate: 0.18).

This is also borne out in the widening wedge between aggregate output and employment growth rates.

The economy needs roughly 20 million new non-farm jobs a year to absorb the demographic bulge, whereas formal-sector job creation runs at about 4 million.

It should be a matter of concern that India, one of the world's largest economies, has one of the smallest formal-sector labour-absorption engines relative to size. It does not help, as I blogged here, that manufacturing’s employment share is stuck at 12%, and every export dollar now buys less domestic employment than a decade ago. As mentioned earlier, the State of Working India 2026 report documents that just under 7% of male graduates secure a permanent salaried job within a year of graduation.

In addition to quantity, another dimension of the extensive margin is the quality of jobs created - i.e., those that pay enough, and reliably enough, to enter the consuming class. Seven rounds of PLFS data (2017-18 to 2023-24) reveal a labour market where employment quantities are rising but quality (measured by contract security, social protection, paid leave, and income sufficiency) has stagnated or worsened for most workers. As a headline number, only 23.6% of workers are regular salaried.

Further, only about 11% are regular salaried with a written contract and social security. Everyone else is either self-employed at very low earnings (56%), a casual daily-wage worker (20%), or a regular worker without protection.

Of the 23.6% who are regular salaried, more than half have no written contract and no social security. It is good that the share of those in regular employment with all three protections has been rising gradually.

The problem is compounded by the quality problem not sparing even the well-educated, and even worsening for them. From 2017-18 to 2023-24, among graduates, precarious contracts (no contract or less than a year) rose from 49.3% to 53.9%; among post-graduates it rose from 38.7% to 44.1%; among technical diploma holders (who should command skill premiums) it rose to 65.8%.

The numbers on quality are likely to be even worse if we exclude government jobs. They have high shares in public administration, education and health, financial services, utilities, and transportation.

On salaries, the average monthly earnings across categories are low enough and vary sharply. The ratio of the wages for regular workers in their highest-paid occupation vs lowest-paid occupation is 4:1, and that for the highest regular vs casual worker earnings is 7.4:1.

The table below captures the summary statistics on India’s employment market today. Only about 11% of India's workersare in the genuinely formal employment cell (regular salaried with a written contract and social security). And within regular salaried work, the 4:1 within-category wage ratio (for regular workers) and the 7.4:1 regular-to-casual ratio mean that even the "good" tier splits sharply.

This brings us to the intensive margin, involving wage trends of existing employees. Are incomes rising for those already in work? Nominal wages roughly doubled 2012–2024 but inflation ate almost all of it. In FY24 corporate profits grew 22.3% and reached a 15-year high.

Real salaried wages fell -4% cumulatively 2012–2024. Real wages for salaried workers were -1.7% lower in Q2 2024 than Q2 2019.

Rural real wages grew about 7% annually in the 2010–2015 period and have been near-zero since.

A decade of near-zero real wage growth means that even the workers who are employed are not getting the income-per-hour gains they need to expand consumption. The corporate sector is booking those productivity gains as profit rather than passing them into wages. This is the "consumption slowdown" that FMCG, auto and durables companies have been reporting from mid-2024 onwards, and is likely caused by the intensive-margin failure documented above. This failure at the intensive margin is a binding constraint to broad-basing economic growth and expanding the consumption class in a substantial manner.

Let’s round things off with the labour-intensity point raised in the Rao oped. The India-KLEMS database shows that labour per unit of capital has fallen steadily across all major sectors, and manufacturing and services have converged to a broadly similar labour intensity. In earlier decades, manufacturing was the obvious job-creation engine because it was more labour-intensive than services. That is no longer true and to that extent diminishes manufacturing value in absorbing agricultural surplus labour.

If labour intensities are similar, the sectors that expands the fastest are the natural venue for large-scale job creation. This points to the importance labour-intensive services like construction, trade, hotels, education, health, etc, as articulated by Rao.

This reality demands a policy strategy that targets improving the quality of education and health services, and increasing their labour productivity. The quality of regulation and formalisation are two instruments in this regard.

To summarise, neither margin is currently operating as India is stuck with quantities of the wrong kind of jobs, qualities that are eroding, and flat real incomes.

India is currently producing high GDP growth without producing either broad-based real income growth or broad-based good-job creation. This means that the growth is not translating into a widening consumption base, which in turn is a binding constraint on the private investment cycle that would generate more good jobs.

Breaking that loop requires action on both margins simultaneously: raising real incomes for those already in work (through productivity gains genuinely passed to wages, and formalisation) and expanding the base of good jobs (prioritising the sectors where labour-intensity remains, and through selective labour-intensive manufacturing where the global window has not fully closed).

India has company in China on the issue of good job creation. An FT long read highlights China’s “great job squeeze”, driving people into low-paying jobs like ride-hailing and food-delivery. This contrasts starkly with the productive factory and construction jobs that underpinned the emergence of China’s middle class and the country’s sustained high-growth era.

The property bust, consumer spending slowdown, and prolonged deflation have taken a toll on job creation. In this backdrop comes the backlash against exports, a major contributor to jobs and economic growth. The result of these trends is a labour market where low-paying gig jobs have become the major source of labour absorption. The number of gig workers has risen by 10 million in just two years.

