Urbanomics

Deploying public finance to derisk private capital in innovation and infrastructure

noreply@blogger.com (Urbanomics) — Wed, 03 Jun 2026 02:16:53 +0000

As the heading suggests, this post points to a few thoughts on the challenge of deploying public funds to derisk and crowd-in private capital into those areas of innovation and infrastructure that are not attractive enough for commercial capital.

I have blogged about public funding of innovation here and here, and this working paper is about public funding of infrastructure projects. The additionality with public finance arises from its risk-tolerant, patient, and concessional nature.

An urban water supply or sewerage, or an industrial bulk water supply, or an electricity distribution, or a solid waste management, or a streetlight energy saving project, or a mass transit project, will not attract commercial capital on its own. Similarly, a fledgling startup making transceivers, or display and camera modules, or high precision resistors/inductors/capacitors, or compressors, or brushless DC motors, or anode materials, or aluminium extrusions, or designing a narrow band IoT chip or some other mid-value chip, will generally struggle to attract risk capital.

But they can be derisked by blending with a layer of public finance. The challenge is how to do this derisking effectively. Specifically, the challenge is how public funds can be channelled to derisk these projects or sectors.

This is less of a problem with grant funding involving smaller amounts, which is simple enough to be done through public entities. In infrastructure, such grants come in the form of viability gap financing (VGF), and in innovation, they are given to those in TRL 1-5/6 stages. The problem lies in the deployment of risk capital (debt and, especially, equity and structured instruments) by public entities.

Given its administrative inflexibility and constraints, direct deployment of funds by the government itself is not only inefficient but also creates incentive distortions.

In the circumstances, the commonly suggested option is arms-length financing through Development Finance Institutions (DFIs). But this approach is seriously hampered by unreasonable expectations (about returns or at the least capital preservation) arising from a deficient understanding and acknowledgement that de-risking, by its very nature, entails a strong likelihood of losing money. It would involve investing in projects that would not attract commercial investors, by insuring for the additional risk borne by them.

Further, even with an arm's-length institutional structure, a fully government-owned entity is subject to constraints that prevent efficient deployment of funds.

The response to this problem has been to build institutional structures by partnering with private investors, even having majority private investors. This, it has been argued, will free them from the fetters and requirements faced by public entities.

However, India’s disappointing experience with infrastructure DFIs starting from IDFC, IIFCL, and NIIF, as documented in detail here, raises questions about this response. In all these cases, instead of complementing private capital, the DFI has ended up competing with private investors in their choice of investments. Instead of funding those risky sectors, the DFIs chase the derisked sectors like power generation, renewables, transmission, highways, ports, and airports.

In this backdrop, a commonly cited option, especially in the context of innovation financing, is to transfer public funds to commercial investment vehicles (or the Fund of Funds, FoF, strategy) and let the latter manage those investments. This looks great in theory, insofar as it aligns incentives and brings in private sector efficiencies.

But it has one problem. The private investors will be primed to invest, at best, in those marginally risky projects rather than in genuinely risky projects (or sectors) that sorely need public finance to derisk them. So, instead of deriskingprojects or sectors, public funding will do returns amplification for private capital.

Here, a big problem, a market friction, is the absence of a pipeline of such risky projects and sectors that investors can draw from. Their search costs are a significant enough deterrent for investors. In contrast, commercial investors have access to a widely known pipeline of investible projects or innovations.

It is also the case that the envelope of such risk capital available to fund infrastructure and innovation is much smaller than the envelope of investible projects. Therefore, there is little incentive to go beyond the confines of the mainstream and search out and fund the riskier projects.

In the circumstances, I can think of three options for the deployment of public funds such that we are able to realise its additionality, and not compete with and crowd-out private capital or end up being leveraged primarily for returns amplification.

1. Invest in FoFs, but with sharply defined funding mandates, almost prescribing the specific nature of projects to invest in, at least a part of their portfolio. However, this can be unsettling for the commercial investors and may turn away the GPs who sponsor the fund from accessing public funds.

2. The DFI could announce its offering as a set of financing instruments that meet the derisking objective. They could include credit guarantees (in the form of first-loss buffers), longer tenor, lower interest rate or hurdle rate, lower liquidation preference and a lower charge on the waterfall, subordinate debt, and so on. The DFI should market these instruments and possible investment projects to commercial investors.

3. The DFI could co-invest with private investors. This would entail the public entity scouting the project or entrepreneur, doing due diligence on it/them, and then shopping it to commercial investors with an offer of an attractive enough derisking financing layer. This would also require an acknowledgement of the fact that the role of public finance is to derisk and not maximise returns. This is perhaps the most ideal approach, one which mature entities like NIIF in infrastructure finance ought to be mandated to do.

The second and third options require highly capable and incentive-aligned institutions. Given weak state capability, that’s a demanding requirement. It is for this reason that even in developed countries, risk capital funding in infrastructure and later-stage innovations is largely deployed through FoFs, notwithstanding its aforesaid failings.

But this reality should not be a reason to ignore the failings of the FoF strategy and step away from pursuing the second or third options.

Implementing TOD in India

noreply@blogger.com (Urbanomics) — Sun, 31 May 2026 23:30:00 +0000

I have blogged here outlining nine low-hanging fruits in urban planning, here on the use of land value capture instruments, and here on TDR trading platforms. This one examines why transit-oriented development (TOD) has not worked in India and what could be done.

TOD is about densifying a defined neighbourhood around a transit station to minimise commute times. It would encourage people to use the mass transit system to commute between their offices and homes. TOD is especially relevant in the context of railway stations.

Globally, many cities owe their expansion to TOD. London and Mumbai are good examples. I used Claude to extract the schematic maps conveying TOD developments in commuter railway stations around London and Mumbai over the 1991-2011 period.

This is the London map for a longer 1991-2021 period.

The Mumbai map draws from the Marron Institute’s Atlas of Urban Expansion, and the London map uses the ONS census visualisations.

Despite several efforts for nearly two decades, Indian cities have struggled with TOD. The only genuine integrated mixed-use station-centric development in India is Gurgaon’s DLF Cyber City + Cyber Hub + Rapid Metro (125 acres, ~15 million sq ft of office, 400,000 sq ft of F&B). The Gurgaon Rapid Metro is itself a private TOD example (built by IL&FS/DLF), covering 12.85 km and 11 stations. Both were built privately by DLF and IL&FS, predating the 2016 TOD policy by years, and the Rapid Metro became financially unviable and had to be taken over by HMRTC in 2019. The MGF malls at MG Road station, Sector 29 at HUDA City Centre, and the Golf Course Road density are all pre-existing development that happens to lie near a metro — co-location, not coordinated TOD.

A fundamental problem with TOD Policy formulation is the assumption that higher FAR, coupled with the benefits of living or working adjacent to a station, will by themselves translate into utilisation. In other words, it is assumed to be sufficient enough incentive for builders and home buyers to choose the TOD zone over its neighbourhood and elsewhere. Unfortunately, this is rarely the case.

Worse still, governments tend to view TOD as also a large revenue generation opportunity from the flush of property developments. The combination of registration fees (in case of purchases), layout development fees, purchaseable FAR rate, building permission fees, etc., adds prohibitive cost layers for developers and buyers. They prefer to develop and buy elsewhere. The normalised expectation of high revenues also prevents governments from considering providing concessions. A gridlock ensues.

So how do other countries promote TOD?

The Tokyo region offers double or even triple FAR in TOD zones, and allows FAR transfer from adjacent lower-value land parcels. Most importantly, the zones have no development fees, with local governments recovering value through land appreciation and property tax growth, not upfront levies. MTR in Hong Kong also offers much higher FAR and does not levy any development charge, and even gives the land to the developer at pre-rail land values. Singapore has URA White sites where land use is left flexible, apart from a much higher FAR. The purchasable FAR rates are waived or significantly reduced. Additional FAR and no parking minimums in the US allow developers to build significantly more in the zones, especially for affordable housing. Australia allows FAR several multiples higher, fast-tracks permissions, waives off infrastructure levies for affordable housing, and even has lower property tax assessment.

The common thread across all of these is that governments provide a package of benefits in the TOD zone. It always combines higher FAR (making more revenue possible per unit of land cost) with lower upfront charges (reducing the cost stack) and faster approvals (reducing holding cost and uncertainty). The Japanese and Hong Kong models go furthest by making the TOD zone not just more permissive but more profitable than any suburban alternative.

So what can cities in countries like India do?

Fundamentally, the objective of any TOD Policy should be to ensure that it makes building in the TOD zone more attractive than outside or elsewhere.

Apart from higher land values, the TOD zone suffers from several other disadvantages - less likely to have larger vacant plots, more likely to be congested, noisier, and so on - that make them less attractive compared to their surroundings or the suburban areas. Besides, the surroundings of stations are not perceived as desirable residential locations.

In the circumstances, there must be a significant incentive to crowd-in development into the TOD zone. Such incentives come from both urban planning instruments and fiscal concessions. Apart from additional FAR, the former could include a higher base FAR, a lower price for purchasable FAR, higher TDR loading, and a more generous TDR conversion rate. Fiscal concessions could include lower stamp duty, layout development fees, building permission fees, and property taxes. If there is a betterment levy or impact fees, the same may also be discounted for those desirable developments (like high-rise buildings). These benefits could be limited to developments initiated within a certain period.

This would also require a shift in the way governments view TOD. They should prioritise the development of the zone over the maximisation of revenues. In fact, foregoing current revenues to harvest future revenues should be the mantra. The foregone revenues would be offset within a few years by those from the economic activities triggered by the developments.

In other words, the strategy should be to first crowd-in a critical mass of developments that is sufficient to sustain future development. Till this happens, revenue realisation should be strictly subordinate. This is especially required in the large Indian cities, which have poor urban planning and a culture of sprawling suburbs.

The timing of TOD adoption is also important. The best time to initiate TOD is just before the project work starts, when land values are lower, and the market is being catalysed. The marginal response to incentives is likely to be much greater in the initial stages when property prices too have not gone over the roof.

It may be useful to experiment in a few bigger cities by picking one or two locations (those with sufficient developable land) and providing a package of incentives for a period of 3-5 years. At the risk of repeating, the package should be designed keeping in mind the need to make the TOD zone significantly more attractive than its surroundings.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 30 May 2026 15:26:14 +0000

1. This captures the big problems with Chinese exports to Europe.

In the early 1970s workers at Dongfeng, or “East Wind”, imported American trucks to inform their early attempts at making off-road vehicles destined for the People’s Liberation Army. Nearly 60 years later Stellantis, the European owner of the Jeep brand, is partnering with Dongfeng to produce a new battery-powered version of the iconic American light utility vehicle for consumers in China, the Middle East and south-east Asia... International carmakers, struggling for survival amid an expensive transition to electric vehicles, are turning to China’s technologically advanced and cost-efficient factories as manufacturing bases for their global businesses. Foreign companies already account for around two-fifths of China’s car exports to Europe, when joint ventures with local groups are included, according to the Rhodium Group, a US consultancy... Indeed, Volkswagen, BMW, Nissan, Hyundai and others are increasing exports from Chinese factories with spare capacity to markets other than Europe and the US.

2. A new approach to making clean hydrogen.

Most of the hydrogen the world uses today — mainly for fertilizer and refining — is produced using natural gas in a process that creates lots of emissions. In recent years, the United States and other countries have invested billions of dollars trying to make “green” hydrogen with wind and solar power, but it has proved difficult and expensive. Now a growing number of companies think a better answer could lie underground. Dozens of start-ups are trying to find large reservoirs of natural hydrogen thought to exist below the surface. Others, like Vema, are trying to stimulate the processes that generate that hydrogen, without any emissions. It’s a field often referred to as “geologic hydrogen.”...

