Urbanomics

noreply@blogger.com (Urbanomics) — Fri, 16 Oct 2026 03:26:37 +0000

Much before the AI revolution threatened to disrupt India’s IT outsourcing firms, the proliferation of Global Capability Centres (GCCs) of global multinational corporations were already impacting them. For at first glance, GCCs involve in-sourcing and off-shoring of those activities previously performed by these IT firms.

This post will examine three questions. What is likely to be the impact of GCCs on the IT firms? What is the likely net impact of GCCs on the Indian economy? How would the GCCs be viewed politically in the era of protectionism and reshoring?

A useful framework to think about the issue is to view GCCs in two dimensions - who does the work (outsource/insource) and where it is done (offshore/onshore or reshore). This is likely to impact India in three measurable ways - substitution (insource work from IT firms to client-owned GCCs), expansion (offshore to the GCC those higher value added R&D and core functions that previously stayed with the parent), and linkages (creation of local supplier ecosystems around the GCC).

It can be argued that substitution is a direct threat to Indian IT firms, expansion is a new opportunity for India (though benefits are captured by MNCs), and linkages are significantly beneficial in terms of knowledge spillovers and new business for the local firms.

I used Claude to generate a taxonomy of activities with tasks that undergo substitution and expansion. For each activity category, the table outlines the parts of it done by the IT firms and GCC respectively, and their potential expansion areas.

In 2024, the 1900 odd GCCs generated revenues of $64.6 bn, forming 32% of the total IT exports of about $200 bn. At such volumes, even if they are substituting a small share of their total revenues, it can be a major top-line drag on the IT majors.

While neat causal attribution may be difficult, there are several signatures of stagnation and even decline in the fortunes of the IT firms, and they predate the emergence of AI. At a headline level, TCS reported its first-ever annual revenue contraction in FY26, Wipro has shrunk for three consecutive years, and Infosys’s FY27 guidance of 1.5–3.5% is the lowest in two decades. In the three years till 2024-25, GCCs added more net headcount in India than the four largest IT services firms combined.

TCS, Infosys and Wipro have decelerated from double-digit growth in 2021-22 and 2022-23 to low-single-digits or outright contraction since then. While GCCs may be substituting their work, on the AI side, the likes of Accenture appears to have taken a head start in capturing the AI consulting work. Reflecting this, Accenture grew 7% in 2024-25 and has crossed $69bn in revenue.

These trends are already reflected in the labour market. The GCCs are now hiring the same IT engineers from their previous outsourcing vendors, and at 25-40% higher pay.

The clearest proof that GCCs are taking share from Indian IT vendors (rather than only expanding the pie) comes from the labour-market. Employees of the IT majors (TCS/Infosys/Wipro) are now being hired by the GCCs of the same multinationals that used to be their clients, at 25–40% higher pay. There may be signs that the IT vendors are now suffering a talent drain to their former clients.

To summarise, Claude offered this assessment

Of the ~$65bn GCC revenue in 2024, roughly $35–40bn is expansion (work that would never have come to Indian vendors) and $25–30bn is substitution (work that was, or would have been, done by Indian IT services firms). That substitution slice is still only ~15% of total Indian IT services revenue, which is why the vendor firms are decelerating rather than collapsing. But at current GCC growth rates, the substitution slice compounds at 20%+ per year while the vendor base compounds at 3–5% — so the ratio reaches 25% by 2027 and 35%+ by 2030. That is when it becomes an existential risk to the current Indian IT services business model.

In the circumstances, for the Indian IT firms, the emergence of GCCs (and AI) bring down the curtain on the lower value added volume game of manpower outsourcing, and reveals that the only credible path is to compete on AI-first consulting at Accenture-like margins, which requires talent, human resource capabilities, and brand investments they historically avoided.

The linkages possible from GCCs are also likely to be significant. Apart from the support services, the GCCs will also catalyse a supplier services ecosystem that serve the main activities. Services sector ecosystems are unlikely to be in the nature of physical input-output linkages. Instead, they are likely to be in the form of various kinds of externalities.

The GCC’s local ecosystem is more likely to emerge through specialist technology vendors, subcontracting, employee mobility, start-ups, collaboration and the circulation of knowledge. The depth of the ecosystem depends on the nature of the GCC's activities, procurement practices, autonomy and connections to local firms.

For example, GCC’s performing like product engineering, R&D, advanced analytics or software-platform/product development, are likely to have greater spillovers than those performing highly standardised internal processing with limited technical autonomy or few local commercial relationships. Further, it can create demand for specialised services and contribute to the concentration of technical expertise that makes local firms more viable, supply a pipeline of employees who can be prospective entrepreneurs, etc.

There is evidence from studies on the impact of multinational IT firms in India of collaboration with local firms, knowledge flows and acess to resources and networks, innovation spillovers, productivity spillovers, and increased export intensity of domestic firms.

Given the objective of maximising expansion and linkages, there is a case for close monitoring of the nature of the GCC’s activities to guide policy making. Are the GCCs procuring technology and professional services, thereby creating creating domestic demand that goes beyond routine facilities, staffing, and support services? What is the level of sophistication of Indian suppliers, and are they are moving into higher value activities? The nature and number of startups established by employees of GCCs, and their trends? How many joint R&D, and university and startup collaborations, that promote local innovation networks? What are the trends with the productivity, exports, sophistication and product development capabilities of domestic firms that are associated with the GCCs?

The answers to these questions can be useful inputs to guiding policy making that advance the objectives on expansion and linkages. It is also an area where applied research partnerships with universities and think tanks can be helpful.

In any case, the overall impact of the emergence of GCCs on the Indian economy is significantly positive. The table below is likely an underestimate since it does not fully account for many of the externalities mentioned above.

The real problem is likely to come from the third question about how the trend on off-shoring of activities through GCCs will be perceived in their parent countries. Hit by the China shock and weakening economies, advanced countries like the US are trying to reshore manufacturing base and protectionist measures are pervasive. In the US, these measures have extended to a crack down on visas for foreigners in the IT industry.

As the GCCs start to become a salient part of the revenues and employment of the MNCs, they will come to be viewed as a backdoor to send local jobs to countries like India. This is all the more likely at a time when good jobs are becoming scarce and youth unemployment is already high and rising in the US and elsewhere.

In this backdrop, a trend of off-shoring of IT services, which includes higher value added activities, even if within the same company, is certain to invite scrutiny and backlash. It is only a matter of time. Countries like India may have a far shorter window than imagined to capitalise on the GCC opportunity and make themselves indispensable parts of the global IT services supply chain just as China did in manufacturing.

Mass transit and land use planning drives economic clusters

noreply@blogger.com (Urbanomics) — Wed, 14 Oct 2026 03:37:28 +0000

Large urban agglomerations are engines of national economic growth. The fuels that power these engines are the transportation infrastructure and mass transit, supported with enabling land use and development control regulations, value capture and revenue sharing, and institutional architecture. This is the topic of the post.

Such urban agglomerations are characterised by clusters of dense, specialised nodes of employment connected to residential nodes by commuter networks. This is the classic model of metropolitan downtowns connected with densified suburban satellite towns that coordinates agglomeration economies at the centre for high productivity job creation.

Accordingly, the central parts of major metropolitan cities of the world are predominantly workplaces, with people commuting to work from suburban areas on commuter railway systems. Mumbai, London, and New York are great examples. This is in keeping with the economic logic of ensuring the most productive use of the highest value lands in the city.

It also unlocks affordable housing supply by locating them predominantly in those areas with lower land prices, thereby relaxing the biggest constraint to affordable housing.

The ingredient that binds the nodes together and creates a dynamic regional cluster is a well-connected mass transit network. In cities globally, commuter and metro railway systems have played this role.

High-volume mass transit systems connect the nodes and bring people closer to jobs. They reshape the geography of what an hour reaches. This trip-shortening effect — making longer distance commutes faster than shorter car trips — is especially powerful in India, where the spatial mismatch between jobs in metropolitan cores and job-seekers in the hinterland has been found to be unusually large. They shrink the distances, thereby increasing the pool of jobs available for people in the hinterland, and expanding the talent accessible for employers in the core.

But evidence also informs us that merely laying the mass transit network is not sufficient. This study by Rana Hasan et albuilt a spatial model of Bengaluru and run the metro against alternative land-use policies and came up with the following quantified impacts.

Holding the metro investment identical, the difference in net benefits between the best and worst land-use plans is roughly 32 percentage points of city GDP. In other words, the land-use plan determines whether the transit investment creates value or destroys it.

The requirement is to locate sufficient density of homes and workplaces within conveniently accessible distance from the stations, either through walk or feeder services. This is transit oriented development (TOD).

TOD is about commuting using mass transit by walking to/from station (to/from home and workplace) or feeder services. A big collateral benefit from TOD is that it avoids the use of cars, thereby decreasing traffic congestion, reducing productivity losses from long commutes, and lowering air pollution.

As I blogged here, TOD also increases the commercial viability of the massive investments made in mass transit systems (~ Rs 8 lakh Cr and counting, with 20-30% ridership realised, and massive debt repayment fiscal burden looming). It induces traffic by creating new trips (by locating more people within the transit zone influence area), shortening trip distances (thereby expanding the effective commute catchment), and mode shifts (from cars to mass transit).

