Urbanomics

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.

Forward guidance and Kevin Warsh

noreply@blogger.com (Urbanomics) — Fri, 31 Jul 2026 05:23:01 +0000

The market reaction to Kevin Warsh’s second FOMC meeting decision to stay the course on interest rates despite rising inflation has triggered a debate on the Fed’s credibility in fighting inflation.

This is how the $31 trillion US Treasury market reacted.

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.

Warsh has made it clear that he does not agree with the policy of forward guidance, and intends to discontinue it. He has argued that forward guidance distorts market incentives and comes in the way of market discipline. This blog is in agreement with it.

The reversal of forward guidance comes abruptly, at a time when market expectations of the Kevin Warsh era are vitiated by the circumstances surrounding his appointment. Markets clearly think that Warsh may buckle down to pressure from the White House or prefer to please it and delay raising interest rates.

In this context, I created the table below that evaluates forward guidance and central bank credibility.

The high credibility and low forward guidance Volcker era is the golden quadrant. The central bank has earned trust through demonstrated willingness to act decisively, but it doesn’t tell you what it’s going to do next. Participants must do their own work to assess fundamentals, price risk properly, and build in uncertainty premia. Volcker’s Fed famously targeted money supply, not interest rates, and didn’t telegraph moves. The result was that markets had to think for themselves, and the discipline that emerged was real. Risk was priced because nobody could assume a backstop.

The Bernanke-Yellen era of high credibility coupled with a high degree of forward guidance ensured that the latter became the market’s mirror. When participants believe the central bank will do what it says, and the central bank tells them exactly what it will do, the rational strategy is to front-run the guidance rather than analyse fundamentals. The “dot plot” era, the “considerable period” language, the “whatever it takes” formulation created a world where the trade was to decode the Fed rather than decode the economy. The moral hazard is structural insofar as investors are rewarded for taking risk they don’t understand because the central bank has told them the floor exists.

The worst combination for policy effectiveness is that of low credibility and high forward guidance. The central bank issues guidance but nobody believes it. Participants pursue their own interests, and policy actions run counter to market expectations. This produces whipsaw where the central bank says one thing, markets price another, and when the policy actually arrives it dislocates rather than stabilises. One could argue the late-stage BOJ falls here (decades of forward guidance that markets progressively stopped believing).

Finally, the Warsh era tries to limit forward guidance but in a period of low central bank credibility, inducing a period of “greatest uncertainty”. Worse still, the transition itself amplifies the shock - moving from a regime of high credibility andhigh forward guidance (the post-2008 consensus) to one where both are removed simultaneously. The question to analyse is whether the Warsh Fed currently sits in the fourth quadrant.

There are four points to be noted.

First, the transition path matters enormously. Moving from the Bernanke-Yellen quadrant (high-high) to the Volcker quadrant (high-low) requires maintaining credibility while withdrawing guidance. This means the central bank must demonstrate through actions (not words) that it will do the right thing even when it doesn’t tell you what the right thing is. The Warsh challenge is that he has withdrawn guidance and may not yet have established credibility through a demonstrated willingness to act decisively against inflation. The risk is that he lands in the bottom-left quadrant (low-low) rather than the top-left (high credibility, low guidance).

Second, while I had blogged here listing forward guidance as an important channel in eroding market discipline, it must be noted that it’s not forward guidance per se that erodes discipline, but forward guidance combined with high credibility. Low-credibility forward guidance is merely useless. And high-credibility forward guidance is actively dangerous because it works too well, by substituting the central bank’s judgment for the market’s own.

Third, there’s a temporal asymmetry in credibility. Credibility is earned slowly (Volcker needed 2-3 years of painful rate hikes) but lost quickly (a single capitulation can destroy it). Warsh’s current position - rates unchanged while prices rise - coupled with the circumstances of his appointment (and the credibility problem it engenders) risks a credibility test analogous to Arthur Burns in 1972-73. If inflation accelerates and the Fed is seen as having waited too long, the move from “low guidance with emerging credibility” to “low guidance with low credibility” could be swift and self-reinforcing.

Fourth, this also highlights the less discussed aspect of policy making that involves shaping expectations. Once collective beliefs are formed and incentives aligned, it is very hard to reshape them. The Bernanke-Yellen response to the market tumult during and after the Global Financial Crisis, guided by the research works of Gauti Eggertsson and Michael Woodford, and Paul Krugman, may well have been required in its immediate aftermath. The mistake was to continue and institutionalise it as part of the regular central bank policy toolkit. Bernanke or Yellen, with their credibility, ought to have exited forward guidance once normalcy was restored. But instead, they chose to please the markets with this new crutch. It is a bit like subsidies - once offered, there’s no sunset.

Some thoughts on metro railway systems in India

noreply@blogger.com (Urbanomics) — Thu, 30 Jul 2026 09:53:25 +0000

This post will analyse metro railway projects in India, highlight their failings and make some suggestions.

There are three reasons why metro projects globally struggle to be sustainable, even on the Opex. One, the original traffic projections were on the higher side, making the revenue forecasts a non-starter. In other words, the metro should never have been built. Second, the ticket prices were kept too high, resulting in less demand. Third, there is limited induced ridership due to the lack of TOD, parking facilities, and modal integration.

The first is a common factor associated with projects globally (optimistic forecasts to justify otherwise unviable projects). The second is a tricky problem insofar as lowering it further risks significantly worsening the financials of the metro. Besides, there is enough evidence that metro ticket prices are reasonable across cities. And the real problem is less the fare level than the generalised cost of the trip, or the fare plus the last-mile penalty (arising from the need to change modes, and the lack of any modal integration).

The last one is especially important since the metro is a large investment that is made to shape the city's growth, specifically by densifying the walkable vicinity of its stations and thereby inducing captive ridership. This is the biggest source of sustainable passenger ridership for the metro. Thin station catchments may well be the binding constraint to the operational viability of India’s metro systems.

India's experience with TOD has been disappointing. None of its 900-odd metro stations is a TOD (densified residential and/or office spaces, which enable walkability from the station to house/workplace). This is unsurprising since the TOD policies generally suffer from poor design. There is also the reality that very few metro projects globally can recover even opex with the farebox collections and rely on real estate and other commercial revenue streams. More on it later.

In addition to the three demand or revenue-side challenges, there is also a cost-side problem. They include the wrong mode selection - choosing an underground full metro when light rail or bus rapid transit system would have sufficed. The low-cost foreign loan is deceptive since a depreciating rupee inflates the cost (though the Yen, the major source of metro debt, has been depreciating or holding steady against the rupee). Further, the linear stunted network topology, as against a connected grid, limits ridership. Most Indian systems are linear stubs, so they sit permanently below the ridership threshold at which farebox economics turn. As an illustration, Chennai’s finances turned around dramatically once Phase 1 closed the loop, with ridership surging from 13% of projection at CAG FY20 to now ~60%.

I asked Claude to generate certain parameters for the leading Indian metros. First, the difference between the DPR ridership projection and the actual realised ridership points to strategic misrepresentation with inflated estimates to secure project approval. As can be seen, apart from Delhi, the shortfall is very high, with the majority not even able to generate a third of the estimated ridership. This points to clear strategic misrepresentation to get the project sanctioned by exaggerating the ridership estimates.

Delhi is now above its old 2019-20 target after Phase-III/IV and post-COVID recovery. This points to the fact that maturation and network completion, and not fare tweaks, are likely to move the needle.

In terms of the percentage of just the opex covered by farebox revenues (or ticketing), it is very low in many metros. However, when combined with the other revenues, five metros are able to cover the opex.

But if we include debt-service, the picture becomes extremely bleak. Most Indian metros are deeply in the red.

This has important fiscal implications. I took six major states, and assumed their current ridership trajectory and fare growth to calculate the gap between their total revenues (farebox and non-farebox) and total opex and debt service. This assumption overlooks that ridership trajectory may improve over time. In any case, this analysis points to an undiscounted 25-year total gap of ₹1,06,569 cr, or NPV of ₹64,423 cr when discounted at 7%. The state share is around 60% or ₹38,582 cr, and the central share is ₹25,840 cr, amounting to a total annual budget requirement of ₹6,900 cr for FY26 to ₹6,256 Cr for FY30.

A global comparison yields interesting results. Apart from Northeast Asia, generally, metro railway systems struggle to cover even Opex through farebox collections.

In all western cities, their governments funded the infrastructure (versement mobilité in Paris, LTA asset ownership in Singapore, TfL/Treasury grant in London, MTA authority-level bonds backed by dedicated taxes in New York). The operator, therefore, never sees the debt service, which has been socialised as a public subsidy up front. Only Hong Kong MTR and Tokyo make the operator carry capital and still clear cost, and they do it through property and ancillary income, not fares.

India is a structural outlier in loading the capital debt onto the SPV's own balance sheet. The Indian farebox is being judged against a burden every comparable peer either socialises to the budget or funds from property. The sustainable systems didn't find a magic farebox - they either kept capital off the operator (the European/American subsidy model) or monetised the land (the Hong Kong/Tokyo model). India did neither.

So what can be done?

A systemic reform requirement is to orient the design and implementation of metro railway systems away from being primarily a railway construction project to an urban planning initiative. This would entail tight integration of the planning of metro rail projects by the municipal authorities.

The TOD influence zone (TIZ) around each station should be seen as a genuine opportunity for redevelopment and densification. The planning regulations applicable to the TIZ should make it significantly more attractive to build insidecompared to outside - 3-4 times higher FAR, remove parking minimum, TDR-driven land assembly, TDRs brought in with higher multiples, etc. Equally important, the regulations should make it attractive to redevelop the built-up areas (and not be like this). Instead of being prescriptive on land use, it should be left to market forces to determine the appropriate shares of different types of uses in each zone. It would also allow the markets to crowd in the right kinds of commercial amenities, such as groceries, retail, restaurants and cafes, and services, into the zone, depending on its broader land-use mix.

An important reason for the failure of TOD is the lack of attention given to its public realm elements, specifically the street configuration for connectivity and walkability, and public amenities. This is a bad omission given that walkability (from/to commute and for amenities) is the primary objective of TOD zones. An area without these elements contradicts TOD. Unfortunately, in built-up areas (which form the major part of TIZ), these elements don’t emerge overnight. They require master plans that are configured to enable walkable street connectivity, higher density, and mixed-use developments. Once the master plan is in place, its implementation should be facilitated proactively through the development control regulations and building bye-laws that allow for TIZ preferences and incentives, and instruments like the Town Planning Schemes. These are 10- to 15-year agendas.

The TIZ preferences should be complemented with feeder buses, multi-modal fare integration, and e-rickshaw access so as to extend the catchment beyond the TIZ. Further, as the Chennai example shows, metro lines should complete the loop or connect the grid, and not remain as linear stubs.

For financial sustainability, the TIZ should deploy appropriate value capture finance instruments. I blogged about it here. They would include betterment levies (brownfield areas) and impact fees (greenfield areas), station-area commercial development, air-rights leasing, and purchaseable FAR. However, care should be taken to ensure that these levies do not detract from the commercial attractiveness of building inside the TIZ. These revenues should be assigned to the SPV balance sheet. This is how HK MTR earned 65% of its 2024 profit from property, not fares.

These urban planning and other policy requirements should be tightly incorporated into the approvals given for these projects. Every new metro DPR must include statutory master plan amendments, FAR densification for station catchments, mixed-use zoning, land assembly strategy, and the land-value-capture financing plan. They should be preconditions, not annexures. The rail alignment should be a subset of the urban plan.