Hydrogen is the most abundant element in the universe, and it gets made naturally in the Earth’s crust when certain iron-rich minerals react with water and rust. This process, known as serpentinization, often leaves behind rocks with a mottled green color. For a long time, many geologists believed that any natural hydrogen produced this way was unlikely to accumulate in large underground deposits because the tiny molecules would slip away through cracks in rocks. Lately, that conventional wisdom has been upended... By the 2020s, scientists were publishing papers estimating that natural hydrogen deposits underground could supply the world’s needs for hundreds of years. One promising location was North America’s Midcontinent Rift, an enormous formation of iron-rich basalt that stretches 1,200 miles from Kansas to Michigan... The Energy Department has estimated that geologic hydrogen could be produced for less than $1 per kilogram. That would be cheaper than hydrogen made from fossil fuels and one-sixth the current cost of making hydrogen from wind and solar power.

It has started attracting private capital.

Companies are racing to find the fuel. One of the best-funded start-ups, Koloma, has raised $400 million from investors including Amazon and United Airlines and has drilled exploratory wells in Iowa. HyTerra, an Australian firm, is searching for hydrogen and helium in Kansas and Nebraska. Not everyone thinks the best strategy is to search for natural deposits underground. A better idea, some say, is to create them. In Quebec, a startup called Vema Hydrogen plans to spend the rest of the year injecting water into its underground test wells to see if it can speed up the process of serpentinization that creates natural hydrogen underground... Vema has already raised $15 million and is working to raise more. There are ophiolites all over the Earth, including a ridge stretching from Costa Rica to Alaska, and the company is looking at sites in Oregon and California as well. Other start-ups, including one out of M.I.T. called GeoRedox, are developing their own approaches.

3. Semiconductor chips are one area where China lags badly.

Chinese companies will most likely make just 2 percent as many A.I. chips as foreign firms do this year, said Tim Fist, a director at the Institute for Progress, a think tank in Washington. The production gap between Chinese and foreign manufacturers is especially big for memory chips, which are essential for the large calculations done by A.I. Companies outside China will make 70 times as much memory storage capacity this year as Chinese chip makers will, Mr. Fist said...The inability to get essential tools from ASML has been a major chokehold for Chinese chip makers. Since U.S. officials led an effort to lobby the Dutch government to block shipments to China, no Chinese company has been able to buy ASML’s most advanced tools. Instead, Chinese chip makers have recruited engineers with experience using those machines at TSMC, the world’s top chip maker. And now, Chinese start-ups are trying to make their own chip manufacturing equipment... China’s A.I. companies are trying to get the computing power they need by strapping together numerous less powerful chips. Huawei has taken such an approach... The chips Huawei does produce are prone to defects and use more electricity than cutting-edge foreign ones.

4. This is one of the greatest messages from a student to a teacher, Albert Camus to his elementary school teacher Louis Germain after he won the Nobel Prize.

5. Japanification in demographics.

And this impact of smartphones is striking.

6. Soumaya Keynes has a good read on the history of export restrictions and their impact, and why trade wars will endure.

7. Southeast Asian economies struggle on the face of rising inflation from the War.

Their currencies have weakened.

The Philippines and Indonesia have already raised interest rates.

8. Good FT visual story on maritime chokepoints.

This is a good illustration of the extent of damage from the Strait of Hormuz closure.

In a sign of Bab el-Mandeb strait’s strategic importance, Djibouti – whose coastline runs along the waterway – is home to military bases of several major countries, including the US, Italy, France, Japan, and the sole People’s Liberation Army base outside China. The Bab el-Mandeb strait is among several trade chokepoints that, when blocked, require vessels to travel more than 8,000 miles. These also include the Strait of Gibraltar and the Suez and Panama Canals...

The knock-on effects of a blockage can be much more significant where there is no alternative route to fall back on, as with the Strait of Hormuz, the Øresund between Denmark and Sweden, and the Turkish straits, comprising the Dardanelles and the Bosphorus, which act as the gateway between the Black Sea and Mediterranean. With the Hormuz strait, says Jasper Verschuur, co-author of a study into the risks of the world’s 24 narrow straits, “there is no alternative for 80 per cent of the trade”.

This is India's exposure to various maritime routes

9. Sajjid Chinoy writes that India's economic problem is less of a current account and more a capital account problem, arising from the sharp decline in FDI and FPI inflows. In the circumstances, he argues that demand compression can be counterproductive by slowing growth. He suggests a combination of depreciation and augmentation measures for foreign capital inflows.

The objective must be to attract a large-enough quantum of near-term capital inflows across multiple avenues — even if it involves a subsidised swap — to change exporter, importer and investor behaviour, and prevent a destabilising overshooting of the Rupee.

I am not sure how this is at all possible precisely when capital is flowing the other direction.

10. For all talk of private participations and efficiencies, the long-distance railway networks in continental Europe is largely state-owned - Deutsche Bahn (Germany), Ferrovie dello Stato (Italy), Renfe (Spain), SNCF (France), and SBB (Switzerland). The Economist writes about how Italo, the private high-speed rail operator co-founded by Luca Cordero di Montezemolo, is trying to disrupt the German network.

11. Securitisation and deepening of financial intermediation in Europe.

The securitisation market in Europe remains moribund, comprising around 0.3 per cent of GDP compared with 4 per cent in the US.

12. SpaceX's IPO prospectus takes the widest liberties with US securities law.

13. K-shape in US economy.

And now in wage decline

14. Ukraine's drones are inflicting massive damage and casualties on Russia as the country forces its way into its most favourable situation since the war began.

Some intelligence reports indicate that a staggering 1.2mn Russian soldiers have been killed or wounded since February 2022, a casualty figure no major power has suffered in a single conflict since the second world war... Backed by some €90bn in EU loans, Kyiv is pouring resources into domestic arms production in a bid to reduce dependence on western weapons and the political constraints that often accompany them. It has moved at breakneck speed to scale up the manufacture of land, sea and air drones, artillery systems, electronic warfare equipment, and even ballistic and cruise missiles.

15. The consulting industry is threatened by AI.

Few industries are debating AI’s implications more intensely than consulting, whose core work of research, summarising data and producing neatly designed PowerPoint presentations is highly automatable. Richard Susskind, co-author of The Future of the Professions, says consultants are more vulnerable than other mainstream professions in part because the work of junior staff “can now be taken on, with mild supervision, by increasingly capable AI systems”. The sector now has two new competitors, he adds: “the AI-empowered client and disruptive start-ups. Both challenge the conventional model.”... AI also threatens one of professional services’ foundational economic models: billing by time. When a bot can review thousands of contracts in minutes and draft complex documents in seconds, the relationship between hours worked and value delivered begins to break down. Increasingly, clients are demanding pricing linked to outcomes rather than labour inputs.

16.

The missing link in India's FAR market - a trading platform

noreply@blogger.com (Urbanomics) — Tue, 26 May 2026 02:30:11 +0000

I blogged here on nine low-hanging fruits in urban planning in India, and here on the actual use of land value capture instruments in India. This post will discuss the Floor Area Ratio (FAR) and Transferable Development Rights (TDR) transactions in Indian cities.

Fundamentally, FAR, beyond a certain limit that comes with property rights, can be purchased at a defined rate (up to the master plan limit). Further, when land is given up for a public purpose, instead of receiving financial compensation, the landowners can get additional FAR that can be traded (as TDR) and availed in certain predefined locations. Finally, the TDRs can be transacted through an institutionalised platform.

The table below shows the status of FAR and TDR transactions across Indian states.

Clearly, while all states have the requisite policy and legal frameworks in place, the actual implementation (in terms of FAR sold and revenues realised, and TDRs issued and transacted) has been limited, except in Maharashtra, and to some extent in Hyderabad.

Mumbai is the most complete illustration of FAR and TDR. It allows for purchaseable FAR (or premium FSI) of 0.5 to 0.84 over the base FSI, depending on the road width abutting the plot (nothing below a road width of 9 m). It is sold at 35-50% of the Ready Reckoner Rate (RRR), varying for residential, industrial, and commercial uses. The revenues are shared between the Brihanmumbai Municipal Corporation (BMC), the state government, and the State Road Development Corporation (MSRDC). BMC itself has so far earned over Rs 14,000 Cr from premium FSI sales.

TDRs are issued (in the form of a Development Rights Certificate, DRC) by BMC for defined instances where land is surrendered for public purposes at the rate of 2.5X for the island city and 2X for suburbs against the surrendered land. It can be used across the municipal corporation limits (with some specific exclusions) in the range of 0.17 to 0.83, depending on the road width (cannot be used below 9 m roads). The TDR generated is indexed at the RRR, and an equivalent floor space is allotted at the receiving plot. Since April 2026, Mumbai has moved into a fully electronic trading platform for TDRs, and manual record keeping has been dispensed with.

An electronic trading platform is essential for unlocking the full potential of TDRs. It is particularly important since it significantly enhances TDR liquidity, enables efficient market clearing, brings transparency and certitude for landowners, and also prevents fraud and abuse. Mumbai is the only place with a blockchain-secured, workflow-automated e-trading platform that allows for buyer-seller bidding and matching.

A major reason for TDR trading failing to operate across states is the manual and opaque nature of the records and the problems with trading them. It forces cities to impose restrictions like limiting TDR to the same locality or zone, thereby sharply diminishing liquidity and deterring land owners from accepting TDRs. Until a state moves to a properly dematerialised exchange, secondary-market price discovery stays opaque, and TDR rates trade at significant discounts to face value. This is the main reason why so many landowners say, “We want money, not land.”

An illustration of its value comes from the experience of Hyderabad’s TDR Bank, which is currently only a depositary and coordination platform, though integrated with its building approval system. In the absence of a trading platform and the associated transparency and liquidity (and also the misguided unlimited FAR provision), in order to trigger TDR transactions, the state government was forced to come up with a government order (GO Ms No 95, March 2026) to mandate TDR utilisation for high-rise buildings.

All told, even highly urbanised states like Tamil Nadu, Gujarat, AP, Telangana, Karnataka, and Haryana have struggled to realise the potential of TDRs due to thin secondary markets that deter efficient market matching and price discovery.

An electronic TDR trading platform can significantly address these constraints and simplify TDR issuance by bringing complete transparency and allowing its trading across the city, thereby increasing liquidity and raising its attractiveness and credibility for land owners (both sellers/owners and buyers).

How do other countries and cities undertake TDR trading?

The table below captures how TDR trading happens across a few cities/countries.

Brazil's CEPAC is the gold standard for an exchange. It is the only system globally where development rights are explicitly structured as securities. As an aside, this also makes Mumbai’s success especially remarkable. CEPACs are auctioned by the Federal Bank of Brazil and can only be used in designated urban operation areas; they must be authorised by the CVM (the Brazilian equivalent of the U.S. SEC) to be traded on the B3 stock market, and have raised over USD 2.7 billion across 15 years from Faria Lima and Água Espraiada Urban Operations, with funds reinvested in transit, roads and parks. In Rio's Porto Maravilha, all CEPACs were wholesale-auctioned to Caixa Económica Federal, which financed all infrastructure improvement and 20 years of service costs without further public outlay.

In this context, I have a co-authored working paper here, where we propose the establishment of a similar exchange for trading FARs with mechanisms similar to those in Mumbai.

So what should be the design for a trading platform for TDRs?

The wide diversity across states and cities, coupled with the weak state capabilities, necessitates a qualified approach in designing TDR trading platforms for Indian cities. Besides, the TDR is a local commodity, whose trading is inherently local. A three-level design may therefore be prudent.

At the first level, as discussed here, there’s a need for a standardised national protocol layer, authorised by SEBI and MoHUA, and operated through a SEBI-approved entity. This layer could do four things: (a) define a Development Rights Certificate (DRC) standard with a unique national ID and QR code; (b) provide a centralised dematerialised depository with its eKYC, escrow, etc.; (c) set eligibility, disclosure, and dispute-resolution norms; and (d) supervise a national audit trail. This layer would enhance the credibility and efficiency of the platform.