A precarious gig economy of ridesharing drivers and delivery couriers has been soaking up China’s surplus labour. The labour market has long been at the heart of the social contract between China’s government, eager to maintain stability, and a vast population yearning for economic betterment. Today it is under strain as rarely before. While flexible work has served as an economic escape valve, it too now risks becoming overloaded by more people than it can provide jobs for… More than 53mn people as of 2025 work as food delivery or ridesharing drivers in China, up 10mn in two years… Several municipalities have reported an oversupply of ride-hailing drivers and in June, the southern city of Shenzhen declared its ride-hailing market saturated…“I would say the demand for labour is falling faster than the supply of labour is declining,” says HSBC’s Frederic Neumann, citing automation in factories, the property slowdown and the as-yet unquantified impact of AI…
Andrew Batson, China research director at Gavekal, an economic research firm, suggests flexible employment and gig work are “more of a symptom of broad-based labour market weakness in China than a totally independent development”, even if technology has aided the growth of platform workers. “Because aggregate demand is low, the bargaining power of workers is weaker and they have to accept more underemployment and less favourable working conditions,” he says… “The anecdotal evidence suggests that gig worker incomes are trending towards subsistence levels, given the competition among workers in China for jobs,” says Neumann… Gig work is increasingly drawing in graduates, of whom there are more than 12mn entering the labour market this year, as well as offering options for migrant workers.

In this context, John Burn-Murdoch has an excellent article of relevance which highlights the contrasting tales of US and UK labour markets. He makes the point that while the UK has done better than the US in school learning outcomes and adult skill acquisition (30 per cent of US adults have literacy skills typical of a 10-year-old), the latter has done well in labour market outcomes.

And this shows the higher wages received by US workers (it remains to be disaggregated as to how much of this is due to higher productivity, and how much due to labour market distortions).

Similar to Germany, factory workers in the US earn 60 per cent more than in the UK after adjusting for differences in living costs. Plumbers and electricians earn 90 per cent more, and retail workers earn double. The same proportion of US workers who score stunningly low on literacy earn an average of almost $30 per hour, and two-thirds of them are in work. Their British counterparts make the equivalent of $20 and fewer than half are employed.

Like India, Britain has invested heavily in skill development, and Burn-Murdoch makes a very important point, of relevance to India.

But if we really want to deliver better outcomes, we must stop thinking of particular qualifications or forms of education as things that produce particular economic outcomes and deliver respect. Rather, we should view education as creating potential that a strong economy unleashes (and a weak one disappoints).

The main point is that, if you cut through everything, good job creation is all that matters. And India has much to do on this front, especially with all the headwinds from geopolitics, trade, technology, climate change, and antecedent problems.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 15 Aug 2026 01:00:00 +0000

1. The solutions proposed by Andy Haldane to address housing supply in the UK is universally valid.

Public land developed for public purpose but privately operated; co-financing by municipal bonds and private capital; a bespoke planning regime; and a transformative method of new construction — these are the base elements needed to ease the constraints suffocating the UK’s housing market and to tackle the housing crisis in every postcode.

2. Talk about a company mobilising debt for others to buy its products, and look no further than Nvidia.

The world’s largest financial groups are working with Nvidia to assemble a funding package of more than $500bn for AI infrastructure development, in one of Wall Street’s most ambitious lending efforts to date. A consortium of groups including Apollo Global, Blackstone, BlackRock, Brookfield Asset Management, Goldman Sachs and KKR is entering a partnership with Nvidia to invest in the AI build-out... Nvidia said on Monday afternoon that it has signed memorandums of understanding with the six Wall Street firms to “mobilise over $500bn of third-party capital for the build-out of AI infrastructure over time”. Under the deal, which is still subject to final agreement, the firms will create dedicated pools of capital to finance Nvidia’s AI ambitions “at attractive rates for Nvidia customers”... Morgan Stanley projects so-called hyperscalers will spend $3.5tn between 2026 and 2028.

3. India manufacturing output trends.

But services exports have doubled in less than four years.

4. Israel's scorched earth policy in South Lebanon.

Weeks into the latest conflict, defence minister Israel Katz invoked a different approach, one used with devastating consequences after Hamas’s October 7 2023 attack: the “Rafah and Beit Hanoun model”, a reference to Israel’s wholesale levelling of cities in Gaza. “All homes in Lebanese villages near the border will be destroyed,” Katz said. By July, Katz claimed his threat had been carried out. “Twenty-four Lebanese villages, hundreds of years old, we destroyed all the buildings,” he said, boasting that up to 20,000 homes had been demolished. “Not house by house, but entire villages.”...

Israeli evacuation orders forcibly displaced some 1.2mn people in the war’s first 10 days, the vast majority from Hizbollah-dominated southern Lebanon, as Israeli forces advanced. Fighting raged for weeks, but most of the destruction documented by the FT and Lighthouse came after an initial Israel-Lebanon ceasefire on April 17. While the truce did not hold and some clashes have continued even past the latest ceasefire in June, Israeli forces — who had already established control over many emptied villages — continued to lay waste to the south through air strikes, controlled detonations, bulldozers and the use of white phosphorus. Israel’s occupation is now deeply entrenched, the area under its control demarcated by what it calls “the yellow line”. The zone covers about 6 per cent of Lebanese territory and stretches roughly 10km inland from the two countries’ informal border...

Israel has also done extensive damage to historic monuments and Unesco-listed sites, including 16th-century mosques, 19th-century libraries, religious shrines, ancient Roman ruins and Crusader castles. “It is an attempt to make the areas unrecognisable . . . to sever people’s connection to their land and their history,” said Joanne Farchakh Bajjaly of Biladi, an organisation dedicated to preserving Lebanon’s cultural heritage. “How can they rebuild their communities if everything is gone?”... Lebanon’s environment ministry and rights groups have documented Israel’s widespread use of white phosphorus — an incendiary chemical that triggers fires and can leave contamination in soil and water — in both populated and agricultural areas. Israel says it uses white phosphorus lawfully to clear brush and create smokescreens, but use over populated areas can violate international law.

5. Janan Ganesh is on to something.

If a politician could decouple socialism from the set of cultural ideas known as “woke”, he or she would be difficult to stop... The one place that might have produced a culturally conservative or at least culturally neutral socialism is continental Europe, but even the French left has absorbed American woke jargon, perhaps recognising in it the authorial stamp of Michel Foucault. And so capitalism glides on, never quite facing what would be its sternest political test. The question is why the left allows it to happen... Woke has been such a godsend for capitalism — making its enemies look ridiculous — that it can seem almost engineered for that purpose.