There should be no sanction without station-area FAR increases, TDR-driven consolidation, betterment-levy design, and air-rights leasing, all routed to the SPV. TDR can pre-fund land assembly before construction starts. These should become an approval veto. Further, any ongoing support from the Government of India must be made contingent on compliance in letter and spirit with these requirements to pre-empt backsliding and subversion by the states.

The planning elements discussed above would have to go against the conventional wisdom on urban planning held close to heart by town planners across India and the vested interests of builders and others. It would therefore require strong resolve at the highest political and bureaucratic levels to overrule objections and enforce them.

For new projects, central funding should become conditional on a corridor-density threshold, independently audited ridership models, and ex-post accountability. There should be an end to the practice of a self-certified 14% IRR. Anything below the threshold should qualify only for a MetroLite / MetroNeo / BRT.

In conclusion, the urban metro should be used as an opportunity to redraw the metro as an urban plan by densifying station catchments, capturing the value, and servicing the construction capital.

The demand side constraint of the Indian economy

noreply@blogger.com (Urbanomics) — Sun, 26 Jul 2026 23:30:00 +0000

I blogged here, arguing that Indian businesses face a structural cost constraint similar to that of developed economies that erode their global competitiveness. This cost constraint on the supply side must be seen alongside a constraint of a consumption class that is far smaller and shallower than imagined. In other words, a developed country's cost structure in a low-income country's market size.

This point has been a consistent argument of this blog and was documented in great detail in Can India Grow? in 2016, much before it became more widely recognised.

India’s demand-side problem is twofold. For a start, it already has a low per capita income, the lowest among its emerging market peers. Second, this itself conceals a low base of the consumption class that is also not widening proportionately with economic growth. The nature of economic growth is such that it is not only not broad-based enough but is also widening inequality.

The recently released PRICE - Tata Sons Many Urban Indias report is a confirmation of the demand-side constraint. It finds that the top 100 cities, with just under a fifth of the population, capture almost half of all household surplus, the closest measure to genuine discretionary spending capacity. What sits outside, the other 81% of India, holds only about 53% of surplus combined, and most of that is in the top slices of tier-2/3 towns and the productive rural belt. The surplus-generating layer of the economy is essentially urban and already fully contained. There is no large pool of "middle India" outside urban India waiting to broaden the base.

PRICE's top-100 city-tier framework (Big Six, Boomtowns, Breakout, Frontier) is the empirical proof that "urban India" is not a homogeneous consuming class. The gap in savings between the top and bottom tiers is nearly 3.5×, and one in six Frontier-city households is already financially overstretched. This is what “narrow” looks like at the city level.

The top 15 cities have two-thirds of all top-100 consumption, and the Delhi NCR alone has 15% of all urban consumption. The consuming class is a stratum within the Big Six, not the Big Six themselves. Even within the six megacities, PRICE reports that 24% of households are low-income. The consuming class is not "urban India" (~500M) or even "top-100 city India" (282M), but a stratum of prosperous households scattered across the Big Six and the top of the Boomtown tier.

The Blume Ventures categorisation of India’s consumption class finds three groups, with the first comparable in size to the population of Mexico at 30 million households (the Blume Rule of 30, or 10% of Indian households). A worrying finding is that the consuming class that anchors private demand is small and getting deeper, not significantly wider. A vast base has almost no discretionary spending power at all. This is the inverse of the broad, upwardly mobile middle that sustains private investment.

The PRICE report's optimistic headline (~715M "middle income" people by 2031) conflates a household that shares a scooter with one that services a car EMI. Once you apply a real surplus filter - savings above ₹4 lakh a year, which is roughly what it takes to run a car, insure a family, and take one flight - the number lands where Blume said it did. In simple terms, PRICE's 715M by 2031 measures how many Indians will earn enough not to be poor, a significant achievement. Blume's 140M measures how many can act as a consuming class today - the market a brand can actually sell a car, an AC, a holiday abroad or a health-insurance policy to.

The numbers are further validated by other sources. An income assessment by Rama Bijapurkar points to a more differentiated group, but a similar narrow base of the consumption class. She estimates that 93% of households have annual consumption of less than $5,700.

The data on penetration of discretionary goods and behaviours corroborates the Blume survey data. Almost every independent marker lands near the same Blume Rule of 30. Whether you measure cars, ACs, credit cards, foreign travel, or who actually pays income tax, the consuming class converges on the same narrow apex. If anything, the Blume data itself looks too optimistic.

Whichever marker you pick - cars (8%), ACs (13%), passports (~10%), income-tax payers (1.5–3%), credit cards (4.6%), foreign trips (2%) - the consuming class lands at ~10% of households or fewer. That is also exactly where the bottom-up Blume spending model, income surveys of Bijapurkar, and asset penetration estimates of NFHS/Bain lands.

India's "middle class" has been estimated at 29 million people one way and 600 million another, a multiple spread of 20 that reflects what one is choosing to count.

India has a consuming class of ~140M, an aspirant class of ~300M moving toward it, and a base of ~1bn for whom the "middle class" debate is moot. That picture is consistent with every methodology once you ask which question each one answers - how many can afford a car (~10%), how many are above poverty by global standards (~30%), how many participate in the digital economy (~65%). Conflating them is the single most common error in India market-sizing. This is a very nice summary of why nobody gets the elephant in full.

In this context, it is also useful to draw a nuance on India’s high consumption rate of 61% of GDP, which is far higher than China’s ~38% of GDP. India’s problem is that while it is already a consumption-led economy, the problem is the quality of that demand. It is too thin per person, skewed to the top decile, and increasingly financed by debt as households run down savings. In other words, the demand side constraint is not the consumption share of GDP, but that there are too few middle-income earners to generate broad, income-financed volume. That points policy at jobs, wages and investment, not at “stimulating consumption.”

Fundamentally, all the above is a reflection of two important factors - the low per-capita income and the widening inequality in sharing the benefits of aggregate growth.

India's per-capita output (PPP) trails Vietnam and Indonesia and is under half of China's. Its Mexico-like consuming tier is real, but at best, only ~10% of the country.

India imposes rich-country costs on poor-country incomes in capital, fuel and land - and because those costs are policy-made, they are the actionable half of the problem. The demand blade can only be widened the slow way: through jobs, wages and productivity.

Unfortunately, corporate surpluses are being captured, not recycled into the wages that would create the next tier of consumers. Profits race ahead while sales, jobs and pay lag far behind.

It also does not help that Indian businesses across sectors are averse to spending on R&D and innovation.

R&D is a fixed cost that only pays off over a large, contestable market. A thin domestic market depresses the return to it, which is why the economies that lead on R&D expenditures are either big-and-rich at home (the US) or export-driven (Korea, Germany, Taiwan). India is neither, and sits alone in the low-R&D corner.

This is an instructive comparison of India with China and South Korea.

The main takeaway is that India’s existing consumption class, confined to just 10% of the households, is too narrow to sustain high growth rates for long periods. It requires considerable broadening. But broad basing economic growth requires access to good jobs, a daunting task given that the gig economy is the biggest source of job creation and elsewhere it is mainly contractual jobs. Worsening matters is the reluctance of the private sector to invest or innovate.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 25 Jul 2026 06:23:32 +0000

1. SpaceX IPO is ample proof that the Chinese wall between equity research and investment banking in IB firms is a myth.

You might expect wildly divergent views on a company as speculative as SpaceX. Here the underwriters disagreed only over the scale of the upside. Sceptical voices came from outside the syndicate. Morningstar, for example, valued the shares at $63.

This is now dead

When the dotcom bubble burst, regulators uncovered emails showing that Wall Street analysts were privately disparaging stocks they were publicly touting. A 2003 global settlement between banks and regulators on analyst research imposed sweeping restrictions. It barred investment bankers from influencing analyst compensation, tightly controlled communications between research and banking, and banned analysts from IPO pitches and roadshows. New York Attorney General Elliot Spitzer’s premise was that shielding analysts from bankers would deliver truly independent — and better — research. On one level, the reforms succeeded. Banks have constructed a robust compliance apparatus to wall off research from investment banking. “Chaperones” now police interactions between analysts and corporate finance to prevent even the appearance of pressure. The Spitzer global settlement formally ended last December in favour of more flexible rules overseen by an industry association.

It is hard to see how SpaceX shares can avoid a cratering.

About 30 per cent of the roughly 640mn SpaceX shares available to trade have been borrowed to sell short, up 10 percentage points over the past 10 days, highlighting how traders are becoming increasingly sceptical of the company’s market prospects... About 900mn further SpaceX shares could become available to trade as soon as next month when certain lock-up provisions for pre-IPO investors expire. Traders who doubt there is sufficient demand for the deluge of extra equity are cashing out now as a result, market participants say.

2. After reducing their hiring last year, firms with jobs exposed to AI are planning to increase their entry-level hiring this year, but they come with a "seniorisation".

Candidates for starter roles in the most AI-exposed industries are now expected to show a mastery of the skills traditionally demanded of more seasoned staff, such as data-driven decision-making and people management... Eleanor Lightbody, CEO of Luminance, which develops AI for the legal profession, says these middle layers could be squeezed out altogether, “because we are going to hire more juniors, who are really going to understand how AI works, and more seniors [are] staying in the business because [by using AI], they can be more productive and have more capacity”. The challenge for job seekers is that it is hard to find entry-level jobs that allow them to develop the higher proficiency that seniorised roles now require... Reliance on AI is increasing the demand for distinctively human “soft skills” — or “power skills”, as some are now calling them — such as creativity, empathy, judgment and networking ability. PwC’s jobs report found that new tasks added to job adverts for AI-exposed roles were two and a half times as likely to call for such capabilities.

3. Very good description of how China became so dominant.

It enticed unsuspecting giants such as Apple, Tesla, Motorola, and Lucent with low-cost logic. When sufficient local manpower was trained, subcontractors developed, and stakes became important, China applied the squeeze. China would break contracts, cancel licences, coerce the transfer of technology, control pricing, withdraw incentives, force equity participation, conscript technology and evict them. Huawei, BYD, CATL, and SAIC are some examples of the resulting indigenous giants that emerged. In an act of silent invasion, conscripted technologies have been converted into military capability. It is dominant as a supplier of several raw materials, such as rare earth minerals, gallium, graphite, and lithium; a dominant buyer of soya from Brazil and iron ore and wines from Australia; a financier of BRI projects; and a provider of processing technologies for Chilean copper and lithium in select South American countries. With this web of dependencies, it can choke several factories.

4. Janan Ganesh feels that for Britain to start making real reforms, the incoming PM Andy Burnham must do more welfare and subsidies and discredit the whole .ideology.

What is the precedent for a rich democracy doing pre-emptive economic reform? Which nation ever made controversial structural changes — involving winners and losers — to prevent a crisis, rather than in response to one? Southern Europe needed the Eurozone panic of 2009 onwards to make spending cuts. Hawke, Keating, Margaret Thatcher and Ronald Reagan were reacting to 1970s stagflation. François Mitterrand in 1983 was reacting to a market shock that to some extent he’d created. Reform only happens when it absolutely has to happen. So try again, prime minister. Fail again. Fail worse.