Each municipal authority (BMC, GHMC, BBMP, CMDA, APCRDA, GMDA, DDA) could operate a city-bounded marketplace on the common rails, and trading within a master-planned area only. It could borrow from the Mumbai e-TDR, which has a single nodal bank (SBI) and one blockchain-secured ledger. This would be supported with a municipal TDR bank inside each metro exchange. It could be designed as a public buyer-and-lender of last resort that holds inventory, sets a price floor, and even guarantees loans collateralised by DRCs. This solves the landowner objection of “we want money, not land” by giving every certificate-holder a guaranteed cash exit at a reserve price.

This three-layer structure also matches India’s existing regulatory plumbing in trading platforms. Mutual funds, government securities, and electricity markets are organised with a national legal and depository spine, with state-specific trading layers on top.

The smaller cities in each state could have a pooled market, administered by an appropriate state government entity. Or it may be useful to start with the larger cities, and expansion to be done based on the emerging feedback.

Applying land value capture to public investments

noreply@blogger.com (Urbanomics) — Sun, 24 May 2026 23:30:00 +0000

Donald Shoup, the famous urban planner, posed this great question that goes to the heart of infrastructure finance: “How do you finance a project that has a return much higher than its cost, but nobody wants to pay the upfront cost?”

The answer lies in land value capture (LVC), a topic that I have blogged on numerous occasions (see here and here). Specifically, two instruments, betterment levy on existing developed properties, and impact fee on those which are undergoing development, have the potential to raise significant revenues.

In theory, LVC spans the spectrum from appropriating directly through ownership of a part of the developed land (through the likes of land pooling) and indirectly through one-time and/or recurring charge (betterment levy or impact fees).

The former, the best example is Gujarat’s historical town planning schemes (TPS), is perhaps the most ideal approach, insofar as it cleanly appropriates a share of the land itself (typically 40-60% of the total land). The problem is that it is an engagement-intensive activity requiring both high credibility and state capability, both deficient across state and local governments. The best illustration of this is Andhra Pradesh’s struggling experiment to develop its capital at Amaravati by pooling land through a TPS.

TPS entails that the state takes over the lands, develops infrastructure, and leaves developed plots for the landowners, all this within some defined period of time. The combination of the political economy of real estate and weak state capability creates a time inconsistency problem that erodes the credibility associated with such schemes.

It is also for this reason that, despite numerous efforts over the last three decades, there are still very few instances of genuinely successful slum housing redevelopment schemes in Indian cities. And there are numerous examples of badly delayed and poorly executed such projects.

In the circumstances, the best bet with LVC in the context of countries like India is to collect a share of the incremental value as a charge on some urban planning instrument. It is the instrument with the fewest implementation difficulties.

Consider the numerous ongoing infrastructure projects across the country, ranging from national highways and expressways to metro railway projects, airports and ports, data centres and industrial clusters, and generally any large investment that leads to the development of an area. In all these cases, there’s an immediate spike in property prices, which is almost completely appropriated privately. If some share of the property valuation increase can be appropriated through the LVC instruments, then it can be securitised to fund the projects themselves, at least a significant share of the cost.

Illustrative examples will include the nodes in the Delhi-Mumbai industrial corridor, stations in the Mumbai-Ahmedabad high-speed rail and the Regional Rapid Transit System(RRTS), vicinity of Navi Mumbai Airport, the corridor abutting Bharatmala pariyojana, the vicinity of several new airports like Jewar and Bhogapuram, and so on. None of these has any specific betterment levy or impact fee charged on properties in their influence zones. These are all massive missed opportunities and large revenues foregone.

The formally reported claims of LVC revenues from all these are either in the form of unlocking value through sales or lease of government properties, or, in a few cases, they include the sale of lands acquired through TPS.

In every one of these projects, the intent of capturing land-value gain from the project announcement onwards exists somewhere on paper. In practice, though, the only meaningful capture has come from in-kind land pooling, lease revenue/premia from sale of publicly-owned land, and a few development/impact-fee tweaks. The second one (lease revenue or premiums from sales of public lands) is pure monetisation and should not be confused with LVC.

A true betterment levy or impact fee, in the form of a charge on existing private property in the influence zone, payable from the first transaction after project announcement, has effectively not been deployed at scale in any of these projects. Therefore, the aggregated, publicly disclosed revenue from "pure" LVC instruments (betterment levy + impact fees, excluding land sales/leases/concession fees/toll/UDF) is very small, even negligible, relative to project cost in every case here. The genuine “capture” that has occurred is overwhelmingly through public-land monetisation or in-kind retention of pooled land, where the former leaves the increment on third-party private property untouched.

Perhaps the only true significant examples in India are the impact fees in a corridor of 1 km abutting the Hyderabad Outer Ring Road (ORR) (though its success in terms of realisation is a matter of debate), and the 1% metro cess on property purchases in Mumbai to fund the metro railway project. A promising effort with the Navi Mumbai Airport Notified Area (NAINA) was that of the 50% betterment levy on the increased property value notified in 2013, which was immediately reduced to a notional 0.05% following political opposition.

The political economy is an important consideration. Every such big public investment immediately invites large speculative purchases, especially by politically and bureaucratically connected individuals. They are an important sink for the large volumes of black money that slosh around the local economy. Vast sums are invested in the name of third parties (benamis) who front the local connected and influential. Throwing sand in the wheels of this speculative activity, much less appropriating a part of the windfall increments as public revenues, will be resisted to the hilt by the aggrieved interests.

It is therefore important to be careful while designing the LVC instrument. It should depend on the nature of the infrastructure project. The objective should be to capture the increment in land value that the incumbent land owner enjoys from the public investment by charging the first transaction after the project announcement (which triggers the spike). Ideally, it should also try to avoid penalising the buyer, who has internalised and paid for the land increment. However, if the increment is ongoing, like with a corridor that undergoes continuous development, there’s a case for also capturing the increment flows over time through an appropriate instrument.

It is also important to differentiate between brownfield (betterment levy) and greenfield (impact fees) areas.

Accordingly, the most appropriate betterment levy on existing (developed or brownfield) property owners (who are not likely to transact) comes from a cess on their property taxes. In theory, if the property taxes are indexed to the market value, there would be no need for a separate cess. However, this is never the case since the property prices are generally linked to the guidance or ready reckoner rates fixed by the local authorities, which are always lower than the market value, and the wedge widens after local property booms.

For properties undergoing development, the ideal option would be to charge from those selling the property. However, this is complicated and can be captured, and that too only partially (given the aforesaid wedge between market value and guidance value) from capital gains taxes. Administering this is infeasible (imagine two kinds of capital gains tax for land, where there’s land value increment from public investment and the rest). In the circumstances, for such properties, the options are to levy a charge on either the registration fees, the change of land use fees, the layout development fees or the building permission fees. The assumption would be that the charge shapes market expectations and cascades across the property market and is internalised by everyone in the property transactions chain.

It may be useful to keep in mind some principles while designing the LVC instrument. In theory, it can be charged on the first transaction for a property in the influence zone after the project announcement as a significant windfall fee, or on all transactions for a period (that reflects the time for the project to realise its benefits). A simple and practical strategy would be to impose a one-time cess (on the property value) on the first transaction on the property. A flat levy/fee, while administratively appealing, does not address the diversity in the types of development projects and their widely varying land value impacts.

An analysis of the projects mentioned above points to a few problems, even where some LVC framework exists. For one, the first transaction after the project announcement rule is not legally embedded. Most Indian betterment-levy provisions trigger at project completion (e.g., Section 37 of the DD Act 1957; Section 66 of the Bombay/Gujarat TP Act 1954/1976). By then, the original landowner has typically already transacted, and the increment has been captured privately. This is not only economically inefficient but also invites public discontent and political opposition.

Policy makers create confusion and skirt accountability by conflating land monetisation with value capture, as is the case with CIDCO, YEIDA, or DSIRDA. Alternatively, user-side instruments like User Development Fees (UDF) in airports, and tolls and concession fees on highways, also get lumped as LVC.

As the aforesaid discussion shows, designing an efficient (in terms of capturing value from the incumbent land owner at the time of project announcement) and least distortionary (in terms of not adding unreasonably to property development costs) LVC instrument requires careful thought and design.

As an illustration, I asked Claude to estimate the likely LVC revenues from the development of the newly announced data centre projects in the Visakhapatnam area in Andhra Pradesh, and other investments in the state.

It estimates a realisation of Rs 700-1500 Cr annually from the application of LVC instruments to the Google AI hub catchment, Bhogapuram airport zone, defence clusters, and metro corridors. Even half of this would be greater than the combined property tax revenue collection of all the state’s 117 municipalities.

As an implementation strategy, it may be useful to align incentives and design a revenue-sharing mechanism among all public stakeholders, especially the local government. So, for example, instead of all the LVC revenues from a national highway or other central government project going to the project development entity, a part should be shared with the local government. This creates the required local incentives to enable effective adoption of any LVC scheme.

In terms of policy mandates, it is time to mandate that all large public investment projects be accompanied by the adoption of LVC instruments by the local governments. This would entail the following: (a) notification of a LVC influence zone around the project, (b) notification of the appropriate LVC instrument and the LVC rate, (c) enabling a statutory framework and a physical mechanism for its collection, and (d) a transparent and public accounting of the realisations.

As a first step, all states should be encouraged to adopt an LVC policy, borrowing from MoHUA’s LVC policy. It may be useful for the Government of India to build on this policy and formulate a model document on both betterment levy and impact fees that can be issued as administrative orders by the state governments. To incentivise this, the Ministry of Finance should consider making this a mandatory requirement to access the 50-year interest-free capex loans being given to state governments under the Special Assistance Scheme for Capital Investment (SASCI).

The model documents and guidance on each of the betterment levy and impact fee instrument options may be useful to ensure that LVC instruments are adopted in letter and spirit. The documents should contain the detailed implementation design of the instrument, and the same should be incorporated into the financial closure, state support, and all other agreements associated with the project, and should be institutionally coded into the system along with the project announcement. All project appraisals should have tightly defined and enforceable requirements on LVC.

Finally, the central government's support for any project should be made contingent on the realisation of the LVC proceeds in both letter and spirit. This should become an integral part of the financing culture of all large projects in India. This is one of the very few big bang low-hanging fruits in the mobilisation of public revenues, especially for fiscally strapped urban local bodies.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 23 May 2026 03:38:55 +0000

1. Samsung's spectacular turnaround, from being in the doldrums as late as in 2024.

This month its market value, which has soared by 400% in the past year, hit $1trn for the first time, propelled by furious spending on artificial-intelligence infrastructure. In the first quarter of 2026 its operating profit rose to 57trn won ($38bn), more than eight times as much as a year before. Analysts expect profits to keep rising at a blistering pace, thanks in particular to the seemingly insatiable demand for its advanced memory chips... Semiconductors accounted for 61% of sales and 94% of operating profits in the first quarter. It is one of just three firms capable of making at scale the memory chips needed for ai, alongside SK Hynix, a South Korean rival, and Micron, an American one. The number of memory chips Samsung sold in the first quarter was up by about 20% on the preceding three months, but the average selling price rose by 90%.

2. The Economist argues that the calm in global oil markets despite a supply shock of some 14 mb per day can be traced to the 4 mbpd of increased exports by the US and the 4.5 mbpd of reduction in Chinese imports, coupled with rationing across countries.

3. As the rise of AI threatens white-collar jobs and increases the returns to capital, The Economist proposes some measures to redistribute the gains.