6. Purchase commitments of the hyperscalers jumped from a trillion dollars to 1.5 trillion from Q1 to Q2 of 2026. These are debt in another form.

7. Guy Chazan describes elite capture of the political system in the US.

In America’s Gilded Age, millionaire robber barons operated from the shadows, bribing pliant lawmakers to do their bidding. Under President Donald Trump, billionaires have gone one better. Some are in his cabinet... No longer content to lobby from afar, ultra-rich tycoons — especially from Silicon Valley — have infiltrated the capital’s ecosystem, taking on advisory roles in government, cultivating ties on Capitol Hill and weighing in on the most important issues of the day, from AI to industrial policy. They attend glitzy dinners, donate millions to White House fundraising projects and are photographed with Trump promising eye-popping investments in the US. Many have enjoyed regulatory relief, policies that benefit their businesses and, in some cases, lucrative government contracts worth billions of dollars. But unlike the robber barons of the past, who were often charitably minded and gave generously to public institutions, the tech billionaires of the present show a “complete indifference” to any kind of “social contract” and any need to “compensate people for the disruption they have brought into their lives”, says Quinn Slobodian, a historian of capitalism at Boston University...

If there was a trigger for the growing influence of the ultra-rich in America’s political system, it was the Supreme Court’s 2010 Citizens United ruling, which held that independent political spending on elections by business was protected by the First Amendment. The judgment opened the floodgates to big money in politics. America’s rich had spent $31mn in the 2010 elections, according to liberal advocacy group Americans for Tax Fairness (ATF). In the 2024 election cycle, the 100 largest billionaire donor families gave $2.6bn. A huge proportion of that came from just a handful of individuals. Three billionaires — Elon Musk, Miriam Adelson and Timothy Mellon — accounted for more than a third of the roughly $1.5bn spent to elect Trump.

8. C Thi Nguyen has a brilliant essay on the value of doing something for its own sake or as labour of love (play, as he describes it), and doing something as part of a requirement (work, as he describes it). He channels Aristotle (through Bernard Suits' The Grasshopper) to describe it as the core of a meaningful life.

For Suits, play is not just a side dish for the main meal of work. Play is at the core of a meaningful life. Underneath the hood, Suits’ argument is Aristotle to its bones. For Aristotle, a good life — a truly meaningful life — lay not in the creation or accumulation of stuff or the achievement of outcomes, but in the process of doing itself, in the rich exercise of our full human capacities. Suits found the deepest illumination of Aristotle’s point in the simplest human activity: playing games. Suits provides, and defends, his definition. To play a game, he says, is to voluntarily take on unnecessary obstacles to make possible the struggle to overcome them. To play a game, therefore, is to be inefficient on purpose. When you run a marathon, you are trying to get to a particular spot in space, but you avoid the most efficient ways to get there. You do not take a subway or a taxi or a bicycle. You force yourself to run, and you try to run as quickly as possible. Which means, for Suits, that the struggle must be an essential part of the true value. What you care about can’t just be the bare outcome by itself. You can’t just care about being at that spot in space. Otherwise you’d just take the most efficient path. But if you took the subway then it doesn’t count — not for the game of marathon-running, anyway...

To understand games, distinguish between two things: the goal of a game and your purpose for playing it. The goal is what you pursue inside the game; the purpose is why you played it... For some people, the goal and purpose are one. They want to win, period. Call those people achievement players. The Olympic runner wants to win the marathon by running it — but they do truly care about winning it. But for other people, goal and purpose come apart. We try to win because we are interested in the struggle, and it is the struggle itself that we truly care about. Call us striving players. It’s all right if we try and we lose, if the attempt was beautiful. In ordinary, practical life, we take the means for the sake of the ends. In striving play, we take the ends for the sake of the means. What is the point of life? Is it to make stuff? Or is it to take difficult actions, think rich thoughts, weigh subtle decisions? Is it having a pile of stuff — or does the stuff just support our quest for interesting action?... Suits argues... that play itself is the point, and that we work in order to survive so that we might play...

Rephrase Suits’ definition this way: play is wasting resources for fun. But also: the whole point is that, deep down, it’s not a waste. A truly wasted life would be one spent working hard, stockpiling goods like the ant and never using them to support joyous play. And to truly waste humanity would be to push people so hard to work productively, to make more stuff, to the point where nobody had time to play. Let me try my own fusion of these two definitions. “Work” isn’t distinguished from “play” by difficulty, suffering or practicality. You can make pottery, knit scarves or grow a garden as play. The true difference between work and play is the reason you have, and the control you have, over what it is you’re doing and why. Here’s my suggestion: to “work” is to perform activities to create outcomes that are set by something external. When you work, you are making what the world tells you to make. Maybe you’re gathering food, because biology tells you you have to eat. Maybe you’re earning money, because the world says you need money to buy food and shelter and medicine. Maybe you’re making products, because the world wants something specific from you — planks of wood, a ride to the airport. But “play” is different. You still have goals and struggles, but your goals are up to you.

9. Two important graphics on the Chinese economy. One, the great job squeeze resulting in the rise of the gig economy, whose workforce has increased by 10 million in just two years.

Second, the persistence of negative household sentiment for the fifth successive year.

10. Andrew Puzder, the US ambassador to the EU, draws attention to the substantive equivalence between US tariffs (50% tariffs on primary steel) and the EU's CBAM on their respective steel and aluminium imports.