Effective implementation of TOD requires addressing three constraints. One, relaxing development control regulations to make it attractive to build density in the vicinity of the stations, and creating the complementary pedestrian infrastructure. It also requires appropriate mixed land-use planning that allows the market to respond in the most efficient manner to order commute patterns and shape spatial growth.

Two, funding of the mass transit capex, especially by enabling with the right kind of value capture instruments, with the right sequencing, and also the appropriate revenue sharing between the rail company and the local government/UDA. Try to capture value too quickly, before value gets created, and the cluster remains still born.

Three, an institutional architecture that aligns the incentives between those constructing the transit system (and repaying the debt mobilised) and those responsible for the land use and other decisions that determine the commercial viability of the system. This could, for example, entail the radical change of making the urban development authorities the owner of metro railway systems in metropolitan areas.

Observations on India’s external exposure in the age of capital wars

noreply@blogger.com (Urbanomics) — Mon, 12 Oct 2026 04:27:37 +0000

There are two important trends that are likely to impact cross-border capital flows for the foreseeable future. The first is the already high and increasing public debt burdens and persistently high budget deficits across the developed world. The second is the growing efforts to reshore manufacturing and reduce the dependency on China. The US is at the forefront of both these trends.

Both are having large and growing spillovers across the global financial markets, especially adversely impacting developing countries. The first trend is raising sovereign bond yields, forcing interest rate hikes, and weakening currencies. The second trend is triggering a rising competition to attract manufacturing investment and retain domestic savings.

I blogged here arguing that these trends will intensify the competition for capital, and most likely trigger capital wars. I had also discussed the possible implications for India.

These trends come at a time when India is continuing the opening up of its financial markets and actively courting foreign investment. What do these trends mean for the RBI’s monetary policy, the rupee, India’s foreign direct investment, foreign portfolio investment, external commercial borrowings, and bilateral and multilateral aid flows?

Finance 101 and historical experience tells us that rising US Treasury yields trigger capital flow reversals, puts pressure on the rupee, worsens the trade deficit, and reduces RBI’s monetary policy autonomy. And there is a self-reinforcing spiral associated with this cycle. On top come the squeeze on FDI inflows arising from the efforts to retain domestic savings and reshore manufacturing.

Globally, the rising stock and flows of public debt portend a long period of higher interest rates, also because of the inflationary pressures that are already on play and will remain so for the foreseeable future.

In this backdrop, this post will use data analysed with Claude to examine the consequences of India’s external exposure.

Arguably the biggest deterrent to foreign capital inflows into India today is the weakening trend of the rupee. A weaker rupee raises the hurdle rate that any investor, FDI or FPI, would demand for investing in India. The rupee depreciation, therefore, functions as a direct tax on foreign investors' dollar-denominated returns. Every 1% of depreciation eats roughly 1% of the foreign investor's return.

As an illustration, the rupee has weakened from ₹74/$ in 2021 to ₹96/$ in 2026, a cumulative decline of 30% over five years. This means that any foreign investors who remained invested in India should have earned an additional 30% returns to offset the depreciating currency.

So what drives rupee depreciation?

The obvious candidates are inflation differential, US Federal Funds rate, current account deficit, and oil prices. While a contemporaneous model OLS regression of annual rupee depreciation on these four structural drivers barely fits, a one year lagged model fits well (R-sq = 0.62, F-stat p = 0.001). The rupee depreciation correlates primarily with oil prices (the import-bill channel), the inflation differential (mediated by the RBI’s response), and the current-account balance, but with a one-year lag.

Going by this, given the prevailing global market conditions and with no signs of an end to the Iran war, the rupee is primed for further declines in the year ahead.

The prospects of further rupee weakening is reflected in the USD/INR forward premium, which compressed dramatically from ~5% in early 2021 to barely 1% by mid-2024 as Fed hikes narrowed the India-US rate gap, but has since been rising and is about 3.5-4.1% in October 2026. For ECB borrowers, the forward premium is the hedging cost.

What does all this mean for RBI’s monetary policy choices?

The Uncovered Interest Parity (UIP), which is an unobserved theoretical construct, states that the difference in interest rates between two countries should equal the expected change in exchange rates between their currencies, so that there is no arbitrage opportunity. The reality though is complicated by risk premiums and transaction frictions.

The higher-for-longer global interest rates narrow the monetary policy space to cut or even maintain neutral stance in India without triggering outflows and rupee depreciation. In an open-economy framework where India’s capital account is substantially open on the debt side, the UIP floor on the repo rate rises mechanically. And, as the graphic below shows, it has been rising since 2021. With the Fed at 4.25% and the BoJ no longer anchored at zero, the UIP floor on the repo rate is around 6.3%.

This has created a situation where the UIP floor today is above the RBI’s repo rate. This puts pressure on the rupee to depreciate, something backstopped only the RBI’s large reserves. In fact, the RBI’s 5.5% repo rate works today only because of the forex-reserve buffer.

However, now with US looking at the beginning of a rate hike cycle, the RBI’s room for monetary policy autonomy is considerably squeezed. It has little choice but to respond with raising rates.

The capital wars channel compounds the problem. A big risk is the US net Treasury issuance estimate of $2tn/yr through 2028. It will be a major sink for global savings, and will raise the hurdle rate for all EM sovereign and corporate issuance.

An associated signature of this squeeze is the narrowing of the spread between Indian and US 10 year sovereign bonds. It has more than halved since the beginning of 2021. Coupled with the currency hedging cost, the spread disappears, thereby eliminating any incentive among those pursuing carry trade opportunities.

What does this imply for India’s external debt exposures?

In the aggregate, India’s external debt looks moderate at 20.8% of GDP. But there are two dimensions that need monitoring. The first is that the historical access to cheap, long-tenor, concessional fixed rate debt, primarily from bilateral and multilateral institutions, has now given way to floating rate loans benchmarked to SOFR/TONA/TORF (the transition from LIBOR happened by 2023). Of the $174.3 bn sovereign debt exposure (as of June 2026), 58% are now floating rate loans. More on this latter.

The second is the composition of external debt is now shifting away from the government to the private sector. This composition deserves closer monitoring given the rising share of External Commercial Borrowings (ECBs).

At 32.8% of India’s external debt, ECBs are now bigger than the combined value of multilateral and bilateral loans and NRI deposits. The downward pressure on the rupee is a major risk for ECBs. This risk is amplified by the rising rates globally since most ECBs are floating-rate (SOFR-linked).

Of the $255bn outstanding ECBs, only 66% are hedged, and the remaining are direct, uninsured pass-through. The 34% unhedged slice ($87bn) is where the first stress will surface. It will fall most likely at NBFCs, airlines and renewable-energy developers that borrowed at low SOFR in 2021–22 and now must roll.

The impact of rupee depreciation on the $87 bn of unhedged ECBs is significant.

These risks are also serious also because of the shorter repayment schedules of the ECBs. About $120 bn are due for repayment till March 2028.

Another cause for concern may be the nature of ECB borrowers. An Indian corporate borrowing via ECB faces three cost layers - the base rate, currency depreciation, and the cost of hedging. The chart below shows that at least since 2023, ECBs should have been losing their attractiveness, especially for the higher rated borrowers. Nevertheless the ECBs have continued to rise, though issuance has fallen 33% in FY26. This raises a concern that some proportion of the ECB borrowers may be coming from the riskier market segments.

The rising ECB exposure necessitates greater RBI oversight and microprudential regulation. For example, it should mandate higher ECB hedging ratios for sectors where revenues are in rupees (airlines, renewables, NBFCs). It should keep a close watch on higher cost commercial borrowings by by systemically important corporates.

The impact of rising interest rates globally is also showing up on India’s bilateral and multilateral borrowing windows. The notion that multilateral and bilateral lending is cheap, long-tenor and insulated from financial-market cycles is no longer true. ADB, World Bank and JICA have all transitioned from LIBOR to the new overnight benchmarks — USD SOFR, Yen TONA and the newer TORF. Each is 300–350 bps above its 2020 floor.

For four decades, yen funding has been India’s cheapest formal external finance. JICA has been the backbone of financing for Delhi Metro, Mumbai Trans Harbour Link, Delhi Mumbai Industrial Corridor (DMIC), Western Dedicated Freight Corridor (DFC) and the Mumbai-Ahmedabad bullet train. All of them were conceived when the all-in yen cost was below 1%. But BoJ’s rate hikes, at 1.25% in Sep 2026, has already taken interest rates to their highest since 1995, and much more is expected as Japan normalises its financial markets. India has roughly $50bn of yen-denominated external debt (6.4% of total).

Each 100 bps of additional yen funding cost on a 30-year ¥1 trillion exposure is roughly ¥100bn in extra lifetime interest. This shifts the IRR calculus materially.

A JICA yen loan signed today has an all-in cost of about1.3–1.4%, still the cheapest money India can get, but roughly double the 0.6–0.8% that typical JICA loans carried in 2015–2022. More consequentially, as new BoJ hikes feed through, the TORF benchmark will keep rising.

Put simply, India’s historical reliance on JICA for metro rail, DMIC, and large infrastructure is predicated on a yen funding cost that is quietly disappearing. This is not a cyclical shift, but structural one.

For the government, and including state governments, there is a need for a serious revisit of the external aided project (EAP) financing windows. Does it make fiscal sense to continue the same levels of such borrowings given the rate risks?