If employment falls, income that once went to workers is likely to show up as high profits in AI firms, chipmakers, data centres or elsewhere in the supply chain. Clever tax reforms, such as levies on corporate profits that are above a normal return on capital, on land and on natural resources, could capture these rents. The case for inheritance taxes to prevent the entrenchment of a capital-owning elite looks even stronger than before. At the same time governments could help workers adjust. Public wage-insurance, which smooths out falls in income after job losses, can help workers find better opportunities (and so can eventually pay for itself). Denmark’s active labour-market policies, in which the state helps people find and train for new occupations, have been proved to cut spells in unemployment...

A last set of radical ideas, such as the partial nationalisation of ai firms. This week a South Korean presidential adviser floated a citizens’ “dividend” from AI businesses, sending the local stockmarket down by 5%, before backtracking. In America politicians murmur about giving citizens shares in AI companies via “Trump accounts”. In economic terms there is little difference between a well-designed tax system and a government stake in the private sector—and countries without AI giants will have to rely on taxes rather than seizing shares in foreign companies. But America may find that some public ownership is the best way to make the social upside from the technology transparent.

4. The changing face of Reliance Industries.

5. America's remarkable productivity growth miracle since the pandemic (it predates the AI boom).

Now with AI coming of age, the productivity spurt is likely to continue.

6. Egypt may well be the leader in land monetisation to promote economic growth in any substantial form. (HT: Adam Tooze)

Since 2015, Egypt has increasingly contributed public land as equity, while foreign investors provide capital, development expertise, and project execution. Once a project is completed, revenues are shared according to pre-agreed division... in 2023, Egypt appointed the bank’s International Finance Corporation as its advisor for the asset monetization program, leveraging its experience supporting emerging markets. While land monetization has been tried elsewhere, Egypt’s projects are among the largest... For the Ras el-Hekma development on the country’s North Coast, Egypt contributed approximately 40,600 acres of state-owned land along the Mediterranean. The UAE (via its ADQ sovereign wealth fund) committed roughly $35 billion, the largest foreign direct investment in Egyptian history. Egypt received immediate foreign currency inflowsfor the land, a 35 percent stake in the project, and long-term profit participation... A similar project, also on the North Coast, is Alam el-Aroum/Samla near Marsa Matrouh. The Qatar Investment Authority-linked Qatari Diar is investing almost $30 billion, which includes a $3.5 billion upfront land payment for some 20 million square meters and $26 billion in development investments. A revenue share for Egypt (15 percent after cost recovery) is part of the deal.

Another arrangement is in place for Egypt’s New Administrative Capital (NAC). About thirty miles east of Cairo, the NAC is designed as the government seat and a commercial hub; reports estimate total development costs of up to $58 billion, including infrastructure and governmental, commercial, and residential districts. Foreign direct investment plays a role in specific sub‑components like the Central Business District (CBD) and future free-trade‑zone ventures. Chinese banks led by the Industrial and Commercial Bank of China provided 85 percent of funding for twenty towers in the CBD. The China State Construction Engineering Corporation developed the CBD; Gulf investors (such as the United Arab Emirates’ DP World) developed commercial parcels. The state monetized land incrementally for the NAC, and parcel sales financed development, without increasing Egypt’s debt.

All this appears very impressive. While the article paints a picture of success, it would be interesting to peel layers and scrutinise this.

7. This is anecdotal, but tells a lot about why India lags in manufacturing.

8. Spain is undertaking an ambitious experiment in immigration.

Since 2022, Spain’s foreign-born population has surged by an annual average of 665,000, the equivalent of adding a city the size of Málaga each year. Last year the country accounted for roughly one-third of the total increase in the EU’s immigrant population, according to the Rockwool Foundation, a Berlin think-tank. Supporters say the influx has given Spain’s ageing society a much-needed burst of economic vigour. Critics call it a poorly planned strategy that is straining the country’s infrastructure and creating new social tensions... In less than a quarter of a century, Spain’s foreign-born population has gone from one in 20 residents to almost one in five, a higher proportion than even the US... Last month the Spanish government’s most contentious immigration move to date took effect — a sweeping amnesty giving at least half a million people the chance to gain residency and work permits and move out of the shadow economy... applicants must prove he was in Spain before January 1 this year and has been there for five consecutive months.

The country is already experiencing an acute housing shortage, has among the highest youth unemployment rates at over 10%, and the anti-immigrant Vox party is running third. The final outcome on the rapid rise in immigration is yet to be known.

9. Ruchir Sharma points to an area where China trails badly behind the US, the negligible role of the renminbi as an international currency.

With a 17 per cent share of global GDP, but only 2 per cent of central bank reserves, China is trailing 30 to 40 years behind previous superpowers at a similar stage of their ascents... Britain at its peak accounted for 40 per cent of trade, but 60 per cent of trade payments were in sterling. China by contrast has a leading 15 per cent share of global trade, but only 2 per cent of trade bills are invoiced in renminbi...

China will remain an incomplete superpower until it can match this financial firepower. For decades, it has kept its financial system more tightly sealed than any other major nation. It now ranks in the bottom fifth of nations by international investment position, which captures the level of foreign ownership in the domestic market. Foreigners own less than 5 per cent of the stocks and bonds in China, one-fifth the level in the US. Its home market is something of a local prison. Beijing has generated economic growth with heavy infusions of government money, corralled at home by capital controls. Its money supply has multiplied sixfold since 1980 to 230 per cent of GDP, among the highest in the world. This liquidity sloshes around inside the walled economy, much of it in the domestic debt market, battered lately by a property bust. Beijing is wary of easing controls, lest it unleash capital flight.

10. The US has been the biggest oil export beneficiary of the Iran war.

11. The booming market for whey protein.

Prices for whey protein isolate have soared fivefold to €28,000 a tonne since 2023, outstripping cheese and butter prices by more than four times as producers struggle to keep pace with a booming protein market... Thirty years ago whey was primarily used in animal feed or spread on farmland as a fertiliser. Whey is the liquid separated from curds during the cheesemaking process. Now, dairy groups upgrade the liquid by filtration to produce whey protein isolate, a valuable ingredient for use in sports supplements as well as groceries such as yoghurt, bread and fizzy drinks, as weight-loss drugs and the protein megatrend propel demand. “This is reshaping the economics of dairy,” said Jose Saiz, analyst at Expana, a commodity market information service. “It used to be a product with no value . . . now cheese could become the byproduct of whey production.”

12. The UK's experience of small altnets driving broadband expansion and lowering prices has come with excesses.

Over the past decade, more than £31bn has been raised to roll out full fibre broadband across the UK, with private equity giants, including Macquarie and KKR, backing upstart challengers — or “altnets” — in the sector. Yet despite the initial investor optimism that the “altnets” could snatch customers away from industry leaders, the firms have been dogged by high build costs, lower-than-expected customer uptake and a sharp response from the country’s largest provider — BT’s Openreach — to deploy its own fibre infrastructure. The destruction of shareholder value has been brutal. At the last count, the “altnets” posted losses of more than £1.5bn in 2024, according to Enders Analysis. After accumulating some £9bn of net debt as of 2025, some companies have already been placed into administration, while others have fallen into the hands of lenders...

Prior to the “altnet boom”, which accelerated from 2021 onwards, only 24 per cent of Britons had access to full fibre internet, according to Ofcom. Fast forward five years, that number is now more than 78 per cent, with altnets serving almost 20mn homes with full fibre, according to Assembly Research. By next year, Ofcom estimates 95 per cent of UK homes will have full fibre, putting it in line with Europe’s leaders, including Spain and Luxembourg, where regulators encouraged full fibre rollout earlier than the UK. The “altnets” have also forced BT’s telecoms infrastructure provider Openreach and Virgin Media O2 to expand their own fibre networks, giving consumers a choice between providers who are now forced to think faster and harder about how to up their game. This added competition has meant prices have fallen, with the average monthly real-terms list price of UK full fibre broadband falling from £62.38 in September 2021 to £43.46 in September 2025, a drop of 30 per cent... altnets are taking close to 1mn [customer] lines from BT annually.

13. Alan Beattie argues that EU has initiatied several trade measures against China, though their implementation has been weak, primarily due to internal opposition within the bloc.

One of the recent instruments with a bit more bite is the Foreign Subsidies Regulation (FSR), launched in 2023 and designed to level the playing field against state-backed Chinese companies bidding for contracts or producing and selling in the EU. It’s notable that it gives a lot of investigatory and decision-making powers to the Commission, specifically to the internal market and competition directorates, which are used to having autonomous powers. By starting investigations into their operations, the FSR has managed to get some Chinese companies to pull out of public procurement bids. But when the EU tries to use its internal market powers to investigate supposedly subsidised Chinese businesses trading in the single market, it becomes clear just how strongly Beijing is willing to resist. Last week, in an investigation dating to 2024 into the Chinese cargo scanner company Nuctech, Beijing cited new supply chain security laws to forbid Chinese companies to comply with requests for information, saying Brussels’ extraterritorial reach was illegitimate.

14. Arvind Subramanian and Devesh Kapur on the contrasting tales of India and China in monetisation of lands by urban local bodies.

China’s land revenues increased from less than 1 per cent of GDP to more than 10 per cent at its peak. In contrast, India’s revenues have stagnated at about 1 per cent of GDP through the entire growth phase. Put differently, the Chinese government’s collections from land revenue for every urban resident that was available for spending were about 15 times more than India’s in 1999; at its peak in 2020, this multiple increased to 225.

15. As AI capex surges, there are growing doubts about whether it will generate the returns required to justify it.

For each of these hyperscalers, I collected the consensus estimates of analysts for the capital expenditures and revenues between 2025 and 2030. In these five years, capital investments are expected to rise by 20 per cent a year, a growth rate never seen before in this industry. Meanwhile, revenues are expected to grow 15 per cent annually. If we make the heroic assumption that there are no costs, then the additional revenue is the profit these companies are expected to make from their additional investments in AI data centres. Yet, even under these extremely optimistic assumptions, I calculate the implied return on investment is highly negative for all of them except Amazon. These numbers show that if the hyperscalers continue on the current trajectory, the AI boom will become a story of one of the largest destructions of shareholder value in history... If the hyperscalers want to generate, say, a 10 per cent return on investment, they would have to find an additional $2tn to $5tn in revenue a year. A tall order for a group of companies that currently generates revenues of just $1.5tn per year.

See this comparison with the technology, media and telecom (TMT) bubbles of the late nineties.

In 2025, US businesses invested almost $1.5tn in IT equipment and software. At the peak of the TMT bubble, it was $466bn or $829bn when adjusted for inflation. Indeed, the US economy is growing solely because of the tech boom. I calculate that over the past four quarters, 93 per cent of US GDP growth was explained by tech investments. Even at the peak of the TMT bubble, it barely reached 60 per cent.

16. Tim Harford points to evidence that retailers jack up prices in response to shocks much faster than they bring prices down, and that retailers make their money not so much during the upcycle than in the downward phase.

Johannes Brinkmann and Nikhil Datta of the University of Warwick recently published an analysis of the impact on petrol and diesel prices of the oil price shock in 2022, following Russia’s onslaught in Ukraine. They found that in the UK, retailer margins compressed: the wholesale price of diesel rose by 39 pence per litre, while retail prices only rose 16 pence. This is the opposite behaviour to that predicted by the greedflation hypothesis. A natural explanation of this price compression is that retailers feel under more intense scrutiny when prices are rising. Brinkmann and Datta show that searches on the petrolprices.com website increased dramatically when prices did — and that areas where such searches were more common were also areas where the price compression was more intense.