Protesting against US national security measures while erecting protectionist barriers reveals a striking double standard... The US approach is direct and transparent. Primary steel faces a 50 per cent tariff (with some rates recently increased), and aluminium a comparable duty. To stop circumvention through finished goods, the tariffs extend to derivatives... CBAM differs in form but not in substance. Importers of iron, steel, aluminium and related products must report embedded emissions and relinquish a corresponding number of CBAM certificates priced at the EU’s carbon price — currently around €80 per tonne of CO₂... At root, both policies are adjustments to protect domestic producers from unfair competition, whether from lax environmental rules or subsidised excess capacity. US Section 232 tariffs address foreign overcapacity that threatens to hollow out its metals sector; CBAM is designed to combat carbon leakage, when production shifts to jurisdictions with less stringent climate standards... In both cases, the measures raise the cost of imports to safeguard local production. The parallels are unmistakable. A shipment of steel-containing machinery faces extra US duties based on metal content. In the EU, the same goods face fees based on production emissions under CBAM. One is framed as security policy; the other as climate policy. Both increase the price of targeted imports relative to domestic options.

11. The US equity market today in perspective.

A graphical summary of India's manufacturing challenge

noreply@blogger.com (Urbanomics) — Thu, 13 Aug 2026 03:24:37 +0000

As AI threatens to hollow out commoditised IT jobs that have created a generation of Indian middle class, manufacturing appears even more important for good job creation.

However, manufacturing’s share of GDP has been declining, falling from 17.1% in 2010 to 13.4% in 2025.

Between 2017-25, manufacturing's employment share has remained unchanged at 12.1%!

India could not leverage the opportunity presented by the global value chain diversification away from China. Countries such as Vietnam and Bangladesh have capitalised on labour-intensive manufacturing.

As a result, direct export-related employment fell from 9.5% to 6.5% of total employment (2012–2020, World Bank).

It does not help that India's manufacturing labour productivity is abysmally low.

India’s labour market challenge is two-fold. At the extensive margin, it must produce more good-quality jobs, ones that are productive and also pay reasonably well. The subsistence gig-economy jobs cannot create the middle class required to sustain broad-based high economic growth rates. Manufacturing is critical to this good job creation agenda. At the intensive margin, the existing jobs must become more productive and labour wages must increase proportionately. Export competition is central to increasing productivity.

I’ll blog separately on the labour market challenge.

A template of a localisation scheme for smart meters

noreply@blogger.com (Urbanomics) — Wed, 05 Aug 2026 00:00:00 +0000

I have blogged here and here outlining an industrial policy to promote domestic innovation in electronic products. The policy should identify a few (say, 3-5) products and encourage phased localisation over a five-year policy regime using a combination of targeted incentives and mandates.

No product is more appropriate for such a policy than smart meters, on which India has launched a massive scheme (the RDSS) to replace the existing 200-250 million electromechanical and basic digital meters with bidirectional prepaid meters by the end of 2028. This amounts to almost a 10-year Rs 2.4 - 3 lakh Cr contract. Given that almost all meters are procured by government-owned discoms with the central government subsidy under RDSS, it is a perfect opportunity to use incentives and mandates.

The meters are rolled out largely on a TOTEX model, where private Advanced Metering Infrastructure Service Providers (AMISPs) finance, install and operate the meters over 8-10 year contracts, paid per meter per month (of around Rs 60-80). The AMISPs, in turn, procure the meters from OEMs like Secure Meters, HPL, Schneider, Landys+Gyr, and Genus. The major AMISPs are Adani Energy, Intellismart (now purchased by Adani Energy), Genus, GMR, Tata Power, and Techno Electric. This market concentration, on both the AMISPs and the meter manufacturers, while a risk, also makes it easier to implement any phased localisation policy.

The smart meters are currently assembled in India, with all three major components being sourced externally from foreign suppliers. In terms of its technology, a smart meter is a rugged, always-on computer with three core integrated circuits (plus a latching relay, which is an electromechanical switch rather than a chip). They are the metrology IC (the sensor), the microcontroller unit (MCU) (the brain), and the modem (the voice) of the meter, and they differ sharply in complexity, which makes a phased localisation strategy possible.

Fortunately, India has a few chip design startups who have already commercialised the metrology-plus-processing layer, and with credible domestic microcontroller unit design. The narrowband IoT/4G baseband for the modem is a genuinely hard one, though achievable in a phased manner given the commercial incentives that come with a policy.

The table captures the smart meter components and the current market landscape.

I have blogged here highlighting the entry barriers arising from financing challenges and deployment opportunities (given the lack of Indian OEMs) for indigenous chip design firms to break out in the chip design market. In this context, the massive volume of subsidised smart meters procured by discoms is an unmatched deployment breakthrough for the domestic chip design industry.

This opportunity can be harnessed through a general “product-mission industrial policy” built on four levers: aggregate demand, mandate and phase, bridge OEMs to chip firms, de-risk capital. The 200 million meters (≈600 million chips) is the rarest asset in industrial policy: demand that is enormous, captive, and shaped by the state itself. India is already partway there, having commercialised indigenous meter silicon (Azimuth AI’s ARKA GKT1 and MosChip’s Vidyut).

There are two commercial firms in the smartmeter contract - the AMISPs and the meter OEM. The two parties hold complementary assets - the AMISP holds the bankable multi-year volume and the government’s contractual leverage; the meter OEM holds the design capability and intellectual property (IP). The most incentive-compatible contracting arrangement would be to anchor the mandate in the AMISP/TOTEX contract, cascade execution to the OEM, and pay a per-meter incentive that neutralises the early cost gap. An OEM-only mandate fails on volume, and an AMISP-only mandate fails on capability and gets passed through as cost.

An illustrative localisation phasing and incentivisation is indicated, which would amount to a total subsidy of Rs 1000-1200 Cr, or less than 0.5% of the total project cost and about $1.6 billion of total chip cost over 5 years. The per-meter incentive neutralises the early cost gap, and it tapers off as volume rises. This would amount to localisation of 60% of the chip design for smartmeters. The numbers could be tweaked and finalised after consultations involving all stakeholders - OEMs, AMISPs, and chip design startups.