5. Japan embraces a more proactive government-driven economic growth policy.

Sanae Takaichi's cabinet approved a policy blueprint that targets a combined $2.3tn of public and private sector investment between now and 2040 in 17 chosen sectors. Ministries will be able to make budget requests without upper limits; budget construction, according to the document, will be “fundamentally” changed. Much of the blueprint is about economic security, but a refreshingly large amount is about growth... possibly the most meaningful lines in the new strategy place Japan’s future efforts in the global context. “Among advanced countries, there is a big trend of the government and private sectors working together on large-scale, long-term industrial spending,” it read... The government would strive, the document further promised, to meet the challenges of “the era of great global competition between industrial policies”...

On the same day that the blueprint was agreed, the Ministry of Economy, Trade and Industry produced separate guidance for growth investment — an effort to encourage Japan’s 4,000-odd listed companies to shift more of their endeavours towards growth and a witheringly blunt critique of how matters are at the moment. Within Japan’s 350 largest companies (by sales), 65 per cent of invested capital remains locked in what it calls value-destructive segments, according to METI’s research. In the US, the equivalent ratio is 39 per cent. Both Takaichi’s blueprint and the new METI guidelines are attempting a new version of industrial policy that not only seeks to spur growth, but places a huge bet on the government’s ability to encourage companies in a way that market forces have not.

6. Kevin Warsh is trying to scale down forward guidance

“Financial market prices are probably the most important source of information to guide central bankers,” he said at his inaugural press conference last month. “But when all the financial markets are doing is reflecting back what we’ve said, then we’re taking the most important source of information and we’re being blind to it.” Many agree with the Fed chair’s view that central banks’ focus on predictability has led to a world in which markets obsess more over what officials say than what is actually happening in the economy. “Forward guidance has turned markets into a mirror,” says Ajay Rajadhyaksha, global chair of research at Barclays. “The Fed watches markets; markets watch the Fed. And no one’s actually watching the economy.”...

Recent research by the US central bank suggests its decisions also have an outsized impact on equity markets, leading to big changes in how investors price stocks. Advocates of forward guidance say it helps avoid the sort of surprises for the markets that feed overall volatility and eventually raise borrowing costs as investors demand greater compensation to stomach market swings. Warsh and his allies counter that the attempt to pacify markets simply encourages greater risk-taking, damping short-term volatility but storing up bigger shocks for later. The debate is all the more important because of the backdrop: the surge in borrowing over almost two decades. Government debt around the world has risen sharply following the global financial crisis, the Eurozone crisis, the pandemic and the wars of the 2020s...

Some analysts highlight the so-called taper tantrum of 2013 — when markets were unnerved by Fed statements about its plans to shrink its balance sheet as a result of officials’ false sense of certainty. Others link the 2023 collapse of the US’s Silicon Valley Bank to central bankers’ previous pledge to keep interest rates low.

This is a very important factoid about Fed communications.

Between 1990 and 2022, an era in which the status and prominence of central banks steadily grew, US 10-year government bond yields fell by more than 7 percentage points. All of the downward moves throughout that period took place during the three days around Fed meetings, rather than in response to political events or economic data. But the relationship broke down after the Fed appeared flat-footed on inflation in 2022. The Riksbank data shows that the central bank’s meetings had little to do with the subsequent rise in yields.

An important concern for the bond markets is the sharply increased volume of Treasuries held by hedge funds that use leverage to bet on tiny differences in interest rates.

The Fed estimates that large hedge funds’ holdings of US Treasuries doubled between 2023 and 2025, faster than the growth of the market as a whole. Such funds now own more than $2.5tn in Treasuries, according to the US central bank and US Treasury data. Such sums dwarf China’s official holdings — not an exhaustive account of the country’s exposure — which have fallen from $1tn in December 2021 to $659bn in May 2026, according to US Treasury statistics. Moreover, the Bank for International Settlements, the central bankers’ bank, has warned that the hedge funds might have to dial back their stakes in government bond markets even quicker than they arrived — a possibility it describes as one of the most troubling financial stability risks in the world today.

Then there are the other concerns for bond markets.

The Bank of England said this month that AI hyperscalers borrowed more in the first half of 2026 than in the whole of 2025. So far this year they have accumulated as much new debt as the UK government. An interest-rate surprise from the Warsh Fed might not only unsettle Treasury yields but set off a vicious circle of margin calls — when a sudden price movement in assets bought with borrowed money requires an injection of capital — and fire sales by hedge funds that could create a dash for cash.

7. A cautionary tale on the difficulty of private enterprise establishing and managing entire railway systems comes from the example of Brightline Express, which connects Miami and Orlando, and became operational in 2023.

Brightline traces its roots to 2007, when Edens’ Fortress spent $3.5bn to acquire Florida East Coast Railway, then a listed freight transport company. Its tracks spanned from north to south in the Sunshine State, and construction for what would become Brightline began in 2014, with the Orlando service beginning a decade later. In a 2024 bond prospectus, Brightline executives forecast that by 2026 they would have nearly 8mn annual riders, split roughly evenly between the Orlando-Miami route and a more local service in South Florida. That base of customers was expected to generate $700mn in revenue... Even with customer levels up 16 per cent year to date through May this year, ridership will struggle to hit 4mn this year. Operating income has at best reached break-even before debt service costs...

The promoter Wes Edens’ Fortress wrote off its investment long ago, and it is now hedge fund bondholders who are jockeying for control of Brightline. But alongside distressed debt specialists such as Nut Tree Capital Management, Aristeia Capital and Redwood Capital Management, there are a handful of more staid asset managers including Nuveen and First Eagle also at the table. As well as corporate bonds issued by subsidiaries, the group’s debt stack includes more than $2bn of traditional municipal bonds, half of which are guaranteed by a bond insurer.

The cost of doing business in India - land prices

noreply@blogger.com (Urbanomics) — Fri, 24 Jul 2026 04:34:26 +0000

I blogged here, highlighting the high cost structure that Indian businesses face. This post dives deeper and examines land cost.

A comparison with peers shows that urban land is priced like that of a rich country and ends up hoarding the nation's savings, with 77% of the households parking their wealth in real estate. Mumbai ranks among the world's 20 most expensive prime markets. Industrial land across the major Indian cities is prohibitively expensive compared to peers.

An Indian manufacturer pays roughly 5–15 times more for industrial land than a Chinese counterpart in a comparable tier-2 city and 1–4 times a Vietnamese peer.

I used Claude to generate the graphic below on the total land transaction cost across states, combining the stamp duty and registration fees and the change of land use fees for the conversion of agricultural land. While stamp duty has converged to 6-7% of land value, the total cost varies widely across states. Interestingly, the southern states have the highest transaction rates.

Four states can’t be reduced to a clean number - Maharashtra charges a premium of 25–100% of the ready-reckoner differential; Gujarat charges on the agri/non-agri differential; West Bengal rarely grants conversion at all; and Delhi’s urban land is already non-agricultural. For these, the combined figure shown is a floor, not a total (hence the ‘+’). Maharashtra, in particular, would likely top the chart if its premium were expressible as a share of land value.

Andhra Pradesh (deemed conversion since 2018, NALA Act now being scrapped) and Uttarakhand (permission eliminated for specified categories) are the only states that have removed conversion permission as a bureaucratic step. Assam, J&K, Odisha, Puducherry and Tripura have moved to negative lists.

I then asked Claude to generate the typical cost of industrial land in some representative locations across India. The wide variations in the construction levies as a share of land value arise from the variations in the underlying land valuations (the % is higher in places with lower land values). While the state and local taxes make up 10-17% of the land value, all the land and building-related taxes make up a near-uniform ~10% of the industrial project cost (land, construction, taxes).

I did the same for residential land cost at representative locations in a few cities. Ignoring the Gurgaon outlier, the state and local taxes make up 16-26% of the land value, and all the land and building-related taxes make up 18-25% of the price paid by the homebuyer. In other words, the tax burden is a fifth to a quarter of what a homebuyer pays.

In both cases, the lower land valuations in places like Lucknow or Indore or Vizag mean that the share of the nationwide levies (GST and labour cess) is much higher. In other words, these levies bite more in the second-tier and below cities and end up eroding their comparative advantage.

A like-for-like global comparison for industrial land is difficult given the lack of data. The graphic below is a broader international comparison, using the World Bank’s last Doing Business 2020 survey, for the construction of a typical (2 storeys, 1,300 sq m, on a 929 sq m plot, valued at 50× GNI per capita) warehouse (as a % of the warehouse value) in each country’s largest business city. It measures every statutory licence, permit, inspection, utility connection, non-recurring tax and property registration fee, but importantly, excludes VAT, capital gains and the price of the land itself.

India’s statutory fee stack is middling, sitting below Mexico, Indonesia, Bangladesh, and Delhi at 2.8% is not too far from the OECD high-income benchmark of 1.5%. This questions the reasoning that Indian construction-permit fees alone make land prices uncompetitive. However, India’s manufacturing competitors like Vietnam, Thailand, Brazil, and Poland levy less than a fifth of what India does on the same measures.

More importantly, the DB survey data excludes land price, stamp duty, conversion charges, and the GST input credit, precisely the costs that were the basis for the discussion earlier. The state’s tax share at 18-43% of industrial land cost, or 9-11% of total project cost is where the land-related competitiveness gap sits, and not in the counter fees that the WB’s DB Survey tracked.

Lessons from Spain for urban planning

noreply@blogger.com (Urbanomics) — Tue, 21 Jul 2026 04:34:47 +0000

Football is not the only area where we can learn from Spain. Energy transition, infrastructure construction and urban planning are some others. This one is about urban planning.

An essay in Works in Progress examined how traditional apartments have declined across Europe, except in Spain, and the role played by late development and public policy. It also underlines how Spain uniquely got all the basics of urban planning right - land readjustment, infrastructure development, mixed-use, densification, connected street network, walkability, mass transit, and low car usage.

This is a good description of mixed-use density in Spanish cities that promote walkability and mass transit commutes, and limit sprawl and carbon emissions.

Spain’s cities are unusual. They are much denser, tighter, and more deliberate than other European cities, let alone North American ones. They reject picket fence for apartment block and choose balcony over front lawn. Two thirds of Spaniards live in flats, against 41 percent of Poles, 36 percent of the French, and just 10 percent of the Irish. Of the remaining third, most live in terraced rowhouses. In Spain’s cities, over four fifths of people live in an apartment. At the edge of Madrid or Valencia, dense mid-rise blocks stand beside open countryside without sprawl in between, something that has almost never happened in an English-speaking country, and that has been rare in France or Germany for a century… Spain’s settlements have some of Europe’s lowest per capita transport emissions, in part because about 70 percent of trips in Madrid and Barcelona are made on foot, tram, or metro. Almost every neighborhood is mixed use; almost all urban Spaniards live in the ‘fifteen-minute cities’ that seem like remote ideals in most affluent societies.

This is a good comparison with other Southern European cities, and even here, Spain stands out.

Spain is not alone in Europe in having become wealthy only recently: most Southern European countries have a similar economic history. And Portugal, Italy, and Greece do share the distinctive features of Spanish urbanism to some extent, with relatively dense cities and relatively high shares of people living in apartments (46 percent in Portugal, 53 percent in Italy and 59 percent in Greece compared to 65 percent in Spain). In other ways, however, Spain is distinctive in Southern Europe. The cities of Portugal, Greece, and Southern or Central Italy are generally surrounded by ragged fringes of unplanned suburban development: their urban cores are dense in the same way as Spain’s, but their peripheries are a chaotic mixture. The transport situation is also dramatically different. About half of journeys in Lisbon and Athens are by car; in Rome, the figure is two thirds, with another substantial share on mopeds; in Nicosia, it is 85 percent, the highest of any European capital. In Madrid, the modal share of cars is below 30 percent. Cities tend to be dense all over Southern Europe, but they have not all achieved the transport outcomes that urbanists associate with density: in this respect, Spain is the outstanding model.