Beyond the direct interest cost, higher global rates reset India’s external exposure through three further channels. They are the foreign portfolio flows into Indian debt markets, the yield that must be offered on NRI deposits to retain the stock, and the capital-wars channel through which US issuance crowds out EM access.

Finally, as we wrote in The Rise of Finance, thanks to the unavoidable spillovers from the dominance of the US economy and the dollar, the space available for developing countries to pursue autonomous monetary policy was already constrained. This is set to shrink further on the face of the trends discussed above.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 10 Oct 2026 09:45:37 +0000

1. Thanks to inflation global debt burdens have been declining, falling by 27 percentage points between early 2021 and end of 2023.

2. Rent controls may do more harm than good, except in controlled apartments.

And Spain is a good illustration that immigration is adversely impacting the housing market.

3. Excellent article on ASML, 42-year old, Veldhoven-based, Dutch maker of the $400 million extreme ultraviolet (EUV) lithography machines.

The size of a double-decker bus, the machine prints circuits on to silicon wafers by firing light generated from 60,000 droplets of molten tin per second at them, using mirrors, lasers and short-wave light in a kind of vacuum-sealed nano-photocopier... ASML’s supply chain is something else. Where a typical industrial product might have a few dozen suppliers, an ASML EUV has more than 100,000 parts provided by 200 principal suppliers and 2,000 companies overall... Rather than trying to make everything itself, ASML outsources to the best manufacturer of each component — Zeiss for optics, Trumpf for lasers, VDL for mechatronics.

4. BigTech AI borrowings have fragmented the US debt market into two parts - AI-borrowing and the rest - and there is a growing risk that the cost of capital for everyone will rise as AI borrowings rise.

The scale of the borrowing will have its impact in squeezing out the rest of the economy and raising cost of capital for everyone. And it is going global.

In June, Amazon sold C$14bn ($10bn) of debt, smashing the Canadian currency’s previous record of C$8.5bn set by Alphabet just a few weeks earlier... Last month Alphabet issued a record A$5.5bn ($3.9bn) bond in Australia, more than twice as large as the previous biggest. The group also holds the record for the largest Swiss franc bond issue, having raised SFr3.1bn ($3.7bn) there in February. Amazon’s SFr2.8bn offering in May is the second-largest... Alphabet sold £5.5bn worth of sterling bonds in February, part of a $31.5bn package that included a rare 100-year £1bn bond that some say rekindled interest in long-maturity sterling debt. Amazon also raised £4.25bn earlier this month, its first-ever sterling issue.

What complicates matters is that the surge in AI borrowings come precisely at a time when government borrowings are also rising and are competing with each other, putting pressure on bond yields.

5. India equity market facts of the week.

Both the Nifty and the Sensex... have ended in the red for eight straight weeks, their longest losing streak in 25 years. In the first nine months of 2026, foreign portfolio investors (FPIs) have pulled out at least ₹3 trillion from Indian equities, surpassing all annual outflow records.

6. Excellent chronicle by MS Sahoo of the emergence of India's regulatory architecture since 1991.

7. African credit ratings fact of the week.

Of an estimated $4tn regional capital base, less than a quarter is covered by credit ratings, according to the African Union. At the end of 2025, it said, the continent had fewer than 4,000 ratings, compared with 823,000 in the EU and more than 2mn in the US.

8. John Mearsheimer describes the Iran war the "mother of all strategic blunders".

Iran is number one in my opinion, because 1) we went into that war based on the false claim that Iran was on the verge of acquiring a nuclear weapon; 2) we had a theory of victory — air power alone would produce regime change — that has never worked and was not going to work this time; 3) we had no contingency plan for dealing with the likelihood that Iran would close the Strait of Hormuz; 4) we failed to achieve any of our four principal objectives — regime change, ending Iran’s nuclear enrichment capability, ending Iran’s long-range missile capability, and ending Iran’s support for Hamas, Hezbollah, and the Houthis; 5) the Strait was closed, which has already done significant damage to the international economy and could do much more — remember President Trump worries about following in Herbert Hoover’s footsteps; 6) we seriously undermined our carefully crafted alliance structure in the Gulf; 7) virtually all of our bases in the region have either been badly damaged or destroyed, to the point where we have moved most of our military assets out of the Gulf region and will probably not be able to return; 8) we have run down our stocks of key weapons to the point where we have weakened our deterrent postures in East Asia, Europe, and even the Western Hemisphere; 9) we have done enormous damage to our reputation as a reliable and wise ally; 10) we have markedly improved Iran’s strategic position in the Gulf region; and 11) there does not appear to be much chance — perhaps no chance — that we will get a nuclear deal of any sort with Iran, which was once considered of the utmost importance. In fact, there is a reasonable chance Iran will acquire nuclear weapons. President Trump has certainly given Iranian leaders — and other leaders of non-nuclear states around the world — a powerful incentive to acquire a nuclear deterrent.

9. Martin Wolf points to why the Iran war did not disrupt the oil markets and world economy as much as expected, with real oil prices still only around the long-term average.

Johannes Urpelainen of the Johns Hopkins School of Advanced International Studies notes that: “First, the energy transition has reduced the global economy’s dependence on oil. Second, supply chains have proven resilient and adaptive. Third, producers outside the Middle East have acted fast to produce more oil and natural gas. Finally, drawdowns of global oil inventories have filled the remaining gap.” Flexibility is notably true of the Gulf. As former diplomat Mohammed Elsoukkary writes: “by the end of September preliminary estimates placed regional crude exports at approximately 16.3 million barrels per day, compared with 19.5 million in February, including roughly 9.7 million moving through Hormuz.”

Interestingly, the world entered the War with record inventories, accumulated especially in 2025.

10. French bond yields are higher than Italy's.

Not only does it now cost France more to borrow than it does Italy and Greece; a rising number of big French companies enjoy lower market interest rates than does the French state. Of all the G7 nations, it has suffered most from the debt sell-off triggered by the Iran war... France’s debt has reached €3.5tn, at nearly 120 per cent of GDP, far above the Eurozone average. Servicing costs have climbed fast to become the state’s single biggest expenditure ahead of education or defence. In just a month the additional interest rate that France pays to borrow over ultra-safe German debt — a key barometer of investor concern — has surged by almost two-thirds to around 1.4 percentage points on 10-year debt, heading towards the heights charted during the Eurozone debt crisis... A series of ratings downgrades has helped push up the country’s borrowing costs, which passed Greece’s in late 2024 and Italy’s last year. Investors now label France the “new periphery”... Despite the government’s tax-raising powers, its borrowing costs now exceed those of big French multinationals such as LVMH, the luxury group, and Sanofi, the pharmaceutical company. According to Goldman Sachs, more than a quarter of investment-grade French companies had a lower yield on their bonds than comparable government debt as of the end of September...

Increasing taxes to deal with the rising cost of debt servicing could also be perilous. At 44 per cent of GDP, the tax burden is already among the world’s highest; the average in the OECD club of rich countries is 34 per cent. Almost a quarter of public spending is gobbled up by pensions. French retirees leave the workforce earlier and receive relatively generous benefits by OECD standards. Attempts to push back the retirement age trigger angry protests.

11. US Treasury bonds are now threatening to hit 6% for the first time since the turn of the millennium.

Borrowing costs for companies with the lowest credit ratings hit their highest level since May 2020 this month at 17 per cent, driven by the rise in Treasury yields to multiyear highs and by investors demanding more compensation for lending to such businesses. The risk premium for companies rated triple C or lower has risen to 12 percentage points, the biggest since 2022. Analysts said companies with floating-rate loans, and those needing to refinance debt in the coming months, were most at risk from the government bond sell-off, which last week pushed the yield on the 10-year Treasury note to its highest since 2002... But a further rise in Treasury yields could lead to broader pain across credit markets, analysts say. When it comes time to refinance existing debt, higher rates risk jarring the many companies that took on debt when interest rates were at rock-bottom levels in the early 2020s. Moody’s estimated last year that a record $1.45tn of US investment-grade corporate debt would come due between 2026 and 2030. Rising rates will put pressure on businesses to increase profits at a similar pace to rising borrowing costs.

12. S&P quarterly earnings growth to remain above 25% for more than three quarters in a row.

13. Ethnic cleansing in West Bank and East Jerusalem now.

14. Interesting analysis of Adani Group's acquisitions through the NCLT process.

Since 2018, Adani Group, its linked entities and consortiums have participated in bids to acquire 26** distressed companies through India’s bankruptcy process. It has won 16 of them, with one case ongoing, though the latest decision went in Adani’s favour. This is a 61.5 percent success rate – meaning it won nearly three out of every five bids. While 14 of these 16 acquisitions came through the Corporate Insolvency Resolution Process (CIRP) to revive distressed business, the other two came through liquidation aimed at winding up operations... Across the 16 Adani acquisitions where tribunal orders disclose both admitted claims and recovery, creditors were owed approximately Rs 1.31 lakh crore and recovered only about Rs 33,000 crore – just 25.4 percent of the total. The loss was estimated to be over 97,700 crore, making the haircut around 74.6 percent. That is slightly higher than the national average of 69.4 percent.

Emerging industrial policy opportunity in batteries

noreply@blogger.com (Urbanomics) — Wed, 07 Oct 2026 02:51:49 +0000

It is well known that the convergence of renewable energy and battery storage would have transformational impacts on electricity markets. It overcomes the intermittancy problem that bedevils renewable generation. However, the high battery costs have been a problem.