I am assuming only the localisation of the chip design, and not the fabrication (amounting to about 60% of the chip cost), thereby enabling domestic capture of about $1 bn of chip value besides the development of invaluable chip design capabilities at scale. However, the central government could target even the fabrication of the higher-nanometer chips under the Semiconductor Mission. At the least assembly, testing and packaging (ATMP) could be localised in parallel.

This would be a genuinely end-to-end localisation achievement that can be emulated for certain other products like surveillance cameras, Fixed Wireless Access (FWA) and other customer premises equipment, automotive chips, etc.

The details are important. The target is chip design - ownership of the IP and the front-end engineering - not fabrication. An Indian-designed metrology or MCU chip can be fabricated at a foreign foundry (TSMC, UMC) or, increasingly, at an Indian one (Tata-PSMC, and the Micron and Kaynes/CG packaging lines) and still deliver the objectives of domestic IP, design jobs, security assurance and value capture. Fabrication indigenisation is a different decade-long, capital-intensive problem, albeit achievable now in some degree with the Indian Semiconductor Mission (ISM). For a country which originates 30-40% of the world’s chip-design talent, this is the natural place to start.

To prevent gaming and ‘badge engineering’, ‘indigenously designed’ must be defined tightly - the IP is owned by an Indian entity and the RTL design and tape-out are done in India, verified by a third party - and not an imported design with a domestic label.

The biggest challenge would be to support the domestic startups quickly build design and testing capabilities to meet the large volumes they must commit (including the continuous technology and standards updations). This will require the OEMs and AMISPs working closely with the chip design startups. They could offer some form of advance market commitments to the chip design startups that would allow them the runway to raise capital and finance their rapid capabilities development.

The success of this will depend on its ownership by the Ministry of Power, which would need to work closely with the Ministry of Electronics and Information Technology, which currently run the electronic products and components schemes and the semiconductor mission.

As an important requirement, there should be no relaxation of the quality and standards requirement from the domestic chip designers. They should pass the same accuracy and reliability tests required by incumbents. In fact, they (either directly or through the meter makers) should also be nudged with soft targets on exports so as to create the incentives for maintaining global competitiveness. If they are unable to with all the support, then perhaps it might be justifiable for the government to throw up its hands and reconcile itself to the quality of Indian entrepreneurship.

Some thoughts on private equity in infrastructure

noreply@blogger.com (Urbanomics) — Mon, 03 Aug 2026 05:46:19 +0000

I have written about the problems with private equity (PE) investments in infrastructure. The argument has been that infrastructure is a boring asset with low but stable returns, hardly the kind of asset that would excite high-return investors like PE funds. However, over the last 15 years, private capital has flowed in large amounts to infrastructure assets. And it has resulted in some spectacular failures, most famously Thames Water in the UK and water privatisation in general.

This post will offer an important qualification of this view to avoid the impression that private capital, in general, has no place in infrastructure.

Let’s start with the same UK water sector itself. FT recently reported that the PE group EQT snapped up a 42% stake in strained UK water utility Yorkshire Water’s parent company Kelda Holdings at £9.4bn (with 5.7 million customers in northern England) at 90% of the company’s regulated asset base.

Yorkshire Water… is under close watch by regulator Ofwat, which warned last year that it was “lagging behind” on pollution. Ofwat demanded the company repay a £600mn loan amid concern about its finances and EQT agreed to contribute to the loan’s repayment as part of the deal… In the 30 years to 2024, Ofwat data show that listed water companies were valued on average 10 per cent higher than their regulatory capital value — the asset base on which they are allowed to earn a set return through customer bills. Between 2017 and 2024, stakes in UK water companies sold at a 36 per cent premium to their regulatory capital values, according to a court filing in a Thames Water case. But EQT’s deal for a 42 per cent stake in Yorkshire also demonstrates continuing interest in the sector despite big shareholders in Thames Water previously declaring the largest water utility “uninvestable”… A decision to allow some water companies to raise bills by more than half between 2025 and 2030 was a key factor in EQT’s decision to buy into the sector.

Yorkshire Water’s problems are only a microcosm of those faced by Thames Water, which serves 16 million customers in London, and is trying to stave off nationalisation by the incoming Labour government of Andy Burnham. The heavily indebted Thames Water’s lenders have recently offered a “golden share” to the UK government (similar to that held in Royal Mail) as part of a bid to keep it private and avert nationalisation. The creditors have been in control of the utility since its shareholders walked away in 2024 and have been talking to Ofwat to take formal ownership before it runs out of money by October 2026.

The government is expected to announce whether it will temporarily renationalise Thames Water under its special administration regime (SAR) within weeks. That could spark a legal battle, with lenders appointing law firm Pallas Partners and indicating they would continue to bid for the utility once nationalised… The senior creditors previously offered to inject £3.35bn of new equity into the utility and stump up £3.25bn of fresh debt. The group is also asking Ofwat to waive certain penalties until March 2030 in exchange for a one-off £800mn payment to the business… The group of creditors, which represents holders of about £17bn of the utility’s debt, is planning a stock market listing of the business as early as 2030.

In simple terms, the distressed-debt and PE funds now offering a golden share and pledging to reinvest all profits are being forced back into utility-like behaviour by the credible threat of state administration.

However, it is hard to imagine any scenario through which this restructuring can address the underlying insolvency of Thames Water as an asset. This is merely kicking the can down the road. A sustainable resolution would require significant haircuts for creditors, sharp squeezing of costs, significant maintenance and capex investments, and running the utility on thin margins for long enough to reach a sustainable debt pathway. It is hard to achieve all this under PE management. So this appears to be the latest in the series of pass-the-parcel routine that Thames Water has been going through.

To better understand such investments, the table below shows the likely returns from various categories of infrastructure investments.

If an asset’s true economic return is 4–6% because a regulator sets it, and the private fund must clear a 12–20% net IRR to justify its fee load and honour its LP promise, the ~10-point gap cannot come from operations, which are capped by the regulator. It has to come from somewhere, and there are only four options.