Public policy has played an important role in making this difference. In Britain and the US, the government develops the main arterial roads and allows development that follows the development control regulations, which results in fragmented urban forms (in terms of plot sizes and types of development). In Spain, the authorities undertake land re-adjustments like the Town Planning Schemes of Gujarat and thereby lay down clear boundaries and forms of development.

This also means a high level of infrastructure development with a high density of roads, based on plans that connect streets and localities to promote pedestrians and cyclists.

This has yielded cities with exceptionally good infrastructure. About 28 percent of Madrid’s surface area is taken up by roads, almost exactly the 30 percent recommended by UN specialists. This compares to 21 percent in Paris, 19 percent in London and 20 percent in New York. Even Los Angeles, a famously road-heavy city, uses only 25 percent for roads. As we have seen, these roads are also more skilfully interconnected, which is indispensable for pedestrians and cyclists.

A large road network has not detracted from policy focus on public transport.

Despite having far superior road infrastructure, Spanish cities also have high public transport use. Around 60 percent of trips in the Madrid metropolitan area and over 70 percent of trips in the Barcelona metropolitan area are made through public or active travel, similar to other major European cities and far higher than American, Canadian, or Australian cities, which typically fall below 30 percent. In other words, Spanish cities have Los Angeles-tier road infrastructure and Paris-tier public transport access. This is paired with some of the continent’s best intercity transport. Spain has significantly more motorways than any other European country: 17,228 kilometers, versus 13,183 in Germany and 11,671 in France. It has the second-longest high-speed rail network in the world, after China.

In fact, public policy played perhaps an even more important role by keeping infrastructure construction costs low and ensuring construction was done within budget and without delays. It was able to utilise something like €200 billion in cohesion funding received from the EU between the late 1980s and 2020.

More importantly, Spain kept costs low… Spain, combined with its non-EU injections, built 4,000 kilometers of high-speed rail, 10,000 kilometers of motorway, and numerous metros, trams, ring roads, and radial arterials, because it kept costs extremely low. It did this by maintaining good practice: flexible environmental rules (although these have since become more problematic), top-tier in-house capacity in engineering and contracting, a commitment to a steady pipeline of projects over decades, and, above all, rapid decision-making, avoiding the costly delays and redesigns common elsewhere. Another part of this was giving small areas the power to decide on and fund infrastructure, like the Madrid Metro, avoiding the ping pong between authorities seen in some high-cost countries.
Together, this has allowed it to build metros more than 20 times cheaper than in New York City. For the price of one mile of the New York’s Second Avenue Subway extension, Spanish builders covered the entire 35-mile 1995–1999 expansion of the Madrid Metro. As a result, Spanish transport infrastructure is both abundant and cheap. Madrid’s metro underwent one of the fastest growth spurts in the worldbetween 1995 and 2007, adding around 203 kilometers of new lines to its already impressive footprint. Barcelona has been continuously expanding its metro network since the Second World War: in a period of astonishing activity between 1990 and 2010 there were 18 separate extensions, and seven more since.
Cities including Valencia, Bilbao, Seville, and Málaga all built metro or light rail systems in the 1990s and 2000s. Madrid and Barcelona have both joined their old suburban rail lines up into Cercanías/Rodalies systems, similar to London’s Crossrail scheme but far more comprehensive (though not always well run). The upshot of this is that, despite having some of the world’s best road infrastructure, Spain still has relatively low levels of car use and ownership: the modal share of driving is low not because driving is a bad option, but because other options are so good.

Since the late 2000s, changes in laws placing a series of restrictions on buildings have adversely impacted Spanish urban planning. For example, before 2007, Spanish land was buildable by default; the same was inverted to allow housing construction only if specifically zoned by the local council. Today, in an emulation of the planning practices followed in the US and Europe, building in Spain has become extremely restrictive.

Planning a major Spanish urban extension now depends on agreement from the municipality, the community (the regional government), the landowners, and, individually, each of the environmental, water, roads, electricity, public transportation, and social housing authorities. The result is that creating new city plans now takes an enormously long time. Creating the plan takes between six to eight years, while designing the streets and plots takes another three to seven… This is leading to high prices. Madrid asking prices are now nearly €6,000 per square meter, and Barcelona over €5,000, above Hamburg, Berlin, Frankfurt, Brussels, Milan, and Rome… But Spanish wages are low… This has left leading Spanish cities with some of the worst house price to income ratios in Europe.

Spain offers important lessons for cities in developing countries like India. Spain’s late development means that its experience has even greater relevance for us.

Spain's cities are unusual not on any single dimension but on the combination - density, mixed use, mid-rise (not high-rise) apartments, walkability, cheap and abundant transit, high car ownership but low car use, infrastructure preceding development, and municipally planned street grids. Spain is unique in getting all the dimensions right.

Indian cities, from metros to the lower-tier ones, are characterised by a far lower share of multi-tenement units, rigid land-use restrictions, high setbacks, poorly maintained or absent footpaths, infrastructure coming well after habitations emerge, and sorely deficient mass transit facilities (especially bus networks).

In India, exclusive land-use zoning is the norm, with mixed-use permitted only beyond generally 15-18 m roads and above, which are present in a very small proportion of the localities. In the older areas, commercial facilities in residential areas have emerged informally over time, whereas in the planned colonies and new developments, mixed use is restricted.

Indian cities have among the lowest share of urban households living in multi-tenement units, with Spanish cities being at the other extreme. Only 31% of urban Indian households live in flats (NSS 2018) compared to about 80% in Spanish cities, with Mumbai being the exception. The India NSS “flat” includes chawls, single-storey shared tenements, and informal walk-ups - so Indian numbers overstate what a Spaniard would recognise as a flat.

Similarly, Indian cities have among the lowest share of road network, not even a third of the UN Habitat norm. Most Indian metros are 6–12%, with only Delhi, the only Indian city with municipally planned extension, getting close.

I can think of at least a few big takeaways. Foremost, there’s no alternative to mixed-use, densified development for both greenfield and brownfield areas.

Given its high share of detached housing, Indian cities have a great opportunity to reinvent themselves. This can be done by increasing FAR, and more importantly, doing it in a manner that allows upzoning adjacent to 9 m and 12 m roads. As I blogged here, the current upzoning deregulation, confined to plots with road width greater than 18 m, is largely superfluous.

This must be coupled with planning norms like allowing for relaxations of setbacks, even dispensing with them and encouraging row housing, multi-tenement units, and mixed-use in terms of encouraging commercial amenities. The latter is about ensuring that people living in a locality should be able to buy their regular groceries and other household items and services from within there. Further, the local government fee and property tax regimes must consider lowering the layout development charges, building permission fees, and property taxes to encourage the realisation of these objectives.

These policies and instruments must be deployed with a long-term perspective (as against expectations of immediate results). The objective should be that they would shape incentives and enable the gradual redevelopment of brownfield areas as densified communities.

Second, we must use urban planning to lay down street network configurations that enable connectivity and walkability. Master plans and their development plans should keep this in mind. Minimising or even eliminating setbacks would be one step to enable such street networks. The prioritisation of walkability requires the infrastructure of footpaths and street connectivity to be able to walk, and the supply in terms of mixed-use amenities to create the demand. And all this must be combined with local campaigns to promote the culture of keeping footpaths free of encroachments.

Third, the current dominant trend across Indian cities of the emergence of gated communities in the suburbs must be examined. These communities, while attractive for their residents and developers, go against all principles of sustainable urban development. These are largely monocultures of upper-middle and higher-income housing (the maids and drivers, and others, commute from distant places), with exclusive residential zoning, limited or no mass transit connectivity, exclusively car-based, and very poor external street connectivity (large gated enclaves with one or two entry/exit points). They impose massive negative externalities on the city and locality, while appropriating all the benefits.

Fourth, mass transit must be at the core of all developments. All greenfield areas, in particular, must be planned around mass transit, in the form of transit-oriented development (TOD). This post discusses some principles for TOD in Indian cities, and this post outlines some of the challenges. This would require going beyond the current norm of merely giving higher FAR and offering significant incentives on fees and taxes to make it more attractive for developers to build inside the TOD zones.

Like in Spain, the challenge is to get the combination more or less right. The good thing is that all of them lie with the states and mostly with the cities themselves. It is only required for 2-3 cities to take the lead and strike out on their own in following these principles and reinventing themselves. They can be the lighthouses that guide urban development in India.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 18 Jul 2026 12:35:13 +0000

1. Are people overreacting to small struggles?

When asked if they would consider someone experiencing typical fluctuations in mood (described as broad happiness but occasional moments of worry, frustration or loss of confidence) as having a mental illness, more than half of young Americans say yes, up from just a fifth 15 years ago.

2. A picture of state finances.

3. The promise of quantum computing.

Quantum computers can transcend the limitations of the traditional binary computer bit, which can exist in two states, denoted by zero and one. By contrast, quantum bits, or “qubits”, can exist in both those states at once. This allows quantum machines to survey multiple potential solutions simultaneously, rather than dealing with them one by one like a conventional computer. One analogy is a maze. Where a quantum computer can examine the whole map to find a way through, a traditional machine will keep exploring dead ends until it finds the route. Quantum computers’ superior processing power should make them better able to generalise from small amounts of data and sift through multiple complex patterns...

But many companies are already experimenting with the technology because of its promised leap in capability, predicting early uses for the machines in areas such as chemistry and materials science. The idea is that because of their own workings and structure the computers will be better able to analyse and predict chemical behaviour determined by atomic and subatomic interactions governed by quantum rules. In a sense, they will be speaking the same language rather than translating an analysis into a string of ones and zeros as a traditional computer does. As a result, a sufficiently powerful quantum machine should in theory be adept at predicting the interactions between drugs and living cells that determine whether a new pharmaceutical will work. Such possibilities have already led tech companies to pair up with industrial groups.

4. India's trade account in a nutshell.

In 2025-26, its exports of services, at $421.3 billion, was close to the export of goods worth $446.1 billion. On the other hand, imports of goods ($783.4 billion) were way above the imports of services ($204.7 billion). Thus, while India recorded a merchandise trade deficit of $337.3 billion, it had a surplus of $216.6 billion on the services account.

5. Brilliant article by Simon Kuper on how football came to be dominated by Western Europe.

Western Europeans didn’t start by asking, “How can we win the World Cup?” Instead, they pursued a different goal: making amateur football cheap and widely available. The intended outputs were happiness, community and public health. Winning World Cups was a byproduct... I began playing football aged six, in 1976, after moving from London to Leiden in the Netherlands. Most Dutch boys I met belonged to a football club... The little Leiden region had dozens of football clubs. Some fielded 20 senior teams, seven teams of under-eights and so on. Many people built their identity and social life on being the right-back or linesman of the 14th team. The Netherlands in the 1970s reached two World Cup finals. Everyone played and understood how to play. Football is geometry — about creating space when you have the ball, and shrinking it when you don’t. That knowledge is all around you in western Europe, unlike in Asia, Africa, the US or Brazil... In 2017, the average Dutch person lived 1.6km from a football field. Neighbouring Germany’s football federation is the world’s largest sports association, with more than 7.7mn members...