But two recent news articles highlight why that may be a thing of the past. One, for the first time, battery storage costs have fallen below thermal. Estimates by think tank Ember suggests that the cost of battery packs used in grid-scale storage systems fell by 45 per cent last year alone.

This trend has been expedited by the geopolitical convulsions of recent times, with the surging demand from data centres and the oil and natural gas supply squeeze due to Iran war turbocharging it. In 2026, 40 per cent more large-scale batteries are estimated to be installed than in 2025.

Second, this convergence is being reflected in tenders being called in India to procure battery power.

Solar Energy Corporation of India (SECI) ran an auction to buy electricity capacity where they (SECI) demanded the availability of a thermal generator. A bidder who plans to use solar or wind is then forced to load up with the batteries required, to charge in the day, so as to deliver thermal-style availability. This auction discovered a price of ₹5.25 per kWh, guaranteed for 25 years. It is hard to identify a single comparable price for coal thermal in India because coal-extraction rights are given by the state in non-market ways. But if we look at recent new coal-power contracts in India, they are priced at ₹5.38-6.30 a unit. The SECI-discovered thermal-mimicking price for renewable power is now 10 per cent cheaper than that for new coal.

However, this convergence is accompanied by the now common concern about dependency on China.

Chinese producers account for 95 per cent of large-scale storage batteries, says Benchmark Mineral Intelligence. The sector’s rapid growth is strengthening China’s position as the dominant force in low-carbon energy, compounding opportunities for Chinese companies in adjacent markets such as wind and solar generation equipment… The seeds of China’s battery storage boom were sown in the years after Xi Jinping took power in 2012, with his pledge to build an “ecological civilisation”.

An industry in China that emerged from China’s industrial policy efforts to support battery production for EVs is now shifting towards grid storage.

By 2021, it had become clear to the Chinese state that a vast amount of renewable power was being wasted, with solar and wind plants often generating far more electricity than the grid could absorb. So it launched a strategic push to deploy battery storage on the grid at large scale. Across much of the country, developers were required to build or commission large-scale storage as a condition of approval for new wind and solar plants. Again CATL has been at the forefront of this effort. Its fastest-growing business line today is the production of cells for large-scale energy storage systems. The company accounted for 22 per cent of cell sales for these systems globally in the first half of the year, making it the market leader in China and abroad. As a result of the state’s drive, China’s battery storage capacity expanded from 2.4 gigawatts in 2020 to more than 140GW at the end of last year, according to the Energy Institute, an industry membership body. In the first half of this year, coal’s share of Chinese power generation fell below 50 per cent for the first time ever. Exports of China’s large-scale battery technology have also surged. Researchers at BloombergNEF estimate that new battery storage capacity of 84.6GW will be added outside China this year — 65 per cent higher than last year.

Understandably, the Western governments have been taking action to reduce the dependence on China.

In August, Trump authorised the energy department to block Chinese-linked battery storage equipment from the US grid on national security grounds. Washington has also revised the rules around tax credits for battery storage, in effect limiting the amount of Chinese equipment American companies can use. Some US officials say that Chinese-made storage equipment could potentially contain chips enabling it to be controlled or switched off remotely. Similar worries have emerged in the EU, where the authorities have moved to restrict public funding for storage projects using certain key components from “high-risk” countries including China… The US crackdown will force a growing reliance on kit made by alternative suppliers such as South Korea’s Samsung SDI and LG Energy Solution, whose storage batteries are significantly more expensive.

Buoyed by the success of the SECI auction in August that secured 1 GW of solar and storage capacity, the Government of India plans to emulate China and drive battery storage.

Chinese-made batteries are now being deployed en masse in the country, which in the first half of this year added seven times as much new power storage as it had in total at the end of 2025, according to energy research company Mercom India. Much of the rise comes from a single huge solar and storage project built by the Adani Group... The government is now planning regulation that would require storage to be installed alongside new solar and wind power plants — similar to the rules that drove China’s storage lift-off. Climate advocates hope this will reduce the country’s heavy reliance on coal, the most carbon-intensive fossil fuel.

However, India’s independent power producers have relied heavily on Chinese manufacturing capabilities to import commoditised thermal BTG equipment in the first decade of the millennium, and solar cells and wind turbines in the second decade. In both cases, the country missed the opportunity to leverage the massive demand to develop indigenous manufacturing capabilities.

In both industries - thermal and renewables - the biggest multi-sector corporate groups in India, with a great appetite for entering new industries, led the capacity addition. But instead of thinking long-term and seeing manufacturing as a vertical integration opportunity, they preferred the short-term and easy way of importing from China.

Another opportunity in power sector that is playing out right now is that of smart meters, where too the same corporate groups have been satisfied with importing Chinese meters and making the easy money by being contractors to install and maintain them.

The massive future demand for batteries presents a fourth opportunity in power sector itself over the last two decades for both the government and the same corporate groups to learn from their mistakes in thermal and solar generation and smart meters. Many large Indian corporate groups are already engaging in the battery energy storage systems (BESS) industry. The Adani group has already started work on the 30GW Khavda renewable energy park, one of the largest in the world.

These, as I have blogged here, are opportunities for an industrial policy that involves partnering with large domestic corporate groups to catalyse domestic manufacturing.

Only these groups have the heft to overcome the coordination problems, financing deep pockets, and risk-aversion to be able to manufacture at a scale that’s attractive enough to break away from the vice-like grip of Chinese manufacturers, and shift component manufacturing in India. Even with the most generous industrial policy and the favourable geopolitical tailwinds of diversifying out of China, there are hard limits to how much industrial policy and market dynamics on their own can go in relocating component makers from China… For countries like India, without any large domestic OEM and without the unique circumstances behind Apple’s engagement with China, local corporate groups may be valuable assets to succeed with the objective of deepening and broadening their manufacturing base.
In this context, there’s always the risk of crony capitalism. Already, there are strong trends of business concentration across sectors in the Indian economy, driven by the large corporate Groups. But this risk should not be an excuse to overlook the large body of evidence from across the world about the value of large domestic corporate groups in national economic growth.

Such engagement by the private corporate group would involve some very logical long-term bets. For one, the Indian market itself presents a great opportunity for huge growth, and therefore a strong case to forge strategic partnerships, acquisitions, technology licensing, and invest in R&D and innovation, to build domestic capabilities in battery manufacturing. Besides, this would be a bet not only on the large Indian market, but also the global market in an emerging technology where there is an acute scarcity of non-Chinese manufacturers.

Further, for these groups, grid-scale battery business has deep synergies with their existing businesses, thereby providing them important leverage in negotiations on joint ventures, technology licensing, and domestic manufacturing. This is important since Indian corporates have preferred to leverage the scale of their purchases for short-term pricing considerations when negotiating with their suppliers.

The Indian corporate groups must summon a long-term vision to both grow into an emerging frontier technology, and also invest in capabilities in R&D and innovation that allow movement up the value chain. They would have to formulate 4-7 year strategies for acquiring capabilities in battery chemistry, starting with the current system integration (or assembly) role to moving up the value chain from licensed to proprietary manufacturing. This would be taking a leaf out of what CATL, BYD, and Sungrow have done.

The government could provide a big boost by coupling battery and renewables in future power purchase agreements, thereby creating an effective advance purchase volume commitment (even if at competitively determined prices). The new version of the Production Linked Incentive (PLI) scheme should embrace the details outlined here (for smart meters) to encourage progressively increasing domestic value addition. It could use diplomacy to support this with securing access to the various chokehold inputs required for the industry.

But most importantly, a non-negotiable requirement for government support should be mandatory export competition from the outset to ensure that a globally competitive industry emerges in the country.

As strategy, it may be useful to bring all the fiscal and other support, including the likes of Viability Gap Funding (VGF) financing, under one umbrella so as to ensure efficient administration and ease of access by companies. This is an important enough agenda to merit such a dispensation. Further, the selected industry partners should be made to commit to medium-term action plans that are linked to simple and easily verifiable milestones and outcomes, and they should periodically report on them. All public policy support should be made contingent on realisation of these outcomes.

India’s affordable housing policy problem

noreply@blogger.com (Urbanomics) — Sun, 04 Oct 2026 23:30:00 +0000

This post will raise a conceptual point about the size of India’s affordable housing market and the targeting of policy measures aimed at them.

The vast majority of urban housing construction are apartment units that come not from the formal branded / organised developers in big plots with large numbers of units but from the informal small owner-builder segment in smaller plots with fewer units (typically 4-5 floors on about 500 sq yards). The vast majority of the latter belong to the affordable housing (AH) segment. However, state RERA rules, with their eligibility thresholds on the plot size and number of units, exclude the informal owner-builder segment.

One implication is that the commonly reported numbers by real estate consultants are likely vastly overstating the deficit, which nevertheless is real and big, but also not reporting the quality, standards, and buyer protection problems that impacts affordable housing supply (by the latter). A bigger problem is that these owner-builder units are ineligible for all the policy benefits that the government provides on AH – GST, PMAY, PSL, etc.

In other words, we have the perverse situation where all the policy benefits are cornered precisely by the formal / branded developers who hardly supply AH, whereas those informal owner-builders who supply almost all the AH are ineligible for these benefits.

It is a challenge to get good data to assess the extent of the problem.