The first option of leverage (i.e. excessive) is fatal in a regulated asset base (RAB) framework since debt-service costs enter the allowed tariff, thereby making the customer pay the interest bill. It is about socialising the financing choice. The second option is tax structuring of the kind that Macquarie did when Thames Water paid no UK corporation tax during its ownership tenure. The third option is to skimp on cost and maintenance by deferring capital investments, stretching maintenance schedules, socialising externalities (sewage, leakage). Finally, there is the option of dividend recapitalisations, multiple arbitrage, and ‘pass the parcel’ secondary sales.

The balance sheet on the UK water sector privatisation over the 32 years is instructive in so far as it exhibits the use of all four options by PE investors. The sixteen monopolies paid out roughly £78bn in dividends against about £190bn of capex. At the same time, net debt rose from zero at privatisation to the £60–72bn range, much of it borrowed to fund the payouts and loaded onto customers’ bills. Thames alone now carries over £19bn of debt - the highest of any UK water company - after a £3bn rescue loan at 9.75%, was fined £123m by Ofwat in 2025 (the largest ever, including £18m for unjustified dividends), and has been allowed a 35% bill rise to 2030 despite losing roughly a quarter of its treated water to leaks. On the investors’ side, Water UK claims £236bn has been invested since privatisation.

Water is representative of several low-risk and low-but-stable-return sectors (also here) in which private capital has been deployed, such as health, education, prisons, veterinary care, and public housing. Research (also here) shows that PE ownership of clinics raised short-term mortality by about 10%, implying roughly 21,000 additional deaths over the sample, while increasing spending by 19%, the vast majority billed to taxpayers, via lower nurse staffing, worse patient well-being, and reduced compliance with care standards. Similar concerns are highlighted in the Indian context in education and health sectors in a recent oped which argued that in the absence of an independent statutory regulator with outcome-disclosure powers, the extraction by PE runs through billing intensity and selective access rather than balance-sheet gearing.

There are some generalisable lessons from the history of PE funds in infrastructure and similar sectors. Wherever four features coincide - an essential service, a captive or vulnerable user who cannot judge quality at the point of purchase, a third-party payer (the taxpayer or the ratepayer), and an implicit public backstop - high-powered return incentives invariably create faultlines.

In this context, as a slight digression, I came across a brilliant articulation by Aswath Damodaran of how alternative investment strategies have lost their way in the quest for scale.

His broader point is that hedge funds, private equity, and private credit… began as a genuinely good niche business solving a real problem. Hedge funds 30 years ago produced positive alpha, beating passive investing by 3 to 5 percent annually. Today they look like expensive mutual funds, underperforming passive by roughly 1.5 percent. Private equity started as a focused, disciplined strategy for a small set of operators and has grown into a sprawling category that now struggles to deliver the returns that justified its emergence. Private credit had a legitimate original purpose, which was lending to borrowers that banks structurally could not serve. What killed each of these businesses was the same disease. Overreach. A $200 billion niche business gets sold as a $20 trillion opportunity. When that scaling happens, sloppiness follows, bad actors enter the space, and the average quality of every participant deteriorates. The original alpha disappears not because the strategy stopped working, but because too much money chased too few good deals.

The danger with private credit is far more severe than the parallel problems in private equity and hedge funds. Equity investors take their losses and move on. Lending businesses, when they overreach, take others down with them. Banks. Pensions. Insurance companies. Sovereign wealth funds. The systemic linkages run far deeper than most participants understand, and the social costs of a real default cycle in private credit would extend well beyond the funds themselves… the industry is repeating the exact mistake that produced every previous credit crisis. Take a good idea, scale it past its natural capacity, attract bad actors with the promise of easy returns, and wait for the inevitable cycle that exposes how much of the underwriting was never serious in the first place.

I have blogged earlier here and here about Ludovic Phalippou’s extensive research on PE returns (here and here). Across three large datasets for the period 2006-20, PE funds delivered net Multiple of Money (net-of-fee) of ~1.55–1.63x, or about 11% annually, matching public equity indices in the same period. During that time, roughly $230bn in carry accrued to a small number of managers, with the number of PE multibillionaires rising from 3 in 2005 to 22 by 2020. Much of the apparent outperformance, he shows, came from choice of benchmark rather than from the returns themselves.

Now, back to our examination of PE in infrastructure sectors.

Given all the aforesaid, investing in infrastructure becomes a rational choice for PE funds. Once the alpha is gone but the fee structure and the promised IRRs remain, reaching into stable, socially backstopped, “boring” cashflows is not a puzzle. It is the rational move. Those assets are attractive precisely because they are low-risk and captive: low-risk cashflows can bear more leverage, and an essential service that the state cannot let fail carries a free option on the public balance sheet. The infrastructure fund is not, in economic substance, buying a low-return asset. It is buying a levered claim on a government guarantee.

In short, a return-maximiser in a regulated essential monopoly is not investing in a low-return asset at all, but it is buying a levered claim on the public balance sheet, which is why it is drawn to “boring” cashflows. Its investment is not despite the low returns, but because low-risk, captive, socially-guaranteed cashflows can support an extraction that competitive assets cannot.

Some important qualifications are in order lest it be seen as a sweeping claim that private capital investment, especially private equity, in infrastructure is uniformly bad.

As I have written here, infrastructure is not one asset class. PE investment becomes problematic when three conditions coincide - a regulated natural monopoly with captive demand; an essential service the state cannot allow to fail; and returns set by a regulator so operational upside is capped. Water and sewerage hit all three. But they do not apply to a large and growing share of infrastructure segments like fibre, data centres, batteries, new technologies etc., where higher returns are legitimately earned by bearing real development, technology and demand risk. There, return-seeking capital is not merely tolerable, but given fiscal constraints, it is arguably necessary, because patient capital typically won’t take the associated construction and demand risks.