Brinkmann and Datta’s analysis is merely the latest in a long tradition of research describing “rocket and feather” pricing at the pump — capturing the idea that pump prices neither faithfully track the ups and downs of the crude oil market, nor exaggerate them — instead, they shoot up like a rocket but drift down again like a feather. What is more, the quick surge upward reaches prices less lofty than one would expect; it is during the slow descent that retailers make their money. Fifteen years ago, Matthew S Lewis and Howard Marvel noted that customers spent more effort searching when prices were rising, even though there was little benefit to that search, since most retailers were charging similar prices. When pump prices were falling, there was more variability from forecourt to forecourt and a higher return to shopping around, but most customers did not bother, feeling content that prices were moving in the right direction.

17. Preference shares are a complicated instrument.

The “preference” investors receive — usually a slightly higher dividend — comes at the expense of voting rights. Preference shares therefore arguably resemble the worst of both worlds of debt and equity. Like bonds, they do not offer any influence over the company’s decision-making. Like ordinary shares, they do not come with a contractual claim to annual payouts as dividends are subject to management discretion. Such non-voting shares have been a prominent feature in corporate Germany. Four of the 40 blue-chips in the Dax have used them to establish substantive two-tier share structures for years: Volkswagen, Porsche and BMW, the three auto giants, and glue and detergent maker Henkel. All are dominated by controlling families who hold a tight grip over the firm.

Two further Dax companies — Merck and Fresenius — are listed as “partnerships limited by shares”, a German legal structure known by its acronym KGaA, that makes some shareholders more equal than others through other means. Deutsche Bank listed its asset management arm DWS as a KGaA in 2018, too, warning at the time that this structure could dent its valuation. Yet the club of German blue-chips with differential voting rights will soon become smaller after BMW shareholders voted to abolish preference shares last week at its annual meeting. The group’s 54.7mn preference shares, representing 10 per cent of BMW’s equity, will soon be swapped into ordinary shares with voting rights... In the US, dual-class share structures have become increasingly popular as fast-growing tech groups want to tap public markets while keeping outsized voting power for insiders. Elon Musk’s SpaceX even wants to grant its CEO 10 times as much voting power as external investors.

Sample this about SpaceX

Elon Musk's special class of shares currently gives him control of 85 per cent of the voting power at SpaceX.

Some thoughts on sustaining high growth rates in India

noreply@blogger.com (Urbanomics) — Thu, 21 May 2026 04:46:07 +0000

The flight of foreign portfolio investors since October 2024, coupled with the declining net FDI, has sparked a debate on what should be done to attract and retain foreign capital to India. This has assumed greater significance given the stagnation in domestic savings at about 30% of GDP.

It is an accounting reality that if the economy has to sustain high growth rates, it must have the capital to support the high investment rates required. Domestic savings must therefore be supplemented with foreign capital. But how much can foreign capital contribute?

A recent op-ed argued that to achieve the Vikasit Bharat 2047 goal, which necessitates a 9% annual growth over the next two decades, India must strive to attract foreign capital in the range of 15% of GDP.

This may be an opportunity to step back and assess the realistic envelope of foreign capital that India can target. As an analytical framing, this would entail examining both the demand and supply sides for the different types of foreign capital available, India’s track record in attracting them, and then making a judgment.

What are good comparators of countries having successfully attracted significant foreign capital? What is the envelope of foreign capital that is looking to invest in markets like India? What’s the level of capital that India can absorb without engendering too many distortions? Based on all these, what is the realistic foreign capital target for India?

India’s net FDI inflows from foreign investors as a % of GDP have shown a continuous decline since 2020.

Taken together, net FPI and FDI as a share of GDP have never exceeded 4%, have been declining since the pandemic, and have been negative over the last two years. (All graphics below generated using ClaudeAI).

The highest FDI share of GDP was 3.6% in 2008, which has been more of an outlier since it has struggled to cross 2% in recent years.

One important thing to keep in mind is that none of the bigger economies have managed to sustain FDI beyond 3% of GDP for long periods. India’s sustained 10-year average has been 1.5% of GDP. Even sustaining it at 2% will be a challenge, leave aside 3% and above.

It is to be noted that the northeast Asian economies did not grow by importing foreign capital. South Korea grew at 8-9% for three decades with sustained FDI of about 0.7% of GDP; Taiwan, with 0.8%; Japan, with 0.2%; China, in its 1990-2010 peak-growth period, averaged ~3%. All four built investment rates of 35-50% of GDP through extraordinarily high domestic savings. The important takeaway is that, for sustained growth in a large economy, foreign capital has historically been a marginal supplement, and high growth has been delivered by domestic savings. Another important factor, which we shall discuss in detail later, has been their high investment efficiency.

Bringing together all types of foreign capital, the graphic below shows a realistic envelope of about 4.2% of GDP. Even this may be bordering on the optimistic, given India’s track record and global economic headwinds.

In fact, reversing the recent trend of declining net FDI and FPI, and reaching even a 2% of GDP target for foreign capital would also be challenging. In the circumstances, a 6.2% to 6.5% target for GDP growth rate on a sustainable basis would be an achievement. Anything beyond that will require substantial breakthroughs.

As a final word on foreign capital, it can be said that if India is to sustain high growth rates, it will surely have to attract foreign capital. But that will remain a marginal contributor. Instead, the heavy lifting will have to come by way of domestic capital, and especially by improving the efficiency of its utilisation. India must significantly increase domestic savings and also improve its capital allocation efficiency.

Since increasing domestic savings is itself a measure of broadbased economic growth and therefore endogenous (a point I have raised on several blog posts), capital allocation efficiency for any given investment rate becomes an important lever for sustaining high economic growth. The Incremental Capital Output Ratio (ICOR) measures the investment required to generate an additional unit of output, with a lower number indicating higher capital allocation efficiency.

India's ICOR has been in the 4 to 5 range since the late nineties, and has never gone below 4 on a sustained five-year period. It briefly fell below 4 during the high-growth phase of mid-2000s. Further, in recent years, it has risen to 5-5.3.

How does this compare with the East Asian economies in their high growth phases?

Each of these countries went through three to four distinct ICOR phases as it transitioned from labour-intensive take-off, through capital deepening, to maturity (or crisis). The lowest ICORs occurred during the take-off phase in Taiwan, Korea and Japan — and during China's pre-2007 reform years. The northeast Asian growth miracles (Korea, Taiwan, and Japan in the 1960s-80s) sustained ICORs of 2.6 to 3.7 through their fastest decades. China repeated the feat in the 1980s and 1990s with ICORs of 3.6-4.1, but its capital efficiency has deteriorated sharply since 2007, with ICOR roughly tripling from 3 to nearly 8. Investment efficiency deteriorated in every country either in the run-up to the 1997 Asian Financial Crisis or, in China's case, after the 2008 global stimulus.

The scatter plot below maps every economy-period in the dataset onto a single chart. The the dashed green diagonals are ICOR isoclines - every point on a given diagonal has the same ICOR. The main finding is important - the Northeast Asian growth miracles operated in a narrow corridor of moderate investment rates and very high efficiency. India operates in a corridor of similar investment rates but lower efficiency. China sits at the extreme right - very high investment rates, with efficiency that was once strong but has badly deteriorated.

India has never matched the East Asian miracle benchmark of ~3, and capital efficiency may well be the single largest constraint on its high growth ambitions. To put this in perspective, at India’s current ICOR of ~5, achieving 8% growth requires a 40% investment rate, well above India’s current ~33%, whereas at ICOR 3.5, the same growth would need only 28%.

In other words, lowering the ICOR by one full point reduces the investment requirement for any growth target by 7-10 percentage points of GDP, a larger lever than raising domestic savings, and far larger than attracting foreign capital. Therefore, the path to faster Indian growth runs through pulling the cluster of Indian dots upward and leftward, i.e., raising growth without raising the investment rate. Unfortunately, it appears to be going in the opposite direction for now.

So what drives lower ICOR?

In simple terms, it is about growth, which comes with lower investment and higher efficiency of capital conversion.

For a start, on the inputs side, services and labour-intensive manufacturing have a lower ICOR than capital-intensive manufacturing and real estate-driven development. Also, higher human resource quality brings greater bang for buck from an incremental unit of investment. On the efficiency side, higher capacity utilisation, expeditious project completion, and factor market reforms - land acquisition, labour mobility, and credit allocation - contribute to lowering ICOR. Finally, institutional quality, involving predictable regulation, contract enforcement, and competitive product markets, all raise the marginal productivity of capital.

These are also the main areas of reform that have been discussed ad infinitum.

An important observation here is that we cannot overlook the reality that while it is essential to move up the value chain to high value manufacturing, it is virtually impossible to generate high growth from it without far higher investment rates. It underscores the criticality of labour intensive sectors like textiles and footwear in the sustainable economic growth of a country, especially a large one like India. This is also underscored by the importance of labour-intensive manufacturing in the high growth periods of the northeast Asian economies.

It is also important to note that China’s ICOR tripled in 15 years (from 3 to 9) as it shifted from labour-intensive manufacturing to capital-intensive infrastructure, property, and state-directed lending. Growth fell from 10% to 5% during the same period, exactly what the ICOR deterioration predicts.

The relevance of capital allocation efficiency also highlights the importance of human resource quality. This is even more so of if the services sector is to increase its role in sustaining high growth rates.

Update on the AI spending boom

noreply@blogger.com (Urbanomics) — Tue, 19 May 2026 03:47:27 +0000

I blogged here on the emerging AI economy. This is an update on the trends in AI spending.

As the hyperscalers - Alphabet, Amazon, Meta, and Microsoft - ramp up their data centre investments to $720 bn in 2026, their age of bountiful cash flows is over. Three of them are expected to have at least a quarter of negative cash flows, and Alphabet will only just scrape above.

At around 40% of their revenues this year, the cloud giants’ capital expenditures will surpass those of the oil industry during the shale boom in the 2010s and the telecoms industry during the dotcom bubble in the 1990s… Nowadays investors judge the success of these firms on the basis of concentrated revenue contracts stretching far into the future, rather than dispersed sales received today. Mostly these contracts involve selling computing capacity to model-makers like OpenAI and Anthropic, which are themselves incinerating vast piles of cash. Total future revenue agreements have risen to $2trn, from $730bn last year, at Amazon, Google, Microsoft and Oracle (Meta is a buyer, rather than a seller, of computing capacity)…
Since the start of last year the big five have raised $260bn from bond markets, a quarter of all such borrowing by listed American non-financial firms… Nearly a third of the haul from selling bonds this year is in currencies other than the dollar… Much larger obligations lurk off-balance-sheet. The biggest are $820bn of future payments to lease data centres yet to be built, up from $270bn a year ago. Commitments to spend money on other things, like packing their data centres with chips, have risen as fast. Amazon, Google, Meta and Oracle now disclose $680bn of such obligations. Other bills are tied to special-purpose vehicles: separate entities with their own balance-sheets. Last year one assembled to build Meta’s new data-centre in Louisiana issued the biggest single corporate bond in history.

This is an interesting summary of the dynamic driving this investment boom

The five firms (hyperscalers plus Oracle) have assumed the role of central planners, attempting to make the complex chain of returns on investment work across the AI economy: data centres are useless if businesses don’t find models worth paying for, which only happens if model-makers can raise enough capital to make them. In the process, the hyperscalers have sacrificed their own returns… Big tech has also liberally lent its creditworthiness across capital markets. Many firms that contract with the giants can take those contracts to the bank (literally) and raise more debt.

There are perhaps three overlapping risks - circular financing, vendor financing, and off-balance-sheet leverage - which are not a set of isolated deals but a single integrated capital structure spanning seven participant types.

Claude generated this comprehensive diagram that captures the linkages across these seven layers.

A chipmaker (and hyperscaler) writes an equity cheque to an AI lab (purple, up the left side), the lab converts it into a purchase commitment back to that same chipmaker and the cloud landlords (orange, down the right side), the commitment becomes backlog that supports the vendors' valuations and their bond issuance (blue), and financiers fund the whole build through SPVs and private credit (amber). Money does not exit the system; it rotates.