The public debates on housing are anchored around the data supplied by real estate consultants. However, they are confined to the formal organized / branded developers in the top 7–8 cities, who develop RERA-registered gated-community projects with titled land and institutional finance. They contribute the vast majority of the units visible in the Credit Linked Subsidy Scheme (CLSS), 1% GST, 80-IBA, and Priority Sector Lending (PSL) developer construction finance.

In contrast, it is a challenge to get good data on the builder-owner units. Three states — Telangana, Andhra Pradesh and Delhi — have built self-certification approval systems calibrated to exactly the owner-builder G+4 band. The approval volumes in those systems are the hardest evidence we have to assess the magnitude of supply of such units. The Telangana government’s TG-bPASS database informs that for the period from November 2020 to December 2023, the average number of owner-builder permits every year in Telangana urban for sub-500 sqm plots is about 35,000.

Three independent estimations - extrapolation from the TG-bPASS, residual from housing stock accounting, and finance-implied - all point to about 0.6-1 million such units being constructed each year nation-wide.

Based on the above, the graphic below captures a snapshot of the demand-supply landscape for housing. About four-fifths of urban housing demand is EWS and LIG. The formal / branded sector targets MIG and above. The owner-builder channel is the only channel at scale that reaches the middle of the LIG band and upper EWS.

Let us first look at the AH market served by organised / branded developers, who build large numbers of units in each project in big land plots. Their share of housing launches that are AH (<₹40 L) was down from ~40% of the pipeline of the top 7 builders in 2019 to about 16% in Q3 2025. Note that the share of even mid-level housing has been declining. In stark contrast, luxury housing has been climbing steeply. Difficult to miss the K-shape. It can be safely argued that organised developers are quietly exiting the AH segment, and this is the big problem.

This is validated by the loans data from scheduled commercial banks, which are also drifting upmarket. Below ₹25 lakh, the SCB loan book share has fallen from 41% (Mar 2021) to 28% (Mar 2025).

New AH launches too echo this trend. The developers have been drawing down the accumulated inventory, instead of starting new projects.

The unit economics of a owner-builder house makes them much cheaper. These are mostly individual plot-owners partnering with a small local contractor to build typically G+4 on 300–500 sq yd (~250–420 m²) in tier-1 periphery and tier-2/3 towns, with 4-8 units and statutorily exempt from registration under the Real Estate Regulatory Act (RERA). They are sold directly, often before launch, and have minimal advertising, and is transacted in a large share of cash and with personal loans.

While pricing and area ranges vary by city tier, the owner-builder model is remarkably consistent, consisting mainly of 800–1,100 sq ft carpet, independent floor on a residential plot. And the favourable unit economics allows it to come at a steep discount on the branded unit of same size.

Now let’s look at the policy benefits available for AH. Interestingly, all policy benfits are gated through RERA registration.

Under Section 3(2)(a) of the RERA Act, projects on land of 500 sqm or less, or with 8 or fewer apartments, do not require registration. Most states have adopted the central threshold. The G+4 structure on 500 sqyards sits almost exactly at the exemption line.

The table below summarises the housing category-wise policy support provided.

The next table points to which among the different policy support measures are accessible to owner-builder projects. As mentioned, every single policy instrument designed for affordable housing uses RERA registration (directly or via tied eligibility conditions) as the gatekeeper, which ends up statutorily excluding the owner-builder segment. This is in keeping with the broader policy focus to formalise the informal.

All this produces a perverse outcome. The branded / organised developer segment, which produces at most ~70,000 affordable units a year in the top 7 cities, captures the full stack of fiscal and regulatory benefits designed for "affordable housing", whereas the owner-builder segment, which likely produces 8–14× that volume of genuinely affordable apartments, captures effectively none of them! The graphic below tells a tale.

Putting everything together, it becomes clear that while the owner-builder G+4-on-500-sq-yard model probably supplies the majority of India’s urban affordable apartments, it sits outside RERA by statutory design, and therefore outside almost every fiscal and policy benefit the state offers for AH. Instead, all the benefits accrue to the formal / branded sector, which barely builds any affordable at all. Classic mis-targeting of scarce public policy resources.

The big takeaway is that India has a serious affordable-housing policy problem, and less an affordable-housing supply problem. The channel that supplies most of the affordable apartment stock is not the one the policy architecture is currently designed to reach.

So what on the way forward? Four responses come to mind.

On the measurement side, since the published AH supply numbers systematically overstate the shortage by excluding the owner-builder channel, it may be useful to build a supply tracker that captures RERA-exempt stock using municipal building-permit data (TG-bPASS, APDPMS, Delhi MCD, etc.), AHFC self-construction disbursals, and listing-site scraping. The state-level building permit systems should be standardised along the TG-bPASS model.

On the regulatory side, instead of lowering RERA thresholds wholesale, thereby raising costs, it may be prudent to have a lighter-touch “RERA-lite” tier for sub-500 sqm / sub-8-unit projects, with structural safety certification, simple possession-timeline disclosures, and a public register.

On the fiscal side, AH fiscal benefits (GST 1%, 80EEA, stamp duty waivers) should be decoupled from from RERA registration, and eligibility should instead be based on unit characteristics (carpet area and price, differentiated across tier cities). It may also be appropriate to create a specific PSL category for owner-builder project finance (small plot, G+4), channeled through Affordable Housing Finance Companies (AHFCs) and Small Finance Banks (SFBs) with structural certification as the gate.

Finally, on the policy architecture, it may be useful to shift the policy frame from the excessive push to formalise the informal. I have blogged here and here about how forced formalisation adds layers of costs and can end up creating more perversions than good.

AH is a teachable example of how a well-intentioned formalise the informal policy focus has ended up creating distortions without serving the purpose. Instead, here the policy focus should be to serve the channel that actually serves the demand, the owner-builder model.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sun, 04 Oct 2026 02:50:00 +0000

1. Foreign capital flows into US equities even as they slow down and even reverse in the debt markets.

Foreign investors made a record $942bn in net purchases of US equities and investment fund shares in the 12 months to July, accelerating a shift in overseas investment towards American stocks and away from debt. The flows represented the highest rolling 12-month total in Treasury data going back to 1985. Net purchases of US equities and investment fund shares by foreign investors jumped to $426bn in the second quarter, up 62 per cent from the same period in 2025, and surpassing the previous quarterly record of $299bn in 2022, according to the Bureau of Economic Analysis... The foreign inflows coincided with a gain of about 20 per cent for Wall Street’s benchmark S&P 500 in the year to July... Foreign demand for US debt moved in the opposite direction. Overseas investors bought a net $188bn of US debt securities in the second quarter, down from $314bn in the first. That came as China’s reported holdings of US Treasuries fell to $618bn, their lowest level since August 2008, as Beijing diversifies into gold, agency bonds and other assets.

2. Markets step in to correct state capability failures - judicial delays edition.

The country suffers from one of the world’s largest judicial backlogs, approximately 54 million pending cases, and inside many of them is big money that one party owes another, that the claimants can’t afford to pursue through years of litigation. An investor could identify favourable cases, fund the legal proceedings, and keep a percentage of the claim if they won. Pool enough of these claims together and it looks something like a private equity fund, except the underlying asset is the claim to a future payout rather than ownership in a company.

Cut to January 2026, and Kundan Shahi’s litigation company, Legalpay, has committed Rs 100 crore over the next 18 months to financing commercial and insolvency disputes. The firm has already worked with the likes of Zepto, Pwc, and Deloitte and claims to deliver returns exceeding 30% internal rate of return (IRR) to its investors... From the US and UK to Hong Kong, Singapore, and Australia, third-party litigation funding has matured into a fully-fledged asset class, with the former president of the UK Supreme Court calling it “the lifeblood of the justice system”... Burford Capital, listed on the NYSE and LSE, manages a 7.5 billion dollar portfolio of legal claims and claims to have delivered a 26% IRR on concluded cases over 15 years... In May 2026, Five Rivers Capital, a Mumbai firm backed by a global legal finance company, surfaced as the first Indian litigation finance vehicle registered with Sebi as a Category II AIF. The firm is reportedly in talks to raise about $25–$50 million, though it has yet to close the fund or deploy any capital.

3. Attracting foreign universities to establish campus in India has for long been the target of attention for state governments. Now that 17 universities have set up shop, the demand side weaknesses are becoming apparent.

In its second year, Deakin University had all of 46 students. Another Australian university, Wollongong, started its India campus with just nine students in 2024 and added 19 more in the second year. Considering the bar for entry is the bare minimum—there is no entrance exam for a start—those are dismal numbers. The reasons aren’t hard to fathom. Indian students looking to study abroad broadly fall into two categories. They either want an education from a prestigious institution or they desire to leave the country and see a student visa as an easier way out. The universities establishing campuses in India don’t cater for either.

“I don’t see these universities bringing any cutting-edge programmes here. It’s more of the same,” says a study-abroad consultant who works with some of them. “There are computer science and business courses that attract a certain student, but they aren’t creating programmes that you don’t usually find in India, like quantum computing or spacetech.” If the country hoped that foreign universities would bring world-class research or future-facing tech to India, it might be disappointed. The “lab-lite” courses they offer are cheap to run and easy to scale, allowing them to operate out of corporate complexes rather than expansive campuses. It’s a low-risk, high-margin play. They promise a degree stamped with a “top 500” brand name but without the research-intensive environment that made it a brand in the first place. And yet, they aren’t cheap. A master’s degree from one of these universities costs Rs 15–25 lakh a year. At that pricing, they have competitors to deal with.