As a father, I raised three footballers in Paris, now the game’s deepest talent pool. Almost all Parisian suburbs, or banlieues, have well-kept sports complexes, with artificial fields, used nonstop: at half-time of any amateur game, children storm on to the field for a kickaround. So structured is the system that my son had to earn a coaching diploma to train his little club’s under-eights. His own beloved coach, Mustapha Sangaré, who only joined a football club aged 15, now plays for Bulgaria’s Levski Sofia and Mali. He is far from an anomaly: almost 100 players across all squads in the current World Cup were born in France and just under 70 in the Netherlands.

In another article Tej Parikh looks at why China and India does so badly in football.

This is a striking statistic, pointing how globalised football has become and how the leading European clubs have become the feeding grounds for national teams.

At this World Cup, more than 72 per cent of players appear for a club outside the country of their national team, and almost one in four are foreign born. (More than half of Cape Verde’s squad was born outside the nation and ply their trade in various European leagues.)

6. In what will prove to be a dramatic decision, DP World, which operates the Jebel Ali port that has been paralysed by the closure of the Strait of Hormuz, is reportedly planning to build a new port and a container terminal on the UAE's eastern coastal area of Fujairah.

Shifting some of the port’s capacity outside Dubai marks a seismic change for the emirate, which has established itself as a global trade and finance hub partly off the back of Jebel Ali’s growth... But DP World’s plans align with a broader UAE government initiative to attempt to bulletproof its economy against future hostilities with Iran by reducing its dependence on the strait, where shipping has been disrupted by Iranian drones and missile strikes since the US-Israeli attack. The new project would deepen DP World’s presence on the Gulf of Oman, allowing containers to enter and leave the country without having to pass through the strait, before moving them on trucks overland to Dubai, Abu Dhabi and neighbouring Gulf countries. Since the war began at the end of February, Iran has fired nearly 3,000 drones or missiles at the UAE — more than any other country... DP World’s plans underline how the Iran war has forced governments and companies in the region to reconsider infrastructure and economic corridors developed on the premise that there would be uninterrupted passage through the strait.

7. Rote memorisation in schools is celebrated in China.

The guidelines to the gaokao, an exam for 18-year-olds and the world’s largest standardised test, describe memorisation as “the most basic level of ability”, placing it first among six traits that include comprehension, analysis and synthesis, appreciation and evaluation, expression and application, and inquiry. At the simplest level, the Chinese script itself, which operates at the level of the syllable and involves thousands of individually meaningful characters, requires years of memorisation... It is hard not to draw a contrast with the English-language west, where rote memorisation has taken on a faintly pejorative meaning. More than a century and a half ago, at the height of Britain’s industrial age, Charles Dickens was skewering the “facts alone are wanted in life” approach of fictional educator Gradgrind in the novel Hard Times.

8. Trump's makeover of the US State Department.

Abandoning the precedent of the past 60 years, Trump has brushed aside the foreign service officers who have typically run at least two-thirds of embassies. Of the 101 nominations for ambassadorships in his second term, just nine were career diplomats. All this is against the backdrop of swingeing cuts to the department, whose workforce has shrunk by more than 3,000, over 20 per cent, since Trump resumed office.

9. China's remarkable success in reducing air pollution by 60% since 2013.

10. Interesting that the IT sector explains half the difference in productivity growth between the US and EU.

Strikingly, even though the tech sector was only 9.2 per cent of US GDP, against 5.4 per cent of the EU’s, almost half of the difference in productivity growth between the two economies was explained by differences in the relative size of this one sector. Moreover, productivity growth in the EU’s (relatively small) tech sector was also measured as being lower than in the US one. So, overall, the tech sector alone accounts for well over half of the overall difference in growth of GDP per head.

This is important

Life expectancy for US men was 76.5 in 2024, against an average of 80.5 in comparable high-income countries. For women, it was 81.4 against 84.8. That is despite spending a far higher proportion of its GDP on health. The US homicide rate was 5.9 per 100,000 in 2023, against 1.3 in France and 0.9 in Germany. Its prison population was 542 per 100,000 in 2023, against 130 in France and 69 in Germany. Thus, if one takes a wider view of human welfare, the US is very far from superior.

11. China reports the lowest quarterly growth rate in decades at 4.3% for the second quarter of 2026. Industrial production and exports are propping up growth, even as consumption declines.

Retail sales added just 1 per cent in June from a year earlier, while fixed-asset investment was down 5.7 per cent year on year for the first half of the year, compared to 4.1 per cent in the first five months. Industrial production, one sign of strength, grew 5.3 per cent last month on a year earlier... Separate data on Tuesday showed exports soared 27 per cent year on year in June, adding to signs of reliance on trade to support economic activity... Julian Evans-Pritchard, head of China economics at Capital Economics, noted that the GDP data brought it “closer in line” with the consultancy’s alternative measure, which has been around 3 per cent.

Underlining the importance of exports, there was a surge in China's EV exports in June.

China’s monthly car exports rose to a record 1mn cars in June as part of an overall surge in trade that will heighten tensions with partners such as the EU. Shipments of cars rose 71.2 per cent from a year earlier to 1.06mn, putting the country on track to export more than 10mn cars this year, up from 7.1mn last year and more than double the 4.9mn in 2023. The surge in exports comes as domestic sales slow sharply following the phaseout of EV subsidies and a decline in demand for fuel-powered cars... The wave of Chinese exports has been driven by lower-cost cars boasting superior software, further threatening carmakers from Japan, South Korea, Europe and the US... China’s exports of rare earths in June fell 34 per cent year on year and 6.4 per cent in the first half, following tight export controls on the minerals, which are essential for high-technology products... The NBS’s Wang said China’s exports of green energy-related products such as lithium batteries and wind turbines increased 37.6 per cent and 35.6 per cent, respectively, during the first half.

And this highlights how production and exports have sustained growth.

Industrial production rose by 5.4 percent in the first six months of the year, versus the same period last year. High-tech manufacturing rose by more than 13 percent over that period. But fixed asset investment — which includes infrastructure, property construction and manufacturing — fell by 5.7 percent. Real estate development dropped 18 percent. The value of China’s exports surged by more than 20 percent in the first half. But consumer spending, which a Moody’s Analytics report said “remains the economy’s weakest link,” faltered. Retail sales of consumer goods increased by 1.3 percent over the first half of the year.

12. Ruchir Sharma holds that peak China was reached in 2021, and since then it has been a story of decline, papered over by exports and AI.

Since then, China’s share of global GDP has fallen in nominal terms from 18 to 16.5 per cent, while the US share has risen to 26 per cent. China’s growth rate has dropped below the rest of the world, including the US. In real terms, independent estimates now put China’s growth in real terms closer to zero than to the official target of 4.5 to 5 per cent... China’s population also peaked in 2021. Last year, births hit a record low, and deaths hit a record high. The working-age population is on pace to shrink by 75mn every decade this century... After adding little in the 2010s, net exports now account for about a third of the country’s growth, driven mainly by AI-related goods... And though every country now hopes for an AI-driven productivity miracle, the expected boost in China is about a third of a percentage point by 2030, hardly enough to halt its decline.

13. India agriculture statistics

If one looks at the growth areas in agriculture in the 12 years between 2011-12 and 2023-24, production of paddy and wheat rose by just 27 per cent. Fruit and vegetable production rose by 52 per cent, and milk production by 85 per cent, even though they did not receive any substantial support by way of subsidies or minimum support price procurement by the government. The true growth areas in agriculture are out of direct central government support and depend largely on producer enterprise... In 2023-24, the value of output of cereals (mainly paddy and wheat) was ₹8.5 trillion, while the value of the largely cooperative-controlled milk sector was ₹12.2 trillion.

14. Outbound corporate investments from India on the rise.

Indian companies have announced overseas equity investments worth more than $14bn in the first four months of the fiscal year that began on April 1, compared with $18.7bn in the previous 12 months. The outflows come as foreign investors flee India’s markets at the fastest pace ever this year, pulling out more than $23bn as of the end of June over a lack of AI champions.

15. Simon Kuper on Lionel Messi.

On the field, Messi sees everything. All his career, he ignored the ball for the first five minutes and instead walked around, memorising the position of each opponent and the spaces between them. But now he spends almost the entire game walking and scanning. When he breaks into a run, his teammates know he has seen an opening. They play to serve him. When he moved to the right wing against Egypt, seeing space there, the team remade itself around him. Argentina, two goals down after 78 minutes, won 3-2. Scaloni said afterwards: “We were not the ones who told him to go out to the right.” Messi moved right again against England and again Argentina came back to win.

16. The AI-boom is spilling over to energy sector.

Initial public offerings for energy firms raised $12.6bn in the first half of this year, according to data firm Dealogic. That marks the highest half-year level since the peak of the dotcom bubble in late 1999 and the highest first-half figure on record. It is well above 2025’s full-year total of $4.3bn. The surge in fundraising comes as access to the vast amounts of energy needed to run data centres emerges as a bottleneck in a multi-trillion-dollar AI investment boom... US electricity demand is projected to increase 39 per cent between 2026 and 2035, according to consultancy ICF, in large part due to ballooning demand from data centres...

Companies that have been able to raise money on public markets include those involved in complex, capital-heavy projects such as nuclear and geothermal power plants, while investors have also been willing to back businesses trying to develop new technologies... “This is a moment in which speculative projects are being funded and underwritten,” said Julien Dumoulin-Smith, a Jefferies research analyst covering power, utilities and clean energy. “They’re not just limited to venture capital or private equity.”... Nearly two-thirds of the energy companies that floated this year and last are now trading below their offer price, according to Dealogic. That compares with less than 40 per cent of IPOs across all sectors that are underwater.

And Wall Street Banks are already AI trades.

Four of the five big Wall Street banks reported yesterday: JPMorgan Chase, Bank of America, Citigroup and Goldman Sachs (Morgan Stanley chimes in today). The numbers were outstanding, as one would expect in a quarter when markets whipped around and big deals were done. In aggregate, equity and debt trading revenue at the four hit $38bn, up more than a third from a year ago and 60 per cent higher than two years ago. Investment banking fees, at $10bn on the quarter, have grown almost as much... It is AI that has markets churning and drives capital-raising. The banks are another example of the false “broadening” of the stock market that has also driven up industrial and utility stocks in the past few years. All these sectors have lived, and could die, with AI.

And their profits are not confined to the US, with even Asia becoming a major source.

Equities trading in Asia is helping power a record-breaking run from Wall Street’s banks, with the region on course to surpass Europe as the industry’s second-largest source of revenue behind the US. In the past 12 months, clients of large investment banks have ploughed into companies in Asia that provide critical infrastructure to the AI semiconductor industry, including South Korean SK Hynix, Taiwan’s TSMC and China’s Cambricon Technologies... In the most recent quarter, the largest investment banks collectively reported an unprecedented $25.7bn in earnings from equities trading and called out Asia as a crucial factor in the growth.

17. Even by the low standards of Trump 2.0, this is surely an outrageous example of private profiteering from public office.