Three properties convert a set of bilateral deals into a self-reinforcing system. First, circularity inflates apparent demand - taking equity from vendors and using it to support further borrowing has made the boom dependent on convoluted financial engineering (echoing the 1990s, when telecom-equipment makers like Lucent and Nortel advanced money to customers to buy equipment, only to face write-offs when bankruptcies hit). Second, a single weak node is load-bearing - if OpenAI cannot meet commitments, Oracle’s revenue, CoreWeave’s backlog, Nvidia’s and AMD’s sales, and the SPV lenders’ collateral all reprice together. Third, the risk has been pushed to where it is least visible (into private credit and SPVs) while equity markets have already capitalised the optimistic case. If demand does not materialise, no amount of financing ingenuity can address it, and given the amounts involved it is certain to have very large financial-market and economy-wide impacts, cascading through the balance sheets of corporates, financiers and households.

The risks are concentrated and largely contingent — they crystallise only if AI demand disappoints, but if it does, they crystallise simultaneously across all seven categories because they share the same underlying bet. Everything rests on AI demand growing fast enough to justify >$1tn in lab commitments and ~$725bn in annual hyperscaler capex. If the revenue curve stays ahead of the cost curve, the circularity is just efficient capital allocation. If it doesn't, the same circularity becomes the risk transmission mechanism.

All this circularity is also generating its set of accounting distortions. Robin Wigglesworth points to the curious spike in the “other income” line of the hyperscaler's quarterly account statements, attributable to the changes in valuations of their investments in AI companies.

Alphabet, for example, booked $37.7bn of “other income” in just the first three months of the year, accounting for over half the company’s net income over the period. Amazon reported “other income” of nearly $16bn in the first quarter, up from $2.7bn in the same period last year. That was nearly half its overall net income for the three months. Microsoft reported “only” $942mn of other income in the first three months of the year, but this line item has now made $7.2bn over the past nine months… what constitutes “other income” in this case: the ebb and (mostly) flow in the valuations of their sizeable private investments in companies like OpenAI and Anthropic…
Not only have private investments and increasingly engorged funding rounds become a meaningful driver of the hyperscalers’ aggregate earnings, but the money the hyperscalers have pumped into the likes of Anthropic and OpenAI has allowed the AI companies to sign huge computing deals with Alphabet’s Google Cloud, Microsoft’s Azure and Amazon Web Services… OpenAI and Anthropic now make up about half of the entire cloud computing order books at Oracle, Alphabet, Amazon and Microsoft.

A vendor invests equity in its own customer; the customer uses that equity to pre-commit purchases from the vendor; the vendor books the purchase commitment as backlog; the backlog supports the vendor’s own valuation and borrowing.

Even though AI expenditures are building the plumbing for the next-generation economy, something is unsettling about the scale and pace of spending. More worrying is the concentration and circularity of the transactions. Is AI spending going to be the mother of all circular trade bubbles?

The limits to reform as an accounting of activities

noreply@blogger.com (Urbanomics) — Mon, 18 May 2026 02:08:41 +0000

This post will urge a note of caution on the trend of treating reform as a purely transactional accounting exercise instead of one which also requires the creation and internalisation of an account about the reform. I’ll borrow Lant Pritchett’s framework of distinguishing between accounting and account-based accountability.

Consider two common examples that we encounter in our daily lives.

Gym memberships are among the commonest new year resolutions. The problem is that the initial enthusiasm ebbs quickly, and in just a couple of months, two-thirds of the enthusiasts drop out. People resolve the anxiety of being unfit by performing the procedure of “joining a gym”, without internalising the discipline that makes a gym useful. The goal of a healthy body was replaced by its most visible symbol.

Fire drills in office complexes are a periodic rite. People walk to the stairs, treating it either as a mild annoyance or a welcome break from work, and return after a few minutes. The drill is logged, and the compliance box is ticked. But ask anyone a few days later on where the nearest fire exit is, or what they should do if the corridor is smoke-filled, and few would have any idea. They went through the drill without internalising it, but merely as part of a record entry exercise and not to form a prepared mind.

Much the same applies to many public policy reforms. Take examples like Ease of Doing Business, deregulation, independent certification and accreditation, and formalisation of the economy, to name just a few.

EoDB is reduced to a set of tick-the-box automation or rule liberalisation, without imbuing the spirit of making it easy for firms to conduct their business. Deregulation is reduced to a process of procedural actions, without administrators actually imbuing the spirit of what constitutes good regulation (or deregulation). Third-party certification is similarly reduced to the form of compliance with a checklist of items, without regard for the realisation of the desired outcomes. Formalisation of the economy is pursued as a relentless effort to bring all economic transactions under the ambit of existing laws, never mind that it adds layers of costs that make the activity itself unviable.

In each case, there are perverse outcomes. In EoDB, the procedural requirements are met without leaving businesses significantly better off in dealing with government bureaucracies. A spring cleaning of existing restrictive regulations does little to prevent the accumulation of new restrictive regulations. Third-party certifications lead to isomorphic mimicry, a form of compliance without its substance. And formality shrinks economic activity or drives it further underground.

In all these cases, the bureaucracy reduces such reforms into a logistical exercise without regard to the human engagement aspects (internalisation of the spirit of the reform, or the account) and their impact on implementation quality. The important point is that a fairly complex issue gets reduced to a procedural/legal fix without the agents involved appreciating the spirit of why they are doing these fixes. There’s an accounting of the reform, without an internalisation of the account behind the reform.

These distortions are more likely when these reforms are implemented on a mission-mode approach within tight timelines. The bureaucracies have no option but to commoditise the reform and its implementation. The instrumental nature of the design and implementation of the reform, coupled with the forced pursuit of targets and over-optimistic timelines, shrinks the space for internalisation of the account.

Now, I am not suggesting that countries should stop pursuing the approaches they are following on these reforms. Nationwide implementations of such reforms invariably demand some form of commoditisation. But, focus on the accounting of the reform should not crowd out the need for internalisation of the account. Accordingly, the commoditised implementation should be complemented with measures to sensitise and instil the account of the reform among officials and stakeholders. This sensitisation should start at the top and should cascade downwards. The space and time required for this purpose must be made available.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 16 May 2026 05:04:25 +0000

1. German bread facts of the week.

Germany has what may be the most diverse bread culture in the world. The official bread registry overseen by Germany’s national bread institute (yes, really) lists more than 3,000 types. Specialities include pumpernickel, Dreikornbrot (three-grain bread) and Kürbiskernbrot (pumpkin-seed bread). There are specific regional iterations of rolls: Brötchen in the north, Semmeln in the south. In German the word “bread” is partially interchangeable with “meal”—a working lunch is Pausenbrot (break-time bread), dinner is Abendbrot (evening bread). Bavarians, who always do things differently, add Brotzeit (bread time).

2. The number of Indians studying abroad has tripled in five years to 1.8 million in 2025.

3. Visakhapatnam's data centre ambitions are staggering in scale.

Andhra Pradesh has promised Google, Meta, Reliance, Tata Consultancy Services, and half a dozen others a combined 5 GW of data-centre capacity in Vizag alone. That is more than three times everything India has built in 30 years, in a city that had near-zero data-centre infrastructure six months ago... (the government) has committed to 6 GW across Andhra Pradesh in five years, a cable network twice the size of Mumbai’s, and three undersea cable-landing stations—essentially building a digital future on the eastern coast... The state’s own electricity planning documents project Vizag’s peak district demand at 2.2 GW by 2029. Google alone has applied for 2.1 GW from the local distribution company...

Google is building a 1 GW campus across three sites: Tarluvada, Adavivaram, and the Rambilli-Atchutapuram cluster. Meta and information-and-communications-technology company Sify are reportedly building a 500 MW facility at Paradesipalem, a village 25km from the city. Reliance and alternative asset manager Brookfield’s joint venture has signed a $11 billion MoU for another GW. TCS, Adaniconnex and real-estate developer Anant Raj round out the cluster. Even if the announced 5 GW materialises, Vizag would rank among the largest data-centre clusters in the world. Northern Virginia, the global leader, sits at 6.6 GW. Beijing, London, Tokyo, Singapore—all around 2 GW each. Mumbai, India’s current data-centre capital, has around 600 MW of operational capacity.

The emerging constraint to these ambitions is power supply.

Deloitte has warned that data centres in Andhra Pradesh alone could add 2–3 GW of peak electricity demand by 2030—up to 20% of the state’s entire current peak load—risking grid instability if transmission infrastructure doesn’t keep up... The Andhra government’s Data Centre Policy 4.0 (the “4.0” a chosen suffix for most of the current TDP government’s industrial policies) offers electricity duty waivers for five years and a Re 1 per unit discount on industrial electricity tariffs for 15 years... state has committed over Rs 22,000 crore in incentives to Google alone... Vizag’s data-centre sites are on the eastern coast, far from the state’s renewable-energy generation zones in the south and west. “You would need entirely new, dedicated high-voltage transmission infrastructure. Not an upgrade to existing lines, but new corridors built from scratch,” said a former APIIC official. “In India, this typically takes years to tender and build. And I don’t see them speeding up the process for these mega projects.”

And the solution is to outsource electricity generation or sourcing to the data centre developers themselves.

In a first for the state, it has granted a private entity, Google, a distribution company licence, allowing it to bypass the standard grid entirely and procure power directly from generators. Reliance is going further still, building its own 6 GW solar project to supply its data-centre operations... when Google contracts directly with generators at premium rates, those generators have less power to sell to the state discom at regulated prices. The discom, which still has the same demand to meet, has to make up the shortfall by either paying more on the open market (which it then recovers through higher tariffs) or simply cutting supply to consumers who have no alternative. If enough large consumers exit the grid, the discom’s revenue base shrinks while its fixed costs stay the same. Eventually, the grid gets more expensive for everyone who remains on it... The data centres planned in Vizag will operate on a hybrid model—hyperscalers will anchor the demand, local operators will build and run the physical infrastructure. Google is the end user. Adaniconnex builds the campus and co-invests in the power infrastructure. Airtel builds the cable-landing station and fibre backhaul.

4. The rise and rise of Chinese cars.

The market share of foreign firms in China has almost halved in five years, to around 30% in 2025. Moreover, in 2023 China passed Japan to become the world’s largest exporter of cars. In 2025 over 8m of its vehicles went abroad, nearly a third more than the year before. In Europe over the past five years, Chinese brands have gone from almost nowhere to nearly 9% of all sales, estimates Schmidt Automotive Research, a consultancy. Incumbents are also under siege in markets from Mexico and Brazil to Indonesia and Malaysia.

5. China promulgates its version of US CFIUS.

In recent weeks the State Council, or China’s cabinet, has issued two menacing decrees. One threatens trade curbs in response to actions that undermine Chinese supply chains (potentially including shifting orders to foreign factories). The other vows countermeasures against firms that apply foreign sanctions against Chinese companies, which in effect criminalises compliance with American law.

6. If the US sanctions individuals, they will be denied access to the services offered by among others, Amazon, Alphabet, Meta, Microsoft, Visa, Mastercard, Paypal, Apple, Slack, WhatsApp, Zoom, YouTube, Uber, Instagram, UPS, Fedex, Booking.com, and Expedia. FT writes about the scenario of US extending sanctions to services.

Weaponising services would mark a clear escalation from trade disputes over goods and have huge repercussions for both sides. For decades, Europe’s economic relationship with the US has been defined by deep integration: goods flowing westward across the Atlantic, services coming back the other way. The EU’s surplus for goods in 2023 was €156.6bn; the EU’s deficit for services that same year was €108.6bn. As geopolitical tensions rise, that interdependence is seen by many EU capitals as a weakness that needs to be fortified as fast as possible.