4. Excellent long read from Gill Plimmer on how the privatised UK water utilities have skimped on investments and discharged untreated water into the country's rivers polluting and making them toxic.

Just eight days after Macquarie sold its final stake in Thames Water in March 2017 — leaving behind a debt pile that had grown to £10.8bn — Thames Water received a then-record £20.3mn fine for allowing 1.4bn litres of raw sewage to flow into the River Thames. The untreated effluent had entered the river at six different sites in Oxfordshire and Buckinghamshire, suffocating bream and trout, killing herons and waterfowl, and putting boating companies out of business... Thames Water had been dumping sewage to save money on maintenance during a period when investors received big dividends and its executives huge salaries. No one was held to account. The company’s chief executive, Martin Baggs, had left six months earlier and before the court case started with a £2mn pay package. Baggs went on to join the board of Thames 21 — a non-profit that protects the river... Between 1991 and March 2025, the 16 privatised water monopolies raised a staggering £82bn in debt while simultaneously paying out £85bn in dividends to their shareholders, according to research by the FT.

5. Robin Wigglesworth has a very good long read on the repo markets, which he describes as being similar to the dark matter in astrophysics.

The repo market is often described as the plumbing of finance. Like the pipes around your house, it ensures that money flows from where it is abundant to where it is needed. And if it breaks down, then things quickly get smelly... It is huge, powerful and omnipresent, and most easily observed through its impact on other bodies... the US Treasury calculates that the US market alone is now roughly $12.6tn, and the International Capital Markets Association, a trade body, recently estimated that the European repo market stands at almost €14tn... when it very occasionally comes under pressure, it is enormously unsettling to the rest of the financial universe.

6. Private equity has become the lightning rod for housing supply crunch in the US during the mid-term elections, on the back of rising home purchases by firms in recent years.

7. Tej Parikh points to an India shock arising from the large and rising pool of migrants from India. The country is the largest contributor to migrants, 18.5 million globally in 2024, and making 70% of all US H1-B beneficiaries.

These migrants contributed $150 billion in remittances in 2025, or 3% of GDP.

Such large migrants invariably invites discontent in these times.

Indeed, anti-Indian sentiment is on the rise. Just this month, the Republican nominee for a seat on Texas’s oil and gas regulator sparked allegations of racism for a social media post aimed at South Asian students. Last year, Indian-origin migrants were explicitly targeted in “March for Australia” rallies. Anti-South Asian slurs in online spaces in the US have also surged. The backlash could hinder the Modi government’s strategy. As it happens, US President Donald Trump has raised scrutiny of and fees for H-1B visas.

8. Very good article about the Gurugram story.

As of June, Gurugram housed North India’s largest office space, with 100 million square feet built and counting. The who’s who of global MNCs — Apple, Google, Microsoft, Amazon — have a presence here, if not their India headquarters... the data shows that Gurugram’s share in Haryana’s employment in the organised sector has risen from 17.35 per cent in FY06 to 67.62 per cent in FY24, meaning that roughly two in every three organised-sector jobs in Haryana sat inside this one district... Gurugram made up 1.2 per cent of the total number of shops and commercial establishments in Haryana in 2006, which ballooned to 13.51 per cent in 2024. It also made up 67 per cent of the people employed in these sectors in 2024, versus about 26 per cent in 2006.

9. Good graphical feature on PE's problem of exits.

The private equity sector is managing a record $4.7tn in assets. But a growing portion of these assets are unsold companies, an increasing share of which have been held for five years or more. The median holding time is a record seven years. Most unspent capital, or "dry powder", was raised before 2024.

This has caused the distribution of cash to its investors to plunge since 2021.

And the share of exits through continuation funds (dedicated pools of cash from new investors to buy companies from themselves) has climbed sharply.

10. Nvidia announces the biggest share buyback in history worth $150 bn, beating Apple's record $110 bn in 2024.

11. Solar plus battery convergence with thermal power in India.

Solar Energy Corporation of India (SECI) ran an auction to buy electricity capacity where they (SECI) demanded the availability of a thermal generator. A bidder who plans to use solar or wind is then forced to load up with the batteries required, to charge in the day, so as to deliver thermal-style availability. This auction discovered a price of ₹5.25 per kWh, guaranteed for 25 years. It is hard to identify a single comparable price for coal thermal in India because coal-extraction rights are given by the state in non-market ways. But if we look at recent new coal-power contracts in India, they are priced at ₹5.38-6.30 a unit. The SECI-discovered thermal-mimicking price for renewable power is now 10 per cent cheaper than that for new coal.

12. This makes great sense, and is something this blog has been advocating, especially the demand-side creation, for India's semiconductor chip design ambitions.

What is missing is capital that funds Indian fabless companies all the way to commercial tape-out, not just prototypes. DLI must be expanded. ISM 2.0 should create a Chip Design Commercialisation Fund at Rs 1,000-crore scale — modelled on NIIF — and designate at least two sovereign AI inference chip programmes with guaranteed government offtake. Those two changes, delivered in the next budget, would do more for India’s semiconductor future than more wire-bond packaging projects.

13. Surjit Bhalla says that India's external linkages in terms of FDI and FPI look dismal.

In 2025-26 India recorded a record FDI inflow of $94.5 billion. In the same year, foreign investors repatriated or disinvested $53.6 billion, leaving $40.9 billion. Indian firms invested $33.3 billion abroad. Net foreign direct investment — just $7.65 billion. About 0.18 per cent of GDP — and that is the good news, being a recovery from 0.02 per cent in 2024-25. Still the second-lowest in three decades... Reinvested earnings of foreign firms — profits earned here and not taken home, a figure not part of India’s FDI statistics until the definition changed in 2000-01 — were $25.6 billion in 2025-26, more than three times net FDI. Retained earnings are not a new commitment to India... In 2025, Indian equities underperformed emerging markets by the widest margin since 1993, and trailed Asia-Pacific by the most since 1998. Foreigners withdrew $17.7 billion. This year till August 19, India was down 9.1 per cent in dollar terms while emerging markets were up 20.6 — a gap of 30 percentage points in under eight months. Korea was up 77.6 per cent, Taiwan 58. Another $10.5 billion has left.

14. Graphical explanation of why the US Treasury Bonds are climbing,

15. Starbucks was once hailed as a poster child for ESG practices. In a remarkable reversal, it has now scaled back or scrapped its green goals and fired sustainability staff.

The coffee shop chain has revised or dropped pledges to halve water use and waste, while a goal to cut carbon emissions by 50 per cent is under review. The pullback comes amid a broader US corporate retreat from environmental commitments as political pressure rose under President Donald Trump and ambitious targets prove hard to meet. But Starbucks stands out because few companies made sustainability so central to their corporate identity. The Seattle-based group announced its targets in 2020, when then chief executive Kevin Johnson declared in a public letter that “sustainability has been at Starbucks’ core since the beginning and consistent with our belief that we can build a great business that scales for good”. The letter, which pledged transparency about its progress, is no longer on the company’s website, while many targets were absent or amended in Starbucks’ annual Global Impact Report published this summer.

16. Good NYT article on how Asia managed to survive the Iran war till date. This is how India managed to maintain oil supplies.

And this is how the natural gas supplies were substituted.

The political challenge in the US of being a socialist without being woke

noreply@blogger.com (Urbanomics) — Fri, 02 Oct 2026 13:09:33 +0000

In a recent op-ed, Janan Ganesh made the provocative point that if the Democratic Party in the US could muster a liberal without being woke, then he/she would march to the Presidency. So why is it hard for such a candidate to emerge?

We live in polarised times, where the overlap between the right and left, or Republicans and Democrats (in the US case), on issues has become vanishingly small. This poses a problem for the median voter theorem, which states that in a majority-vote electoral system, candidates will position themselves to appeal to the median voter. Polarisation weakens the conditions under which the median-voter theorem predicts convergence. The nature of the US political system compounds this problem.

The US Presidential candidates have to fight through primaries, progressively winning over their opponents and accumulating votes through a series of compromises. The candidates dropping out keep transferring their endorsement to a remaining candidate in return for support on some of their causes. This plays out till the last candidate remains.

The very nature of this process entails accommodation. This accommodation was fine as long as there was large overlap between the left and right within the same party on issues and the tails on both sides were small. These compromises would come out as centre-right or centre-left. In this context, candidates constantly adjust their platforms to appeal to moderate voters.

But the greater ideological sorting and partisanship means a significant and growing proportion of the electorate now occupy the tails.

They are also the most politically active electorate. The most politically polarized being more actively involved in politics results in the amplification of the voices that are the least willing to see the parties meet each other halfway.

This necessitates compromises and the candidates must constantly adjust their platforms to accommodate at least some elements of the extreme left/right positions.

For the Democrats, it then becomes necessary to accommodate at least some elements of the woke position - progressive cultural positions on immigration, taxation, race, gender and social policy. This, in turn, leaves them vulnerable to being branded as woke-washed. This, in turn, scares away the median voter, who gravitates to the right or doesn’t turn up to vote. The challenge becomes even more daunting as progressive-woke candidates gradually make deep inroads into the Democratic Party.