Donald Trump’s social media company has discussed charging traders and investors as much as $100,000 a month for faster access to the US president’s posts on his Truth Social platform. Trump Media & Technology Group (TMTG) has quoted the six-figure monthly sum in talks with prospective buyers of the “Truth API” data service, according to people familiar with the matter. Proprietary trading firms and hedge funds pay huge sums for ultrafast data feeds because every millisecond counts when reacting to market-moving news. Trump often makes major announcements on Truth Social that trigger huge fluctuations across global markets... TMTG, which is majority owned by the Trump family, controls Truth Social...

A pitch sheet circulated by TMTG to promote Truth API, seen by the FT, lists 10 “documented market-moving posts” from the president’s Truth Social account. On April 9 2025, for example, the document says Trump’s “THIS IS A GREAT TIME TO BUY!!!” post “restored” $4tn to the market capitalisation of the S&P 500. Trump’s post in early June that the US would hit Iran “very hard tonight” caused a 6 per cent intraday jump in oil prices, the document says. “When @realDonaldTrump Truths, the world reacts,” the document continues. “No comparable signal exists. No official API has ever been offered. Until now.” Trump has also touted specific stocks, complimenting companies such as Nvidia and Apple and fuelling rallies in their share prices. More recently after the outbreak of the war with Iran, Trump posted on March 23 that there had been “very good and productive conversations with Iran”, sending oil prices falling sharply.

The probation problem in India's public sector

noreply@blogger.com (Urbanomics) — Thu, 16 Jul 2026 02:37:14 +0000

Public recruitments come with a one- or (mostly) two-year probation period. The idea is to correct a Type I error (a false positive recruit) in the recruitment process.

Underlining its importance, the DoPT Master Circular on Probation/Confirmation of 2019 has this to say about probation:

‘Probation should not be treated as a mere formality. The existing powers to discharge probationers should be systematically and vigorously used so that the necessity of dispensing with the services of employees at later stages may arise only rarely.’

Unfortunately, while it is part of all recruitment rules, it is widely believed that there are few instances of discharge during probation in any local, state, or central government recruitments.

Before we analyse this, it must be clearly stated that data on this is very patchy in the absence of disclosures by either the DoPT, UPSC, state PSCs, or the central or state government cadre controlling agencies. Empirical evidence, or whatever can be gathered, shows that across every service - All-India Services, central Group A civil, central Group A technical, state civil services, state police officers, state medical services, the great mass of teachers, constables and healthcare workers - the discharge rate on performance grounds is effectively zero.

This is what Claude gathered about central government cadres.

And this about state government cadres.

It must be disclosed that both the data are not validated, but conforms to the widely known anecdotal knowledge.

The rare discharges that do occur are almost invariably for fraud (fake caste, disability, TET or degree certificates) discovered post-selection, or for medical/physical failure during pre-probation training. Fraud detection and physical fitness testing are legitimate filters, but they are not the probation function. This has been confirmed by every major civil-service review (Hota 2004, Yugandhar 2003, Second ARC, Baswan 2016).

There are three examples of probation discharges outside of fraud and medical or physical ineligibility. An estimated 2-5% of the scientists and engineers recruited by the Department of Atomic Energy are discharged for non-completion of the academic curriculum. An estimated 3-15% of the police recruits by state and central government paramilitary forces are discharged for physical and disciplinary reasons (not deficiencies in the acquisition of policing capabilities). Thanks to supervision by the High Courts, an estimated 0.5-1% of every batch of state civil judges and munsiffs are discharged for failure to meet defined output and quality metrics during probation.

The absence of any discharge deterrent increases the stakes associated with the recruitment process itself. This most likely contributes to the fraudulent practices that are pervasive across recruitments at all levels.

This is a comparative assessment of probation discharges globally and from India’s own private sector.

The deterrent effect of even a few discharges can be significant.

So what can be done about this?

The probation instrument has not served its purpose because the framework it operates within provides neither the assessment infrastructure (objective performance criteria linked to a role profile), disclosure requirement (not even DoPT publishes data on probations), nor the political-economy incentive (senior officers who discharge a subordinate invite litigation and administrative-tribunal action). In the circumstances, reforming the probation clause without reforming both the criteria and the incentive structure will change nothing.

A low hanging fruit is to shine light on the problem and make it mandatory for all departments to disclose the status of probation confirmation, extensions of probation, and affirm that all the probationers met the requisite benchmarks for the same.

The first step in any systematic effort would be to define a few objective and easily captured metrics of probation performance that are proximate to their roles. This would usher in transparency and shape expectations among probationers about their roles.

Second, the probation performance evaluation should be made a mandatory exercise, by a committee consisting of the Departmental head (or representative), officer responsible for training within the Department, and the Director of the Training Academy. This would mitigate the political economy deterrent to discharges.

Third, there could be a mid-way evaluation of the probationers by the same committee, which discusses any laggards and inform them about where they are falling behind. The same should be documented. This could shape expectations and ensure that the probationers are forewarned before any discharge.

Fourth, the evaluation reports should be submitted every year by the Departments to DoPT (and its state government equivalents) and the UPSC/SPSC, failing which no recruitments by the Department should be allowed. This would bring departmental accountability to the process of probation confirmation.

The aforesaid measures would constitute a simple and realistic start to addressing one of the most farcical features of the recruitment process.

Higher FARs, but very few plots can avail them

noreply@blogger.com (Urbanomics) — Wed, 15 Jul 2026 02:31:00 +0000

Many state governments in India have issued executive directions increasing the permissible Floor Area Ratios (FARs) in their cities. However, these upzoning reforms are likely to struggle to meet the objective of densification due to restrictive conditions to avail the increased FAR. Specifically, three gate-keeping elements - minimums on road width and plot size, and a maximum on height - leave the upzoning reforms largely stillborn.

To understand why, we need to keep in mind the street layout of the typical Indian city. The colony street widths are typically 9 m (30 ft) or less, and at best 12 m (40 ft). Even the connecting roads are no more than 12 m. In any city, a very small proportion of properties, and an even smaller proportion of residential land use, will have road widths greater than 9 m. Only the arterial roads, which are in any case mostly commercial and higher-valued, are above 12 m.

A comparison of upzoning reforms across the ten biggest states reveals some interesting insights. For a start, the upzoning itself is generally marginal, and even where significant, the higher FARs can be realised only on wider roads. In simple terms, the upzoned FAR apply to a tiny minority of parcels - greenfield layouts and edge plots on arterial roads. Every state except Gujarat, UP (individual) and Haryana (small plot) sets the FAR uplift threshold above 12 m - typically 18 m, 24 m or 30 m. But even for the three, the uplift is marginal and only for a few categories of properties. Also, none of the three touches group housing or vertical redevelopment on narrow-road plots.

Further, plot size and setbacks compound the problem of a minimum road-width gate. Even where a 12 m road technically qualifies, high-rise / group-housing rules require minimum plot sizes of 750–2000 sqm and setbacks of 6–12 m. In existing settlements, individual plots average 60–150 sqm, and assembling five to twenty of them is legally and commercially nearly impossible without a TDR/land-pooling instrument. Even then, practical challenges are daunting.

This also means that even the TOD zones cannot benefit from the upzoning. In existing town cores, which are where TOD catchments actually sit, FAR reform delivers almost nothing until the road-width and plot-size gates are lifted or bypassed.

In other words, the upzoning reforms largely bypass the built-up city and are relevant only to the greenfield areas. In these areas, the uplifts linked to higher road widths end up benefiting only the large developers. They, in turn, build high-rise gated communities of higher-end housing, mostly unconnected to mass transit and with multiple car-users in each household. Ironically, this also ends up expanding the sprawl, flooding the roads with cars, thereby worsening traffic and increasing pollution.

On the other hand, it does nothing for the smaller developers who are likely to develop affordable mid-rises (say, 6-12 floors) inside the existing colonies. Instead, they end up constructing low-rises (up to 4-5 floors). Further, the unit economics given high land prices mean that even these low-rises gravitate towards the suburbs.

It is these mid-rises that are likely to contribute meaningfully to expanding supply and addressing the affordable housing problem. Unless the upzoning covers the 9 m road width and smaller plots (which make up the vast majority of the potential developable properties in any city), there cannot be any significant impact on housing supply and the affordable housing problem.

Further, to realise the full potential of such upzoning, it must be complemented with sharply increased mass transit services, especially buses, that cover these colonies. The quality, frequency, and connectivity of the bus network must be high enough to induce people to shift from car usage.

Workers and startups are helping train AI to replace them

noreply@blogger.com (Urbanomics) — Mon, 13 Jul 2026 02:01:57 +0000

Data annotation work is increasingly moving up the value chain, from tagging and labelling data to replicating the work of semi-skilled (on the factory floor) and skilled (consultants, analysts, lawyers, engineers, and doctors) workers.

Startups sell data to AI labs, which use it to train and refine their AI algorithms and develop software products/solutions that replicate the work of these workers. In other words, the semi-skilled and skilled workers, or at least some among them, are feeding their time and skills into the AI algorithms that seek to replace them and their kind. Both the training startups and those workers offering their services to them are basically helping make themselves redundant.

On this, the FT has a very good film about how Indian startups are paying factory floor workers and gig workers (and even people in their homes doing regular household chores) to use cameras and record their work. Data annotation is becoming the new BPO for India’s IT industry.

The Ken has an article that raises the possibility that for all the attention and hype around robotics, Indian startups might remain stuck at the lowest end of the robotics value chain - data collection.

India was the back office for the IT boom. It became the annotation and reinforcement-learning labour pool for the generative AI boom. It is now emerging as the behavioural data factory for the physical AI boom... Building the robot is only half the problem. Building the intelligence behind it is much harder. That requires data. Vast amounts of it. Unlike large language models, which were trained on the equivalent of hundreds of years of human reading scraped from the internet, robotics companies are working with barely a fraction of that in video... What they need is meticulous, first-person recordings of humans interacting with the physical world, carefully collected, annotated, and painstakingly structured.

So the industry turned to India. Across the country, workers are recording themselves doing everyday chores for data-collection firms, which then sell that footage to companies such as Tesla, Figure AI, and Agility Robotics to train their humanoids. Indian startups see this as a moment to claim a seat in the global AI value chain. The country has over 260 robotics startups, and investors are beginning to pay attention... The footage being recorded by Indian workers becomes proprietary once it leaves the country. The datasets assembled from it are accumulating on foreign servers. The foundation models trained on them are owned by foreign companies.

The NYT has an article about how startups like Handshake, Mercor, and Surge in the US are paying skilled workers to collect data on their work.

Mercor and a handful of similar start-ups are the primary middlemen in a supply chain of “human data” that may power the next generation of A.I. As OpenAI, Anthropic and other major ventures compete to become the industry’s dominant platform, the market for premium data that has been vetted by experts is exploding…They need mathematicians to annotate proofs, lawyers to mark up briefs and professors to grade essays… To use the parlance of the industry, data labeling has moved up the “value chain,” and the start-ups that offer this service have become some of the fastest growing in Silicon Valley… The data-training start-ups see a lucrative opportunity in recreating workplaces in miniature: controlled environments in which their gig workers can evaluate and reproduce emails, memos and slide presentations in context. The information emerging from such a setup, the companies boast, will help shrink the gap between what A.I. models can accomplish and what office workers actually do from one minute to the next, as ideas and instructions flow between meetings, documents and applications…
To keep improving their models — to make them more useful, more sophisticated, less prone to hallucination and mistakes — A.I. companies heavily refine what goes into them. That’s post-training, and it includes buying data from vendors like Handshake and its competitors… Deeptune, a start-up that makes “training environments” with simulations of the software programs, like Slack and Salesforce, that many workers toggle between all day long to get their work done. The idea is to painstakingly create a mirror image of, say, an investment bank so that A.I. can observe every interaction…
It may turn out that once OpenAI, Anthropic and others have taught their models to perform a certain job, their need for more training data in that area could sharply decline. In this way, Mercor, Scale, Handshake and their peers are much like the elite freelancers they employ: making money today, but in danger of being dropped tomorrow… People sign up for data-training gigs for a variety of reasons. The main one is, of course, money… Though the labor is unpredictable and rates vary… the workers who cobble together enough shifts can generate meaningful income. People might sign up because they have been laid off, or because they can’t find enough work in their field. They might do it because they’re eager to get “A.I.” on their résumé, or because they need extra cash in retirement… Many people who contract for these companies understand that this is a short-term opportunity, a brief chance to train the models to automate jobs before they themselves are automated out of the job of training models.