7. A New York Fed study finds that around 90% of the Trump tariffs have been borne by US consumers and companies.

Further, the complexity of the tariff regimes and its multitude of carve-outs means that the effective rate is lower than the headline tariff.

8. Global economic imbalances are back. Two graphics capture them starkly. The first is how China and the US represent the two sides of the problem.

Global public sector indebtedness is at historic highs.

This is a good description of the way out, though it is unlikely to happen on its own.

As a first-best response, the Centre for Economic Policy Research’s fourth Paris Report recommends fiscal consolidation in the US, boosting household consumption in China and an increase in productive investment — modelled on former Italian premier Mario Draghi’s report — in Europe. These measures would encourage more balanced patterns of global saving and investment.

9. A ten-fold increase in export restrictions since the pandemic.

According to Global Trade Alert, the number of distortive export restrictions and bans has increased dramatically since the pandemic. Before Covid, an average of 22 export restrictions were being introduced a year. Since 2020, that average has shot up to 228.

The myth of ring-fenced "private" markets

noreply@blogger.com (Urbanomics) — Thu, 14 May 2026 02:23:18 +0000

One of the biggest enduring myths in the financial markets is the distinction between public and private markets, and the article of faith that private markets should be lightly regulated. The time may have come to question this article of faith.

The issue has become a topic of interest in light of the turbulence being faced in the private credit markets, and also the steps in the US and elsewhere to allow public funds to invest in alternative assets. It is also important, given the growing share of private capital markets, amplified as it is by the secular decline in interest rates (in turn a consequence of several factors, including ageing populations, financial market integration, and globalisation).

On the former (private credit markets), the FSB has just published a report on private credit, pointing to several vulnerabilities arising from complex interlinkages with banks, borrower credit quality concerns, and valuation opacity.

This activity has grown rapidly, to an estimated $1.5-2.0 trillion in assets at end-2024 and is heavily concentrated in a few jurisdictions… Banks and private credit funds are connected through financing arrangements and strategic partnerships. Across FSB members, the available data captures direct exposures of around $220 billion of drawn and undrawn bank credit lines to private credit funds, while some commercial estimates range from $270-$500 billion… there are also potential vulnerabilities from a range of other indirect exposures including through banks providing revolving credit facilities to companies that are simultaneously borrowing from private credit funds and the growing use of synthetic risk transfers.

The former Bank of England Governor, Andrew Bailey, writes,

Private credit has significant interlinkages with banks, asset managers, insurers and private equity. These multiple layers of leverage across the ecosystem deserve deeper scrutiny. While direct bank exposure to private credit funds may be limited, indirect connections are extensive. Banks are establishing partnerships with asset managers that have a credit focus and often provide revolving credit facilities to companies simultaneously borrowing from private credit funds. Insurers actively invest in private credit markets while also establishing indirect connections to private credit through participation in reinsurance arrangements. Private equity managers increasingly own the insurance companies. These interlinkages can be difficult to detect, assess and manage — and so can the related risks.

On the latter (public financial institutions’ exposure to private markets), in August 2025, President Trump signed an executive order directing regulatory agencies to reexamine existing regulations and open the $9 trillion US retirement market to cryptocurrency, private equity, and other assets like property. Following this, on March 30, 2026, the US Department of Labour issued orders allowing 401(k) plans easier access to alternative assets.

So why are private capital markets lightly regulated?

The standard response is that they are targeted at sophisticated, institutional investors who are presumed to have the ability to conduct their own due diligence and bear the risks, including high illiquidity. To this extent, it is argued, they do not pose the kind of negative public externalities and systemic risk that is associated with institutions that are public-facing (which take deposits, savings, premiums, etc., from retail investors). Any losers are those well-heeled investors who have the ability to absorb their losses.

Is it really the case? What does the evidence inform us?

The reality is, as the following figures and statistics show, that retail investors are increasingly participants, both directly and indirectly, in the private capital markets. Here is a simple illustration of the channels of exposure of public-facing financial institutions to the private capital markets.

What makes this arrangement questionable is that the people at the top of the chain, the actual end-bearers of the investment risk, are not the ones doing the investing. Whatever counts as "sophistication" sits with the agents in the middle layer, not the principals at either end. However, the costs and consequences are borne primarily by the capital providers.

The table below is a summary of the various institutional investors, their respective linkages to the private capital market, and their systemic risk channel.

The table below is a summary of these investors and the extent of their exposures to private capital markets.

The sheer volume of private funds is staggering. Between 2020 and 2023, assets in private funds grew by 34%, from $20.8 trillion to nearly $28 trillion. This is only slightly less than the just under $31 trillion in assets held by public investment vehicles (mutual funds, ETFs, and closed-end funds). In 2024, 87% of companies with revenue greater than $100 million are private, and private funds have approximately tripled in size in the last decade to $26 trillion in gross assets, comparable to the $23 trillion US commercial banking industry. But their capital comes overwhelmingly from public institutions.

US public pension plans have allocated 34% of their holdings into alternative assets, including private equity, hedge funds, real estate, and commodities. The channel runs directly from workers’ retirement savings into PE buyouts of companies, hospitals, and infrastructure, with liquidity terms that have no resemblance to the pension’s own annual payout obligations. Similarly, the assets of private equity-influenced insurers have grown significantly in recent years, with these entities owning significantly more exposure to less-liquid investments than other insurers. By 2024, financial and ABS private placements reached 8% of assets for PE-owned insurers, while they were only 4% for non-PE-owned insurers. Apollo’s Athene, KKR’s Global Atlantic, and Blackstone’s insurance partnerships route annuity premiums, the most conservative class of retail savings, into direct lending.

The numbers alone make it abundantly clear that private capital cannot be a ring-fenced ecosystem of alternative assets with little public externalities. Private markets have become too big to be ring-fenced. Given the linkages discussed above, any stress in the private capital markets will immediately cascade across to public stakeholders and the markets as a whole.

It is now the hidden layer of the public financial system. Its debts appear in pension statements, its managers appear in index funds, its loans back annuities, and its performance propagates through bank balance sheets and university budgets. The “private” part is increasingly a regulatory and disclosure category, not an economic one.

There’s also the political economy that perpetuates the fiction around a ring-fenced private market. For one, private market intermediaries and investors benefit from favourable taxation regimes like carried interest and a lower capital gains taxation rate. There’s also the trend of diminishing public markets and expanding private markets, with its implications on access and equity, given the entry barriers for retail investors to access private markets.

Both these dynamics threaten to create two distinct financial systems, with one serving retail investors and the other serving those well-off. Worse still, while the latter can access the former and benefit from it without bearing the proportionate costs, the former must bear disproportionate costs and consequences of excesses arising from the activities of the latter.

The time has come to view private markets as no longer confined to sophisticated high-net-worth and institutional investors, but ones with deep interconnections with the public financial markets, and therefore demanding greater oversight and regulation. The matter for debate should only be the extent of regulation.

Unfortunately, such a regulation as a preemptive process is unlikely given the political economy dynamics. However, it is only one big crisis away from such regulation. This painful learning pathway may be unavoidable and the only route to private market regulation.

Industrial policy is back, but the implementation challenge remains

noreply@blogger.com (Urbanomics) — Mon, 11 May 2026 03:19:00 +0000

The return of industrial policy to the top of the global development agenda has been formalised with a new World Bank report on the topic. The summary is here. I blogged earlier on this here.

Notwithstanding the standout success of the East Asian economies in using industrial policy to drive economic growth, for long the WB and others had sought to minimise its role and explain it away by pointing to their unique circumstances. Specifically, their high educational attainment, high savings rate, low inequality, and the capability of the governments to implement such policies. At best, they were targeted to address specific problems in the functioning of markets. These conditions, it was said, did not exist in other countries.

The report admits that industrial policy is now more replicable. It points to increased capabilities due to higher education levels, political support for delivering development objectives, and greater global trade integration. On their own, none of these is compelling enough for a re-examination. It is most likely that the widespread adoption of industrial policy by developed countries in response to Chinese competition is behind this change of mind within the Bank.

Two comments in this context. It would have been more appropriate for the WB to acknowledge that its assessment was incorrect and to revise its views. Two, given their own market dominance in manufacturing, it was in the interests of developed countries to then oppose industrial policy in developing countries. Now that China has assumed dominance, it has reverted to the same set of policies that allowed it to become dominant in the first place.

The WB report defines industrial policy as “the range of policy tools that governments use to shape what an economy produces rather than leave it to the discretion of markets alone”. It says that upper-middle-income countries now spend a record 4.2% of GDP on business subsidies. Low-income countries target growth of 13 industries on average, more than twice that in high-income countries.

It identifies 15 industrial policy tools and categorises them, as in the table below.

It analyses the minimum requirements for their adoption. The cells marked large indicate the tool needs a large fiscal space, market size, or government bandwidth, and vice versa for those marked small.

In general, when government capacity is small, local market size is small, and fiscal space is also small (as in the case of most low-income economies still), industrial parks constitute the best industrial policy tool. When all three of those advantages are large (as in the case of the world’s biggest economies), then import tariffs, innovation subsidies, local content requirements, and many other policy tools can be effective... These countries enjoy the widest range of opportunities to experiment with industrial policy for development… this report finds that low-income economies—usually characterized by small market size—tend to be the heaviest users of import tariffs, which require a large market size to be effective. Upper-middle-income countries, for their part, go big on business subsidies.

The report has the latest glowing impact assessment on one of South Korea’s industrial policy decisions, 33 years later.

They found that the impact of the government’s big push for heavy and chemical industry (in the 1970s) caused the economy’s GDP to be 3 percent larger each year in the long run. This benefit far exceeds the economic cost of the government’s “large subsidies,” estimated by the World Bank’s 1993 report at 2.4 percent of GDP in only one year.

While all 15 policy tools are well known, the report provides a very broad but widely-known framework for understanding and applying industrial policy, and has a good compilation of case studies. Beyond this, I’m not sure how relevant or useful the report is for policymakers and implementers struggling to make decisions on their industrial policy.

The framework presented in the report can perhaps be reduced to three different instruments of industrial policy - regulatory restrictions (restrict access to foreign firms/investors/imports), regulatory enablers (preferential treatment to domestic firms/investors), and fiscal support (tax concessions, input subsidies, capex incentives).

In theory, mandates (regulatory tools) appear simpler than subsidies since they seek to directly target the required change. For example, domestic content or technology transfer mandates or commodity export bans (Indonesia’s ban on nickel and now bauxite exports) are easier to adopt compared to subsidies for production, innovation, consumption, or exports. But mandates create the risk of suboptimal outcomes - poor quality, capture by vested interests, constraints on production (e.g., due to limited supply), poor uptake, etc. Compliance with the mandates becomes even more of a challenge when the manufacturing supply chain is so utterly dominated by China.

An underlying assumption behind advisorial policy prescriptions by entities like the World Bank, consulting firms, or research experts is that they are actionable and can be readily applied by practitioners without much effort and existing capabilities. This assumption is most often incorrect.

Assuming the objective (say, building local manufacturing capabilities) and the target industry (say, electronics devices), a practitioner who is preparing a proposal for financial appraisal and subsequent approval by the competent authority generally struggles with the following five questions.

1. What combination of instruments is adequate to achieve the objective?

2. What should be the degree or extent of incentivisation or regulation? Specifically, how much is just about enough to trigger the market response? More likely, is the proposed measure sufficient to trigger the supply response?

3. What should be the implementation design of the chosen policy tool (especially relevant for tools like skill development, market access assistance, innovation subsidies, R&D tax credits, etc.)?

4. How to know that the industrial policy is having its expected impact, and what revisions and course corrections are required?

5. What are the likely distortions from these interventions, including abuses during implementation, and how can they be mitigated?

The policymaker or implementer must make choices in constrained conditions - information, time, resources (financial and physical), acceptance, and capabilities.