What complicates matters is that woke positions can create a gap between the Democratic activist base and moderate voters, especially when voters perceive the party as more culturally radical than its candidates actually are. Therefore, accommodating any of these views can concern even moderates. But without accommodation, the likelihood of electoral success in the primaries decreases. This logic applies just as much to Republicans.

All this creates a potential gap between nomination and election. A candidate with strong support among a party’s ideological base can succeed in a primary even when their positions differ substantially from those of the broader electorate. The electorate that determines the nominee can therefore be systematically different from the electorate that determines the winner in the general election.

This may create particular challenges when a party’s activist base is substantially more progressive than its broader coalition on issues such as taxation, government spending and the role of government. Positions embraced by activists may be less popular among moderate voters, and opponents may amplify that gap by portraying them as more radical than the candidate or party actually is. A Democratic party candidate may be more vulnerable here than a Republican counterpart.

One way out of this gridlock is that the candidate first satisfy one electorate to win the nomination and then appeal to a substantially broader electorate to win the general election. This has its set of practical problems, especially for Democrats given the substantial divergence between the progressive ideologicals and the broader coalition, and the substantial share of those who describe themselves as progressives.

A second route would be to nominate a candidate whose personal appeal and policy positioning extend beyond the ideological base from the outset. The objective would be to assemble a sufficiently broad coalition of moderates, independents and swing voters to offset any loss of enthusiasm among the ideological edges. But this requires a candidate who can hold the party coalition together while also establishing credibility with voters outside it. That is a demanding political task since the candidate must satisfy enough of the primary electorate to win the nomination without becoming so identified with the ideological base that they narrow their appeal in the general election.

TOD is critical for the commercial viability of Indian metros

noreply@blogger.com (Urbanomics) — Wed, 30 Sep 2026 02:34:36 +0000

I have blogged here making the case for doing Transit-Oriented Development (TOD) around mass transit stations in India, here about the challenges with TOD implementation, and here about the low traffic realisation problems facing metro railway systems in India and the ₹1.07 lakh crore (undiscounted) fiscal burden.

This post will argue that TOD is the critical requirement for the commercial viability of India’s regional and metro railway systems. TOD is a combination of densified, mixed-use development (supply-side), and walkable streets andintegrated feeder services (demand-side) around mass transit stations.

In other words, regional and metro railway systems in India can become commercially viable only if they can induce ridership, and this shift would require adoption of TOD at both ends of the commute.

But India’s regional and metro railway systems are encumbered by structural problems compounded by bad design.

For a start, unlike the successful global mass transit systems which precede real estate development and emerge from an integrated land use and transit plan, Indian railway systems follow it. They try to retrofit into the built-up city and suburbs. Second, as I wrote here, Indian regional and metro rail systems unfairly put the burden of capex on the operating entities without endowing them with the real estate that can be monetised to finance capex. Third, the railway construction entity does not control land use decisions, and those making them do not bear the consequences if their decisions erode the financial viability of the mass transit systems. Finally, making matters worse, they are primarily railway construction corporations, for whom urban planning integration and real estate development are afterthoughts. This is unlike in Japanand other East Asian cities where the metro operators are primarily real estate developers who also build and operate railway networks.

Given the circumstances of India’s mass transit journey, the best that can now be done is to create conditions to induce ridership and improve commercial viability of metro and regional railway systems. And, as aforesaid, TOD is central to this objective.

The first order requirement is to induce ridership. This can come from two directions. At the intensive margin, ridership can be induced by shifting existing car users to mass transit. At the extensive margin, it would involve locating commuters within walkable distance of the station and expanding geographical access through feeder services, and shortening the transit trip.

The intensive margin relies on modal shift among people whose destination and origin are fixed, whereas the extensive margin creates new origin-destination pairs of which mass transit is the obvious mode from the outset. An important, but less discussed, mechanism of the extensive margin is that of trip shortening. The regional or metro rail shortens the commute time to distant places (besides also eliminating the hassle of car-based trips) and brings workplaces closer (in time) to homes and thereby expands its potential users. This trip-shortening effect is typically larger than the modal-shift effect, and second only to ridership induced by locating people inside the TOD zone.

However, while convenience (of avoiding road traffic and walkability at both ends) can induce some mode shifts, getting people who would otherwise not prefer living near a station at all to relocate entails going beyond convenience and also making the place itself liveable and financially attractive. Further, the inducement is significantly likely only if there is a workplace within walkable distance at the other end of the commute.

In the case of metros, it is about densified developments (at both home and work sides) around stations with walkable streets, supplemented with feeder services. In the case of regional railway systems, this is the classic downtown-satellite town mode of development. However, in India, since the satellite towns are already well-developed towns and cities, the station vicinity requirements are similar to the metros.

The walkability part is critical, and one completely overlooked. Densification alone without the ease of walkability at both ends will not induce ridership. Walkability and street connectivity are central to expanding the pool of users. If a commuter who lives 800 metres from a regional railway station still needs to find an auto or shared vehicle because the intervening streets are not well connected, unwalkable, and unsafe, the catchment effective radius collapses to perhaps 200 metres, and the ridership projection drops accordingly.

The demand side (walkability) and the supply side (density) are complements, not substitutes. Building one without the other produces either pleasant low-rise neighbourhoods that don’t fill the trains, or towers in traffic that people can’t walk through. Further, the walkability (and associated liveability), in addition to the mass transit commute convenience, are perhaps critical for also incentivising people to trade-off living in a cheaper and larger housing unit distant from the zone with a pricier and smaller one inside the TOD zone.

Finally, the mixed-use part is also important. For one, it should provide market participants the flexibility to determine the demand responsive and commercially viable nature of development around the nodes. Further, a node that densifies the area around a station but retains single-use zoning (apartments that connect to the city’s existing car-commute grid) will produce less additional ridership than a node that places offices, retail, and housing within walking distance of each other and of the station. The ridership gain from the second type of node comes not only from the peak commute trip but from the off-peak trips that only a genuinely mixed-use, walkable neighbourhood generates. The former will end up creating a mass transit system that is used only in the 3-4 hours of peak commute times. Mixed-use is therefore critical to generating two-way, all-day ridership.

In other words, ridership of a transit system is determined predominantly by the land use in its catchment — how many people live, work, shop, and study within a walkable distance of its stations, and whether those people can get to and from the station without a car. Building the station but leaving the land use unchanged will not change much. It will produce the infrastructure, but underproduce the demand. This has been India’s metro reality.

All this means that densified, mixed-use, walkable zones around the station, with convenient feeder services, or TOD, is an essential requirement to achieve significant inducement of ridership.

The case for TOD is likely more relevant and its impacts greater for Indian cities than counterparts in developed countries. For one, the spatial mismatch between job availability (in the city centres) and affordable housing (in the periphery) is very large. A system that closes this gap generates much greater welfare gain, and therefore much greater demand, than the same system operating in a less mismatched city.

Further, given India’s low car ownership base, the marginal ridership gain from TOD does not come mainly from convincing existing car users to take the train, but from improving trip quality for those already transit-dependent, and from expanding the pool of riders. Finally, India has a low-hanging fruit to harvest in terms of its low FAR baseline, which allows for significant densification and location of potential transit riders. Relaxing FAR therefore would have an unusually high ridership yield per unit of policy change in Indian cities.

The summary from the Indian context is that the inducement from modal shift is likely marginal, and confined to only those whose commute is already partly walkable and partly by car, or whose car commutes are very long. The larger and more structurally significant opportunity is at the extensive margin from locating new workers and from bringing the workplace closer to homes. TOD is therefore the primary demand generation mechanism for a rail transit system.

Unfortunately, India’s TOD policies have consistently focused on the supply side (FAR uplift), and that too inadequately, while under-specifying the demand side (street design, parking, block structure). Getting both right is the institutional challenge. It is also something that the argument for TOD-for-viability of metros implicitly assumes but rarely makes explicit.

Thoughts on private equity in consumer service businesses

noreply@blogger.com (Urbanomics) — Mon, 28 Sep 2026 00:00:00 +0000

It has always been a matter of debate that there may be a trade-off between building an enduring business and maximising short- to medium-term returns on those business investments. The private equity model of investment, it has often been argued, inclines to the latter.

I have written here about the incentive incompatibility problem when returns- maximising investors like private equity pursue infrastructure assets with their low but stable returns. More generally, when asset ownership and operation and maintenance are separated, and especially when the former is dispersed, the incentive distortions compound.

With headline returns capped by regulation, the PE investors must find alternative channels to squeeze more out of their investments. Leverage and asset stripping become the preferred strategies. The British water privatisation is only the most totemic illustration of these trends.

In this context, I have also blogged here and here, and here about the trend of rising PE investments in the locally operated regular consumer services — healthcare, education, residences, student housing, pet care, salons, mobile trailers, pubs, home repair services, etc. In all these cases, incentive distortions similar to infrastructure have now been widely documented.

The strategy in all these cases is to target service-based businesses with long-term demand (especially those requiring O&M, and the possibility of subscriptions and service contracts), aggregate or roll up small local providers, and centralise their operations to harvest economies and efficiencies of scale. On top is the purchasing (and bargaining) power with suppliers and customers. And on the bottom-line side, undertake aggressive cost-cutting and asset stripping.