The question should therefore not be about the asset’s headline return but its structure. “Should return-maximisers be in low-return assets?” is the wrong question. Instead, “should they own regulated essential monopolies whose returns are capped and whose failure is likely to be socialised?” is the right one.

It must also be acknowledged that it is not the specific vehicle of PE that is the problem. Apart from Macquarie, an infrastructure fund manager and not a classic buyout shop, Thames’s later owners have included pension and sovereign funds (OMERS, USS, CPPIB-type investors), some of which geared just as aggressively. The largest infrastructure owners today are pension/SWF/insurer capital, though much of it is deployed through fee-charging, IRR-targeting fund structures (Brookfield, GIP-BlackRock, KKR). The problem is a configuration - high return target plus leverage plus regulatory arbitrage - that any owner, including a public pension, can adopt.

Finally, there are the issues of competition and regulation. Too much return-seeking capital chasing a genuinely competitive asset pushes returns down toward the asset’s true economic return. However, in the absence of competition, as with captive-customer monopolies with a public backstop and a weak regulator, incentive distortions emerge quickly. Here the deficiency of regulatory competence and/or avoidance of regulatory capture assumes significance.

In conclusion, the problem with private capital in infrastructure arises when there is a combination of return-maximising capital, high leverage, regulator-capped returns, captive users, socialised failure moral hazard, and a weak or captured regulator. This is a recipe for systematic transfer of value from the public to investors through a pass-the-parcel game, presented as investment and public-private partnership.

The policy challenge then is to match the ownership and return model to the asset’s structure, and where the asset is a regulated essential monopoly, regulate the balance sheet, not just the tariff. This aligns with the findings of the UK government’s Cunliffe Independent Water Commission (July 2025), which, apart from proposing the scrapping of Ofwat in favour of a single integrated regulator and nine regional water authorities, also proposed a supervisory (rather than arms-length) regulatory approach and mandatory asset-health monitoring. This goes against the conventional wisdom on regulation and is exactly in line with the patient capital under active public oversight approach proposed in the long paper here.

The main takeaway for India is not to import the UK’s RAB-plus-leverage-plus-socialisation architecture, but to reserve genuinely patient capital (NIIF/NABFID-type, pension, insurer, etc.) for revenue-generating infrastructure assets (or Core I/II from the paper here), admit return-seeking capital only where the asset is genuinely commercial or greenfield and bears real risk, and in TOT-style road or water monetisation, get the discount rate and the balance-sheet ring-fence right before the concession, not after the renegotiation.

Most importantly, these assets should be regulated with active supervision, including of financing practices, and close asset-health monitoring. This is especially important since, when stripped to its bare bones, the binding constraint to the successful management of private investment in any kind of regulated asset is regulatory capacity and independence. Unfortunately, both are challenging, even in developed countries.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 01 Aug 2026 07:36:15 +0000

1. US equity markets fact of the week.

In the year to March 2026, the US received well over $600bn in net equity inflows. Not only was this a record sum, it was also double the flow into government and agency bonds. Net equity flows exceeded debt flows by the largest margin in history.

2. US utilities are shifting from net metering to net billing on rooftop and home solar installations.

Many utilities pay homeowners the same rate they charge for electricity, meaning the energy sent to the grid when the sun is out offsets the cost of the energy pulled from the grid at night. That’s called net metering, a system where the energy you send is worth typical U.S. prices of 10 to 30-plus cents per kilowatt-hour. Under newer policies, often called net billing, utilities buy the extra energy back at a lower rate, often 2 to 10 cents.

3. In a country ravaged by deflation (pork prices have hit a 16-year low), egg prices are rising in China.

Egg prices are up by more than 40 percent from a year ago, according to an index that tracks the top producing provinces. They recently hit a 10-year high by another benchmark that tracks prices at a wholesale market in Guantao, in northern China... Two years ago, farmers started expanding after several bumper years, adding more egg-laying hens from 2024 to 2025 than ever before, according to Aspen Li, an analyst who studies the egg market. Suddenly, there were too many eggs and the price plunged. Farmers then found themselves short of money to feed all their chickens. So they culled them, at a rate that experts considered excessive. Eventually, there were not enough egg-laying hens to meet demand, sending prices to levels that Mr. Li said were “even higher than my expectations.”

4. Japan's return to normalcy.

5. President Xi's flagship Belt and Road Initiative (BRI) projects hit a record $20.1 bn in green energy financing in the first half of 2026, topping its total value for the whole of 2025,

Total BRI deals rose to a record high of $126.3bn in the first half of 2026, up from $123.3bn in the same period in 2025. The 2026 figure was composed of $49.8bn in investment and $76.5bn in construction projects.

A distinguishing feature of BRI projects is the increased share of the private sector.

The latest data highlighted how the BRI had become primarily driven by private companies rather than China’s state-owned enterprises. According to the University of Queensland data, the share of engagement from the private sector, as opposed to SOEs, reached 48 per cent in the first half, compared with 13 per cent in 2022.

6. The Great Divergence between labour productivity and wages.

Labour's share of income has fallen sharply.

7. Tata Zudio is following in the footsteps of Zara.

Despite its bargain offerings, Tata said gross margins at Trent, which includes the more upmarket Westside clothing stores, stood at 44 to 45 per cent. “The playbook is you go end-to-end — you go from the source of the product to the customer and you do everything yourself in between,” he said. “That’s why we do our own transporting. We do our own warehousing. We have our own shops. The manufacturing units we use are more or less dedicated to us.”... Zudio eschews online retailing, believing that high return rates clog up the operation and generate too much extra cost.Rapid turnover is key to Zudio’s appeal. New lines are launched every Thursday and a team of social media watchers monitors fashion trends and feeds them to a design team.