I asked Claude to generate a visualisation of this market landscape, including an assessment of the Indian landscape. The numbers are clearly estimates and must be validated (though at a ballpark they appear alright).

The unit economics of the data chain shown below for a garment worker in India is instructive. She gets roughly ₹400 a day to wear the camera (or $0.60 per hour); the startup pays the factory ₹450–500 per hour; US-based startups like Human Archive price data at $1–10 per hour; and once annotated and packaged, it sells to global robotics labs at $15–50 per hour. That is a 25–85 times markup, and every rung above the worker is owned outside India.

The graphic also shows that the vast majority of AI workers are doing the BPO equivalent, whereas the vast majority of funding is going to those building the data centres. India has 170-odd AI startups that have raised $2.6 billion in total and over 260 robotics startups, but the genuine model/product builders are a tiny set, and the majority have rebranded annotation as an AI line of business (iMerit, Objectways, Awign, Karya, Deccan AI, Human Archive, Egolab, Neo Cambrian, Humyn Labs, RoBoEra, etc.).

It must also be highlighted that in the majority of cases in India, the data goes from the garment worker to an Indian data aggregator to a robot-brain lab in San Francisco, and comes back as a robot/humanoid. The frontier LLM labs are not in that loop. This also means that none of the emerging governance conversations about frontier models - safety frameworks, export controls, model-access negotiations - touches the mainstream data collection work being done in India. India is negotiating hard for access to frontier language models while simultaneously handing over, for ₹400 a day, the training substrate for the physical models that will actually displace its manufacturing workforce. Those are two different conversations, and only one of them is being had.

Further, as the Times article highlights, while these annotation startups are flourishing now, they may not be sustainable ventures. Once experts teach the models to do something, their services are no longer needed in the same way, and the vendors themselves need the models to keep improving to show they add value, while needing them to remain imperfect so clients keep coming back.

I asked Claude for historical precedents and got this:

Frederick Winslow Taylor’s explicit programme, from the 1890s, was for management to “gather in all of the great mass of traditional knowledge which in the past has been in the heads of the workmen.” Skilled machinists were stopwatched; the Gilbreths filmed them with chronocyclegraphs — a literal 1910s head-camera. Workers cooperated because they were paid piece-rate bonuses to do so. The tacit craft was decomposed into instruction cards and handed to cheaper, unskilled labour. Outcome: enormous productivity gains, the collapse of the craft wage premium, a machinists’ revolt, congressional hearings in 1911–12, and Taylorism banned in US government arsenals by 1915. It took roughly fifty years and the postwar labour accord before the gains were broadly shared…
In the 1990s American hospitals routed physician dictations to transcriptionists in Bengaluru and Chennai; it was unglamorous work, but India was good at it. That corpus is precisely what trained speech recognition. The industry peaked and then largely evaporated. Compensation to the transcriptionists: zero… most startups in this space risk meeting the same fate as the transcription companies of the 1990s.

In this context, I am reminded of the claim made by Daron Acemoglu and Simon Johnson in their book Power and Progress that the trajectory of technological progress is a political choice made by society and should not be left to corporations and technocrats. Their central claim is that the direction of technology is a social choice, not a technical destiny, and that redirecting it requires countervailing power rather than better-intentioned technocrats.

The problem, though, is that globally, and especially due to the Trump 2.0 regime, the rule makers have surrendered agenda-setting to Big Tech and AI Labs. Closer home, India has almost no leverage over the direction of frontier AI. Instead, its leverage is confined to the terms on which its labour and data enter the supply chain, and not to bending the technology’s arc.

In the circumstances, what can a country like India do?

Here are some thoughts for consideration. One, a statutory floor rate for training-data contribution and an industry-led collective licensing body for data work are both administratively feasible and could increase value capture (from the worker’s current share of 1-2% of the value created) without banning anything. A comparator is the model of SoundExchange (US) or PRS (UK) in the music industry, which acts as a government-designated clearinghouse that collectively licenses music, collects usage fees, and distributes royalties to creators, effectively removing the burden of individual licensing. This model would also subtly frame the market in terms of treating data as labour, and not as mere raw material.

Second, on the regulatory side, it may be useful to revisit the DPDP Act provision that permits employers to process worker data without explicit consent under “employment purposes”. Instead, there should be purpose limitation, or restrictions on repurposing training data for other activities, and consent requirements of all involved.

Third, public spending on AI innovation and procurement preference could be made conditional on the recipient retaining licensing rights to datasets collected from Indian workers rather than doing work-for-hire. This would frame the collection of data as an input and not a product, and industrial policy could price it appropriately. Fourth, there is the argument about extending statutory instruments like the gig worker welfare boards or the Code on Social Security present in some states (Rajasthan, Karnataka, etc.) to cover data work. It could help build countervailing power.

But pursuing these agendas can be costly. This being a global market, prohibiting or putting too onerous terms on value capture and the entry of data into the supply chain will backfire by moving the work to Vietnam, Ethiopia, or the Philippines. Besides, for the Indian workers, already facing an acute scarcity of jobs, the choice isn’t really on offer, and ₹400 a day is ₹400 a day. There is a collective action problem here which calls for multilateral engagement through a forum like the ILO.

But this should not mean that we sit back helplessly and allow the market dynamics to play out. Instead, before enacting any of them, there must be a public debate on the merits or otherwise of these proposed measures. What are their respective costs, and what can be done to mitigate them? What versions, if any, of these measures should be enacted? Such debates are essential to make informed and collective social and political choices.

The public debate is important since the agenda-setting process here, like with any technology change, pushes certain considerations to the forefront while also marginalising certain others. Almost always, the former represents the interests of the corporations and elite beneficiaries of the change, and the latter represents those of the vulnerable and voiceless. Therefore, such agenda-setting debates are a purely political activity, with profound social implications.

It is also important since there is the distinct likelihood that India could spend the next five years as the world’s back office for the third time, and when the juice has been sucked out and value captured, there could be nothing left standing that India owns.

PS: In this context of collective action problems, it is worth taking inspiration from one very impressive and encouraging breakout (which has not received the level of attention it deserves) from South Korea. It is a tribute to the maturity and wisdom of the country’s corporate and political system and the robustness of its democracy that Samsung and SK Hynix agreed to share 10% of their windfall profits from memory chip sales, with no ceiling on payouts, with their employees for the next ten years. Sample this.

Samsung Electronics... agreed last month for employees to share the chipmaker’s blockbuster profits from an AI-led boom... SK Hynix... handed employees a similar profit-sharing deal last year... Samsung is also going to give Won500mn loans at low rates to employees... Samsung and SK Hynix together control much of the market for the advanced memory chips used in AI servers. Employees at both companies are in line for average annual bonus payouts of Won600mn, which compares with a national average salary of about Won50mn... district of Hwaseong... expected to gain corporate income tax receipts of Won1tn to Won1.3tn from Samsung alone this year, an extraordinary sum for a city authority whose annual budget is about Won3.5tn.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 11 Jul 2026 04:05:56 +0000

1. FT long read on how senator Deborah O'Neill, as chair of the Parliamentary joint committee on corporations and financial services, has single-mindedly exposed and brought the knees the Big Four auditing and consulting firms in Australia.

Deborah O’Neill has led the charge against KPMG in Australia over a client confidentiality scandal that prompted the departure of the firm’s chair, chief executive, chief operating officer, audit leader and a senior partner over the past month... comes on the heels of a similar implosion at PwC. The rival Big Four firm came unstuck when a data leak led to the exit of senior management... An EY employee was charged with accessing the bank details of Prime Minister Anthony Albanese while working on contract at Australia’s biggest bank. Meanwhile, Deloitte partially refunded the Australian government after admitting that it used AI to compile a report...

In 2023, the Labor senator forced the publication of emails that implicated PwC partners in the tax leaks scandal. PwC partners were caught sharing secret government tax plans that one of them had obtained from his work on an advisory board in Canberra, in the hopes of winning business in the US. This year O’Neill used parliamentary privilege to air allegations made by a KPMG whistleblower that had been inadequately investigated by the firm. KPMG has now been exposed as having used confidential information from existing audit clients to try to win new business from rivals — some from PwC as its audit customers looked to switch in the wake of that firm’s woes...

She entered parliament in 2010 having spent her career in education. O’Neill soon discovered that some Big Four consultants acted like some of her former pupils — copying the answers from the back of the book and then marking their own work, as she puts it — and used her role to put the leaders of the firms under pressure.

2. Soumaya Keynes points to a fascinating study by Rebecca Diamond of Harvard University of the use of GLP drugs that appears to show increased confidence and employment rates among women in the US. The study finds, using data gathered between 2021 and 2023, that the poorest third of women in the US suffered an obesity rate 14 percentage points higher than the richest third, whereas the gap was negligible for men.

The study's main findings:

After 18 months, women using GLP-1 drugs who start off without a job enjoy employment rates 27 percentage points higher than otherwise similar non-users. Women who start off with a job see their employment rate fall slightly, and although the data is too noisy to pick out effects on their earnings, it looks like their household income rises by 10 per cent. That second effect is a bit surprising, and possibly explained by parallel developments in these women’s love lives. Diamond estimates that GLP-1 drugs give single women a dramatic 29 percentage point increase in their chances of coupling up. On average, their new partners are richer than them, giving their household income a bump. Which could explain why a few of the women losing weight then feel able to drop out of work.

The study also points to a more disturbing consequence.

So far at least, GLP-1 drugs are disproportionately used by the rich. In Diamond’s study two-fifths of the women paid for the drugs out of pocket, at a median cost of $275 a month. Research based on Voy prescriptions shows how, adjusting for relative obesity rates, uptake is skewed towards more affluent areas. If obesity becomes an even stronger signal of economic disadvantage, the stigma attached could grow.

3. The rise of London's King's Cross area as perhaps Europe's AI capital.

Two decades ago, King’s Cross was central London’s most neglected district. Today, it is home to the main foreign outposts for several of the world’s wealthiest companies, from Big Tech giants Google and Meta to their richly funded AI challengers including OpenAI, Anthropic and Jeff Bezos’ Prometheus. AI researchers and entrepreneurs are packing out the area’s canal-side cafés so densely that venture capitalists prowling for their next deal are struggling to prevent their coffee meetings from being overheard by rivals.