On the financial side, the strategy is to harvest the scale arbitrage — acquire a large enough regional or sub-regional entity at 6–8x EBITDA, add 10-50 more smaller entities at 5–7x, centralise back-office and procurement, load up debt, and exit the consolidated entity at 10–12x before the consequences of cost optimisation show up on service quality. The primary driver of returns is less operational improvements, but the arbitrage of paying small-company multiples and selling at large-company multiples. This is financial engineering applied to a captive demand. The new buyer, in turn, would be motivated by another business model for the same business.

There is also the tension between building long-term sustainable business and the pursuit of short-term returns maximisation. In other words, long-horizon value creation trades off against short-horizon, leveraged returns maximisation. It is like the comparison between a business that earns a steady 8% over 30-40 years, and another that targets 15% over 7-8 years in addition to the 2:20 fees.

In short, the PE model’s problem appears to be that it seeks to maximise returns within a hold period that is too short to bear the consequences of its own cost optimisation. This causes a temporal mismatch — returns are harvested before the deferred maintenance, staff morale declines and attrition, community erosion, and quality degradation.

Apart from the adverse impact on the quality of service delivery, there are also the negative externalities ranging from a change in the ownership of local businesses (with disruptive impacts on local communities) and increased prices of services, to bankruptcies and closures with attendant job losses. So much so that private equity has become a lightning rod for rising housing prices in the US mid-term elections.

FT has an article that points to PE firms buying up swimming pools in the UK and offering maintenance services.

Private equity-backed swimming pool “platforms” have been buying up hundreds of local builders and repair services. The goal is to create national scale in an industry dominated by pint-sized companies. SPS Poolcare and Pool Troopers, two of the largest consolidators, between them bought more than 200 businesses before merging themselves earlier this year. Main Street Capital, a small listed private equity firm, has marked up the value of its equity holding in Cody Pools sevenfold since buying in at the height of the coronavirus pandemic.
The trend might sound surprising to anyone focused on public markets, where many investors ended up deep underwater after a wave of enthusiasm crested in 2021… while buying a pool is about as discretionary as it gets, upkeep on an existing pool is not. There are north of 10mn installed in the US, and they all need regular cleaning and repair. Servicing businesses can therefore offer the sort of subscription-like revenue that buyout firms love. And although construction is in a cyclical slump, there are reasons to expect longer-term growth as climate change makes outdoor pools attractive in more areas.

This mirrors PE investments elsewhere in retail. The FT article writes

Compare the heating, ventilation and air conditioning sector, where there have been more than 1,100 acquisitions since 2020, according to data from Capstone Partners. Mid-market specialists have had success rolling up small companies until they create a group big enough to appeal to bigger buyout specialists, as shown by Blackstone’s $2.5bn purchase of Champions Group earlier this year. Pools are just one riff on a wider home-enhancement theme. Other firms are trying the same playbook with trades like garage doors, pest control and plumbing.

The trajectory outlined above is largely a narrative formed by observations. What does the evidence say?

I have written extensively on infrastructure, consolidated here. See also this recently. The sector with the largest and most conclusive empirical evidence base, and at least less than positive impact of PE is healthcare. In a systematic review in The BMJ, covering 55 studies from 2000-23, Alexander Borsa and others found definitive evidence. Of the 27 studies assessing quality, 21 found harmful impacts; of the 12 studying costs to patients or payers, 9 found increased costs, and none found decreased costs; and of the 8 studying health outcomes, 3 found harmful, 2 beneficial, and 3 neutral impacts.

This mirrors findings across the segments in health care. Atul Gupta et al, found that PE ownership of nursing homes raised short-term mortality by about 10% or about 20,000 additional deaths over the sample (1,674 PE-owned nursing homes from 2000-17, and covering 4.2 million patients), increased spending by 11%, reduced nurse staffing, and decreased compliance with care standards.

On dental practices, Kamyar Nasseh et al, found that PE-acquired dental practices raised list prices by 3.3%, and shifted procedure mix from preventive toward higher-reimbursement restorative, specialty, and surgical procedures. Sailesh Konda and Joseph Francis showed that PE-owned dermatology practices saw 4.7–17% more patients per dermatologist, raised prices for routine visits by 3–5%, and employed four advanced practitioners per ten dermatologists (vs three in non-PE practices).

In the most dramatic evidence of revenue-maximising treatment intensity replacing clinical judgment, PE-managed neonatology practices were associated with 70% higher common NICU days and 54% higher physician spending. Finally, this study by MIT Sloan found that negotiated prices between hospitals and insurers rose 32% after PE investment. It also found that PE firms burden acquired health care organizations with unmanageable debt, stealthily decrease health care competition, often increase costs for patients and payers, can compromise patient care, and can harm health care workers and providers.

Its findings and recommendations are striking:

Private equity firms’ focus on short-term revenue generation and investor profit also can lead them to strip acquired facilities of their assets, force those entities to raise prices through anticompetitive practices, reduce staffing to dangerously low levels, avoid investment in critical infrastructure, and eliminate vital services—to the detriment of patients, workers, and entire communities… Policymakers must take steps to safeguard the health care system against harmful private equity practices by enhancing regulatory oversight over health care acquisitions, rolling back reporting exemptions on financial transactions in private markets, and changing the incentive structures to limit private equity firms’ interest in engaging in financially risky behaviors that run counter to the public interest.

The empirical evidence in other consumer services is thinner, perhaps only because of lack of studies. There is no peer-reviewed equivalent of the Borsa review for HVAC, pool services, pest control, pubs, pet grooming or salons. This will change in the years ahead as PE ownership in these businesses surge.

However, in all these cases, there are several anecdotal and journalistic examples of high-profile failures. They are most likely a good representative sample of the general direction of impacts from PE in those market segments. But in the absence of empirical evidence, supporters of PE will continue to argue in their favour.

This cannot detract from the emphatic finding that the distortionary impacts of PE ownership of businesses are documented wherever the research has been done.

As with all such debates, the reality is perhaps more nuanced. The evidence from competitive, non-essential service markets like manufacturing, technology, and business services is mixed. For example, Steven J Davis, John Haltiwanger, and others have found that PE-owned manufacturing plants had higher productivity growth.

I can think of some determinants of a business that increase the likelihood of incentive distortions. One, a service where quality is hard for the buyer to observe at the point of purchase creates perverse incentives. Two, the nature of these kinds of consumer services calls for stewardship and trust, which are most often overwhelmed by market incentives. Three, captive or sticky demand arising from switching costs, essential need, or geographic lock-in, is another factor that encourages market abuse. Four, there is a moral hazard arising from a regulatory backstop or a third-party payer that socialises costs. Finally, a short holding period allows the owner to exit before the consequences of underinvestment show up.

Healthcare and infrastructure are vulnerable to all these determinants, and others in varying combinations and degrees. The evidence is strongest in healthcare, and the same structural incentives apply wherever the determinants are met. However, the absence of evidence elsewhere reflects the absence of research, not the absence of harm.

All this comes in addition to questions on the financial side too, about the superiority of PE as an investment strategy. 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.

Weekend reading links

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

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

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

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

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

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

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

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

3. What are the fiscal costs of immigrants?

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

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

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

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

5. Oil prices over the last fifty years.

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

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

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

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

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

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

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

8. Some facts about the SpaceX business model assumptions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Public policy for domestic semiconductor design and components in general

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How do we reconcile the dilemma?

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

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

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

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

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

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

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

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

Weekend reading links

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

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

2. AI solves the Navier Stokes equation breakdown.

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

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

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

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

Prices have risen sharply across the board.

5. US inflation clearly owes to the Iran misadventure.

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

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

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

7. VC wealth multiplication.

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

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

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

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

9. Tiruppur facts of the week.

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

10. India's affordable housing market facts.

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

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

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

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

12. This is a staggering statistic on IPOs

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

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

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

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

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

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

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

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

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

16. Finally, some FDI facts about Indian states.

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

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

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

Disaggregating India’s savings and its risk capital challenge

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So how have been the trends over time?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The global crisis of falling student learning outcomes

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

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

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

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

The Economist writes

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

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

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

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

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

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

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

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

Schleicher makes important suggestions about better use of AI.

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

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

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

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

John Burn-Murdoch points to possible reasons.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Capital wars to follow trade wars?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So what does all this mean for India?

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

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

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

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

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

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

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

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

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

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

Weekend reading links

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

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

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

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

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

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

Further, there's an inverted tax structure.

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

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

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

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

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

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

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

Jayant Mundhra's Substack is excellent.

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

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

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

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

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

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

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

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

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

8. London's experience in reducing knife crimes.

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

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

9. The state of gender empowerment.

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

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

Deregulation - chainsaw Vs the wood-splitting maul

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

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

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

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

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

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

First, on the nature of deregulation.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I’ll blog on this at a later occasion.

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

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

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

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

Update on the emerging AI economy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And this

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

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

Some thoughts on Chinese manufacturing dominance and deglobalisation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Weekend reading links

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

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

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

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

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

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

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

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

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

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

4. The rise and rise of bond yields.

5. India cash transfer schemes facts.

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

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

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

7. Interesting trends in gold prices.

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

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

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

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

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

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

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

Improving ‘decision velocity’ in bureaucracy

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

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

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

Tharoor offers some suggestions.

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

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

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

I can think of three process safeguard reforms.

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

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

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

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

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

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

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

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

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

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

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

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

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

Resolving the public debt pile facing the developed world

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And there’s more.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Some thoughts on the Hyderabad model of urban growth

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This brings us to the issue of urban planning.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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