8. The IPOs of SpaceX, OpenAI, and Anthropic could generate a massive flush of philanthropic capital.

Nan Ransohoff, the head of public goods at the payment processor Stripe, estimated in a Substack post, between $37 billion and $100 billion could become available to charities annually... And that doesn’t even include OpenAI’s employees. Or the newly rich created by SpaceX, whose I.P.O. spawned an estimated 4,400 millionaires (and some 400 employees now worth more than $100 million). Or the many other IP.O.s on the docket... Giving money away is a common maneuver to avoid taxes: Up to 74 cents of every dollar donated to charity would have been paid as taxes, according to the Institute for Policy Studies. It reported that charitable giving in 2022 alone had resulted in $73 billion in lost tax revenue.

9. Debt service and defence make up two-thirds of Pakistan's budget expenditure.

10. On Europe's pensions problem.

Across the EU, 47 per cent of the bloc’s social protection expenditure is spent on old age and survivors’ benefits, ahead of 36.7 per cent spent on sickness and disability and 8.7 per cent on families and children. Even in the UK, where private provision plays a greater role, the country’s fiscal watchdog has forecast that spending on the state pension — the second-largest item in the government budget after health — will rise from almost 5 per cent of GDP to 7.7 per cent by the early 2070s. Italy has the EU’s highest pension costs at just over 15 per cent of GDP, according to statistics from the European Commission. France and Greece each spend over 14 per cent. In Germany, a third of all federal tax revenue will be spent plugging holes in the state pension system this year, according to an estimate by Munich economic think-tank Ifo...

In France, the audit office estimated last year that the country’s pension deficit, currently around €1.7bn, could grow to €15bn by 2035 and balloon out to €30bn by 2045 if further reforms are not made. European countries have tried to tackle their surging pension costs since the 1990s, and have had some successes, with many lifting the state pension age from 65 to 67 or more. Italy has tied its pension age to life expectancy, while France has pegged annual pension increases to consumer price inflation rather than earnings. In some countries, spending on pensions as a percentage of GDP is set to fall in the long term as a result of such moves...

In most big European countries including Germany, France, Italy and Spain, the state provides the main earnings-related pension, paid for by contributions from current workers, which aims to replace a proportion of pre-retirement income. Such systems were modelled after the one created by Otto von Bismarck, who introduced national state pensions in 1889 to ward off surging socialism and strengthen loyalty to the authoritarian German monarchy... It paid up to 20 per cent of average salary to industrial workers when it became payable. It was designed to prevent destitution rather than facilitate a comfortable retirement. Other countries soon followed. In the UK, Prime Minister David Lloyd George ushered in old age pensions in 1909... A full UK state pension is currently close to a third of median earnings; private provision, usually through workplace schemes, is meant to provide additional security in retirement... Italy has one of Europe’s highest replacement rates, with pensions paying out close to 80 per cent of average earnings... Contribution rates, from workers and their employers, are correspondingly high at 33 per cent of earnings in Italy, 28 per cent in France and 19 per cent in Germany... That compares with an average of over 20 per cent in the UK — paid via national insurance — and just 11 per cent in the US.

11. Ramesh Chand argues for rationalising the PDS and moving to a nutrition security programme.

Between 2013-14 and 2025-26, India’s real per capita income (net national income at 2011-12 prices) increased by 78 per cent, from ₹68,572 to about ₹1.22 lakh... At the time of the NFSA’s enactment, around 22 per cent of the population lived below the poverty line. Both official estimates and independent studies now suggest that poverty had declined to around 5 per cent by 2022-23... In the early years of the NFSA, roughly one-third of the beneficiaries were poor and two-thirds were above the poverty line. By 2025-26, only about 10 per cent of those receiving free food grains were estimated to be below the poverty line while the remaining 90 per cent were non-poor... The latest UN report... estimates that the proportion of Indians unable to afford a healthy diet declined sharply from 59.8 per cent in 2017 to 35.5 per cent in 2025. In absolute terms, the number of such people fell from 759 million to 589 million. This indicates that about 170 million people crossed the affordability threshold for a healthy diet during this period as their purchasing power improved... The prevalence of undernourishment in India declined from 13 per cent in 2013-14 to 9.8 per cent during 2023-25, indicating progress but at a relatively slow pace.

12. The Fed under Kevin Warsh appears to be facing a credibility crisis as it grapples with rising inflation.

As Mr. Warsh spoke, longer dated Treasury yields rose sharply, with the 30-year bond closing in on its May peak of 5.2 percent. That was the highest level since 2007. The rise in the 30-year Treasury yield suggests some worry about Mr. Warsh’s ability to tackle inflation in the long run.

And this.

Long-term government borrowing costs shot higher as Mr. Warsh spoke, with the 30-year bond notching its largest one-day increase in more than a year. Trading around 5.22 percent, it is at the highest level since 2007. The 10-year Treasury yield, which serves as the benchmark for borrowing costs around the world, also rose alongside expectations about inflation over a longer time horizon.

13. FT has a long read describing the story of Situational Awareness, the $20 bn hedge fund of 24-year-old Leopold Aschenbrenner, which had racked up gains over 400 per cent on the back of massive leverage, and has now run into the wrong side of the AI sell-off. The fund sold its portfolio to Ken Griffin's Citadel in an almost distressed sale. Apart from being an alumnus of OpenAI, Aschenbrenner is also the husband of Avital Balwit, who now works as chief of staff to the CEO of Anthropic.

What stands out in the entire article is the reluctance to call out the obvious contributor to Aschenbrenner's success: the strong likelihood of insider trading at a massive scale. It is hard to believe that the smart investors who were betting on Situational Awareness were betting on the expertise or competence of Leopold Aschenbrenner, and not on the insider information he possessed.

14. Fascinating snippet on wealth creation in the equity markets.

Economic analyst Hendrik Bessembinder has shown that half of the net wealth creation in US stock markets over the last century flowed from just 46 public companies, out of a total of almost 30,000. Looking at his list of the greatest wealth creators, the knowledge companies dominate the top spots, and all the winners have high walls around them.