For many, this resurgence can be traced back to one individual: Sir Demis Hassabis, the DeepMind co-founder and Nobel laureate who stayed in London to build his AI lab following its sale to Google in 2014 for £400mn. “Demis keeping DeepMind in London and resisting the gravitational pull of [America’s] West Coast is the most important thing that has ever happened to the London tech ecosystem,” says Tom Hulme, a tech investor at Alphabet’s GV venture capital unit... Just as PayPal helped launch the careers of a generation of Silicon Valley founders and investors including Elon Musk and Peter Thiel, a “DeepMind mafia” in London is pulling in billions of dollars to AI start-ups founded by Hassabis’s former lieutenants, including David Silver’s Ineffable Intelligence and Tim Rocktäschel at Recursive Superintelligence...

It was Hassabis’s pursuit of an “artificial general intelligence” capable of scientific research and a wide range of human tasks that in many ways kick-started the current AI boom. DeepMind’s sale to Google prompted Elon Musk to set up a research lab to counterbalance the internet group’s dominance of AI; that lab was OpenAI. DeepMind went on to make a series of AI breakthroughs including AlphaGo, which in 2016 beat the board game Go’s world champion Lee Sedol, and AlphaFold, which used deep learning to predict protein structures with superhuman speed.

King's Cross has emerged as the Canary Wharf of tech in UK, and this description is apt and underlines the continuing importance of personal interactions and connections.

The density of AI talent in King’s Cross was why the government’s scientific research agency Aria took a “very conscious decision” to base itself there rather than Whitehall, says Pippy James, its deputy chief executive. “We were definitely inspired by Kendall Square in Boston,” she says, referring to the area surrounding MIT where Google, Microsoft and Amazon, as well as biotech companies Moderna and Novartis, have offices. “Value creation comes from those serendipitous collisions.” In recent weeks there has been a steady stream of American AI companies announcing moves into the area. OpenAI and Anthropic have signed leases for tens of thousands of square feet in King’s Cross. Others moving in include Bezos’s “physical AI” company Prometheus, Cursor, the AI coding company that recently agreed a $60bn sale to SpaceX, AI agent group Perplexity and open model developer Reflection. Google, which already has many researchers and engineers in the area, plans to start moving staff into its vast new “Platform 37” office this summer after almost a decade in development.

4. This is a striking factoid about the importance of chips now.

With SpaceX going public, the list of the 10 most valuable US public companies is entirely made up of tech companies for the first time. Of those, three are semiconductor specialists. But with chips a key ingredient in AI, the other seven are also now all designing their own chips.

Some stats about the global chip squeeze.

... Elon Musk’s xAI to rent out spare capacity in its data centres. In recent weeks, Anthropic, Google and start-up Reflection AI have agreed to pay a total of around $2.3bn a month — or $28bn a year. This looks like a big return on Musk’s data centre investments. As of March this year, xAI’s total capital spending over its lifetime totalled $26.5bn... this surge in demand has already prompted a huge increase in supply, both of planned chipmaking capacity and newly minted chip stocks. One sign is the $600bn that memory chipmakers Samsung and SK Hynix said this week they plan to invest in Korea. Another is the $29bn that SK Hynix hopes to raise when its American depositary receipts begin trading in the US next week... TSMC has said it will boost its capital spending by as much as 37 per cent this year, as it did in 2025. But those increases follow two years of retrenchment and would leave 2026 capex only around 50 per cent higher than 2022. Contrast that with the biggest buyers of AI chips. Seven of the largest data centre operators are planning to spend an astounding $848bn this year, at least five times what they spent in 2022, according to a calculation by the newsletter Exponential View.

5. On the new bonds issued by SpaceX.

The bonds enjoyed very robust demand at the point of issuance, but some see that as a problem in itself. Allianz’s chief investment officer has described the market’s willingness to hand money over to Musk as a clear sign that we have moved from “a healthy boom, a stretched boom . . . into bubble territory”. Ominously, the bonds have weakened since they launched.

6. The AI LLMs scorecard.

Where will Sarvam stand?

Also national scorecard.

7. The low-margin business of mobile phone assembly. Amber Industries which makes air conditioners for eight of the top 10 brands and more than a quarter of all ACs made in the country, now proposes to assemble smartphones for Oppo.

Now, the company plans to sub-lease a part of Oppo India’s factory in Noida, set up SMT lines, and start assembling phones there... But smartphone assembly is one of the toughest businesses in electronics manufacturing... The target is to eventually assemble about a fifth of Oppo India’s volumes, scaling from roughly 8 million handsets in the first year to nearly 15 million in the second... Amber expects Ebitda margins of 1.5–2%, excluding benefits from the government’s production-linked incentive (PLI) scheme. That’s well below the 8.8% Ebitda margin generated by its broader electronics business in FY26, and the 7.1% operating margin recorded by its AC-heavy consumer-durables segment... Take Dixon, for instance. The company already accounts for nearly one-fifth of India’s smartphone output. Even at that scale, smartphone assembly, aided by PLI incentives, generates Ebitda margins of only about 3%.

8. AI boom compared with historical episodes.

9. On the rise of non-compete clauses in OECD countries and their adverse impact on productivity.

About 30 per cent of employers surveyed by the OECD said they had increased their use of the clauses in the past five years... It estimates that a 10 percentage-point increase in the prevalence of non-compete clauses in an industry was associated with a 1.9 per cent decline in the level of labour productivity, with workers stuck in sub-optimal jobs and firms less able to gain new skills. In many countries, non-competes have spread into parts of the labour market where the original justification of protecting sensitive information and firm-specific information is “weak or absent”, the research found, pointing to their use among entry-level fast-food staff in the US, manual workers in Italy and childcare workers or yoga instructors in Australia.

10. The market concentration in DRAM chips.

A market in which a monopolist owns 100 per cent gets an HHI of 10,000, a duopoly scores above 5,000, and a perfectly competitive market approaches zero... The US DoJ considers anything between 1,000 and 1,800 points to be “moderately concentrated”. Per Counterpoint Research, as of the first quarter of 2026 the memory market is 38 per cent Samsung (South Korea), 29 per cent SK Hynix (South Korea), 22 per cent Micron (US), 8 per cent CXMT (China), 2 per cent Nanya (Taiwan), and 1 per cent everyone else. This gives us an HHI of 2,838... Both Samsung and SK are two of Korea’s largest conglomerates (the so-called chaebols) which benefit from cosy relations with the state, so viewing them as fierce competitors in the same memory market might be wrong-minded in this case... And if the two companies function as a single economic entity in the global DRAM market, we should probably count them together for HHI purposes. And doing this we get a much higher HHI reading of 5,042. That’s above 5,000 —the HHI of a perfect duopoly.

11. China’s excess capacity in manufacturing requires something similar to what was done by the former Prime Minister Zhu Rongji.

In the late 1990s and early 2000s… under Zhu’s slogan of “zhua da, fang xiao” or “grasp the large, let go of the small”, Beijing retained its grip on key strategic industries while relinquishing control of a vast sea of smaller companies and factories…Thousands of mines, steel mills and other industrial sites were shut for good. An estimated 30mn to 40mn workers lost their jobs. The process was deemed painful but necessary: not only in setting up China’s accession to the World Trade Organization in 2001, but in freeing Beijing from supporting uneconomic industries…
Over the past 15 years, as China’s share of global manufacturing surged to around one-third, the share of lossmaking industrial businesses jumped from about 10 per cent in 2010 to nearly 25 per cent last year, according to the MERICS China Overcapacities Monitor. This dynamic exists across everything from steel and cement to cars, computer chips and robots. Take the automotive sector for example. Domestic car sales last year totalled 23.9mn against estimated production capacity of 45mn to 50mn. Sales are highly concentrated among a clutch of leading companies. According to HSBC, more than 70 per cent of EV sales — including plug-in hybrids — are being soaked up by 10 brands, leaving 47 others jostling for the remainder. In the shrinking market for petrol and diesel cars, 10 brands have about 70 per cent of sales and 73 others compete for the rest.

12. South Korean capitalism and windfall profits sharing - SK Hynix and Samsung edition.

Soaring global demand for high-bandwidth memory chips used in AI systems has propelled SK Hynix and Samsung Electronics to record earnings. This week Samsung announced quarterly operating profit of Won89.4tn ($59.7bn). The windfall is being shared with employees. Last September, SK Hynix agreed to pay workers 10 per cent of annual operating profits for a period of 10 years. Samsung followed with a similar arrangement in May after its union threatened strike action. With both firms expected to earn hundreds of billions of dollars this year, average bonus payouts per memory chip worker could reach about Won600mn ($400,000) at Samsung and even more at SK Hynix. Such amounts are staggering in a country where the average worker earns Won50.6mn per year, according to Korea Enterprises Federation data.

The Bank of Korea has warned of potential inflationary pressure as a result, and towns where many semiconductor workers live are undergoing property price jumps. Competition is intensifying for places at universities offering semiconductor “contract” programmes that guarantee jobs at Samsung Electronics or SK Hynix upon graduation. Admission scores required for some such courses now exceed the average for natural sciences at Seoul National University, the country’s top-ranked university, and are just below those needed for medicine... The boom is also reshaping Korea’s marriage market. Matchmaking agencies, which are known for using meticulously harsh metrics to rank clients, are now giving higher points to chip workers.

13. Data centres are consuming massive amounts of power and water.

Data hubs already devour more electricity globally than all but 10 countries. About 448 terawatt hours last year if you’re interested. The AI boom means that amount is on track to roughly double within four years... By 2030, they could be using enough water to meet the basic needs of all 1.3bn sub-Saharan Africans for a year, UN researchers estimate.

And it is provoking backlashes. Sample this from the US.

An unprecedented 75 US data centre projects worth around $130bn were blocked or delayed in the first three months of this year, nearly as many as in the whole of 2025, says the Data Center Watch research group. It reckons active opposition group numbers have grown from 396 at the end of 2025 to 833 by the end of March.

14. The Strait of Hormuz squeeze was not as bad as earlier episodes.

15. Transformers are at the heart of power transmission, distribution, and use. Thanks to the AI and data centre boom, transformer prices have gone over the roof.

Specialist electrical steel — essential for transformer cores — is produced by only a handful of global suppliers, many of whom are struggling to keep up with the surge in demand. Market growth, price volatility and limited mining capacity have also strained supplies of copper, crucial to the conductivity of windingsaround a device’s core. But one of the most acute bottlenecks is the shortage of skilled workers needed to carry out complex, labour-intensive manufacturing tasks...

With up to 80,000 different designs, most transformers still have to be built largely to order, taking three to six months to make. The most demanding stage is the windings, when copper wire is applied around a transformer’s core — a “beautiful” process, according to Bruno Melles, an engineer now leading Hitachi’s global transformer business. Each winding is unique and is “still a human manual activity that we’re very proud of”, he says. The number and pattern of these windings dictate voltage — fewer turns lead to lower voltage while higher-voltage devices can have multiple windings stretching hundreds of kilometres. Once complete, the assembly is placed in a protective outer metal shell, where oil acts to insulate and cool the device...

The world’s biggest transformer manufacturers have reported tens of billions of dollars in backlogs in the first quarter of 2026... US developers are turning to imports. The EU, Mexico, South Korea and Brazil are the biggest suppliers of power transformers to the US, together accounting for more than three-quarters of imports by value last year.

Into this mix come innovations in the form of modular solid-state transformers that use modern power electronics and respond dynamically to changing power needs, enabling real-time monitoring and control (which legacy transformers with their steel and copper cannot do).