For one, there is the absence of good data to assess, prioritise, and make choices. Second, the theories of change are complicated, especially given the multiple confounding factors. Third, the problem-solving required to figure out the combination of choices is often a challenging exercise that does not get done well. Fourth, given fiscal constraints, the sponsoring departments often end up being forced to compromise substantively on the unit rates for any fiscal support (like the percentage of concession or extent of subsidy). The fiscal support ends up being below the threshold and fails to generate the market response. Fifth, there are the deficient state capabilities that weaken effective implementation. Sixth, there’s no way to know whether the policy combination is meeting the intended objectives, beyond some headline numbers which are often deceptive and misleading. And so on.

To illustrate the points made above, the table below captures the uncertain elements. The tools and frameworks outlined in the WB report cannot be of much help in resolving the uncertainties and making decisions. The details of these elements matter, and are generally the difference between success and failure. Getting these details right is hard.

In this context, there may be some useful principles for resolving the aforementioned uncertainties and formulating an industrial policy that is likely to succeed.

In responding to a policy problem, it is advisable to start with a combination of instruments that are identified and prioritised using internal institutional judgment (and this is the way it happens in practice). But there should be rigorous monitoring systems that use administrative data (and targeted rigorous surveys, as required) to generate feedback on performance and impact, mainly to assess the directionality and order of magnitude of impact. Almost always, it is the absence or inadequacy of the latter that is a far bigger problem than the rigour of the choice and design of the former (combination of instruments). Surprisingly, the report overlooks this aspect completely.

It is typically the case that the extent of subsidy depends on the fiscal envelope available and/or the priority accorded to the objective or target industry by the government. If the primary objective is a national priority, then compromising on the unit rates (or the extent of subsidy) should be strictly avoided. The same risk is there with mandates - how much restriction is sufficient? The feedback loop mentioned above is critical for getting the details of both subsidies and mandates right.

Once the higher-level choices are made, it is essential to avoid constraining implementation with onerous eligibility, access, documentation, compliance, and general procedural requirements that are typically put in place to eliminate abuse and fraud. There should be less invasive and onerous mechanisms to achieve the objective of abuse elimination. Further, the system should condone some level of slack or abuse, like false positives (Type I errors).

Most importantly, competition is critical to ensure that industrial policy is not captured by vested interests. Just as the performers should be rewarded, the non-performers should be progressively excluded. As Joe Studwell has written, export competition was critical to the success of the Northeast Asian economies. Other arrangements/metrics of competition are therefore critical for the success of industrial policy. It shapes the overall expectations and aligns incentives for the policy to play out for the long-term.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 09 May 2026 04:47:00 +0000

1. China may be turning to its traditional industrial policy playbook to reduce its current import dependence and achieve self-sufficiency in food, especially animal protein, thereby upending global supply chains.

Adam Tooze writes, pointing to analysis by the research group Systemiq.

This involves a combination of investment and innovation. Beijing is coordinating central and provincial government, state-owned enterprises and financial institutions around smart agriculture. It has licensed the commercialisation of genetically modified maize and soya. Research clusters are forming around neoproteins, fermentation-derived ingredients, feed additives and agricultural biotechnology. State banks are on hand to provide cheap finance. To channel demand, Beijing is tightening food and feed standards and tweaking procurement requirements. This is the kind of whole-system policy that has given China a commanding lead in the new energy sectors. With all the levers in play, we may, by as early as 2030, see a significant fall in soyabean demand, slashing imports from the US dramatically. By 2040, innovation and efficiency gains could plausibly turn China into a net exporter of poultry, dairy, eggs, fish and seafood. If agriculture follows the industrial policy timeline, by 2050 we should expect to see China emerging as a major source of “cultivated meat”.

2. Indonesia's President Prabowo Subianto has signed a presidential regulation cutting the percentage that ride-hailing platforms like Grab and GoTo can take from each order to a maximum on 8%, down from the current 20%.

3. The latest on the dominance of the Magnificent Seven (US stocks make up 65% of global stock market capitalisation, up from 40% in 2010).

This is an important data point.

Bloomberg data suggests that almost 80 per cent of the S&P 500 companies that reported first-quarter results this month beat analyst earnings estimates.

4. Chinese ports facts of the week.

Chinese firms now operate or have a financial stake in at least 129 ports outside China (see map), and have spent at least $80bn on port construction from Antigua to Tanzania, with many of the investments tied to bilateral trade and regional shipping agreements. More than a third of China’s overseas ports are near maritime chokepoints, including the Strait of Malacca, the Strait of Hormuz and the Suez Canal, making them indispensable operators in strategic areas. China’s firm grip on global ports has rattled Western governments. MERICS, a think-tank in Berlin, found that after a terminal operating contract is signed, total trade with China rises by more than a fifth, while countries that allow Chinese firms to run all their terminals at one of their ports see a 19% drop in exports to the rest of the world. Operating ports allowed Chinese firms to prioritise their cargo and vessels and speed up customs and logistics...

China’s reach extends beyond physical infrastructure. LOGINK, a Chinese government-run logistics-management software, is used in at least 24 countries and 86 ports (America banned its use in 2023). LOGINK shares data with CargoSmart, another shipping-management software firm owned by COSCO, another Chinese state-owned firm, and in turn gives it access to the whereabouts of 90% of the world’s container ships. It also has a tie-up with CaiNiao, a logistics provider with hundreds of warehouses around the world... Chinese firms are also building industrial parks and manufacturing facilities close to their existing ports in Africa and Europe.

5. Good FT article on how data centres construction is triggering local backlash as residents fear for their water and electricity.

Around two-fifths of all US data centres are located in areas of high water stress, according to S&P Global... In DeKalb, a city of around 40,000 people, water demand averages just over 3mn gallons a day, rising to in excess of 4.5mn gallons at peak. The latter figure is broadly comparable to the needs of a single large AI data centre.

Data centres have already emerged as a significant driver of economic expansion in the US, accounting for 80 per cent of private sector growth in the first half of 2025, according to S&P Global... Researchers at the Lawrence Berkeley Laboratory forecast that so-called hyperscaler data centres will consume anywhere between 60bn and 124bn litres (16bn and 33bn gallons) of water on-site each year in 2028. This figure excludes the indirect water use tied to electricity generation, which the lab previously forecast could be as much as 12 times higher than direct consumption...

Of the roughly 100GW of additional electricity capacity that the US is projected to need at peak times by 2030, roughly half will be used by data centres, according to the Department of Energy... On average, American bill payers — including residential, commercial and industrial customers — paid over 6 per cent more for electricity year on year at the end of 2025. This increase was starkly higher in the mid-Atlantic states which house a large number of data centres such as Pennsylvania and Virginia, where bills rose by 19 and 10 per cent respectively.

6. Indian equities suffer from a high valuation gap with EM peers.

In recent weeks, a string of global brokerages – including Goldman Sachs, Nomura, HSBC, UBS, and JPMorgan – have downgraded Indian equities in their emerging market portfolios. The concerns converge around a common theme: Deteriorating macro conditions amid rising energy prices, weakening earnings visibility and, crucially, more attractive opportunities in other EMs... The relative valuation gap still stands at around 65 per cent—well above South Korea, Brazil, China, Mexico and South Africa. “South Korea is expected to deliver about 180 per cent earnings growth at around 7x P/E. Taiwan offers about 35 per cent growth at 18x. China delivers about 14 per cent at 11x. India, by contrast, offers 8–14 per cent growth but trades at ~19x,” said Amish Shah, head of India Research, BofA Securities. From a global allocator’s perspective, India remains expensive.

The weight of Indian equities in the MSCI EM index has continued to fall since March 2025, from 18.5% to 12.58% in March 2026.

7. India's trade deficit with China continues to grow.

On April 8, Xu Feihong, Chinese ambassador to India, posted on X: “Glad to know that China has become India’s largest trading partner in FY2026 — for the 11th straight month.” This was great news for China but not for India. The $151.1 billion trade between the two comprised $131.63 billion of exports from China to India and a meagre $19.47 billion of imports from India. It was a one-way street. China was flooding Indian markets even as it became India’s “largest trading partner”...

India must import electronics and electrical equipment ($40 billion-50 billion), machinery ($27 billion), organic chemicals ($12 billion-13 billion), plastics, steel, medical equipment, and so on from China every year. These are critical products without which the Indian economy would not be able to function. Alternative sources exist for some, but at a much steeper price. Moreover, China has diversified its supply sources, so even if not directly from it, Chinese goods would still reach India through Southeast Asian and other manufacturing bases.

8. One explanation with oil markets are still not rising as much as expected.

In 1973, the year of the first oil price shock, I calculate from industry sources that about 80 per cent of one barrel of oil was consumed per $1,000 of global GDP in 2025 prices — 131 litres, to be precise. In 1980, the year after the Iranian revolution, this was down to 116 litres. Last year, it was 52 litres. The current level is still a lot, but the average oil burden is 60 per cent less than 50 years ago. If so much less oil is needed, real prices should have much more room to escalate before they cause the economic damage associated with previous disruptions. A simple illustration of today’s diminished oil cost burden to the global economy is to adjust the nominal price of oil not only for inflation but also for the efficiency improvements. If one does, a hypothetical price of $115 per barrel today compares with an average price of $339 in 1980 in today’s dollars. By this measure, prices have plenty of runway before the oil burden resembles 1980.

But it must be balanced against other factors pulling in the opposite direction.

Oil consumption today is more concentrated in high-value uses and in areas where there is no substitute, like road or air freight and maritime shipping. These are load-bearing economic activities, less price sensitive than discretionary or consumption-oriented drivers of growth. Once disrupted they are likely to cascade through the economy... Oil concentrated in high-value uses is a little bit like rare earths, tiny compared with the size of GDP but essential for much of it. If the size of a supply disruption requires demand to come down and prices surge to the required level, the response will be sudden with a potentially unforeseen and disproportionate impact on economic activity.

9. Jakarta's success with mass transit appears exemplary.

In 2014, Jakarta was crowned the world’s most congested city by the Stop-Start Index and a year later was ranked far below other Asian cities on livability by the Economist Intelligence Unit. Ten years later, Jakarta has the world’s largest and one of the most used bus rapid transit (BRT) systems. The old, crowded diesel commuter trains, famous for allowing passengers to ride on the roofs, are now electrified, air conditioned, and run on regular schedules linking the suburbs to the city center. There are multiple subway and light rail lines crisscrossing the city. The transformation has been remarkable: in 2015, less than 20% of residents were within walking distance of transit. Now, nearly 90% of the city has access to BRT or trains...

The user experience has also been streamlined. All of the new MRT lines are part of an integrated digital fare system. A journey from one end of Jakarta to another is capped at 10,000 rupiah (about 70 US cents). According to WRI Indonesia, as of 2024, 10 percent of trips in Greater Jakarta are now made by public transit, compared to just 2 percent in 2015... While the JICA loans covered the cost of building the MRTS and training local staff, the full cost of operation has now fallen to the city government. So far, this has worked reasonably well, with Jokowi arguing that the cost of running the system — at about 800m billion rupiah (US$50 million) a year — is justified by the estimated 65 trillion rupiah (US$3.5 billion) in annual economic losses due to traffic.

However, much more remains to be done.

The city has recently overtaken Tokyo as the world’s largest city, with a metro population of over 41 million people, and it is still growing rapidly. It is projected to add another 10 million people in the next 25 years. To serve this population, Greater Jakarta has only six train lines and under 250 miles (400 km) of track. Tokyo, by contrast, has an astounding 158 train lines and 2,930 miles (4,715 kilometers) of track connecting 2,210 stations throughout its massive metro area.

10. Foreign portfolio investors sharply cut exposure to Indian software firms.

Foreign Institutional Investors’ (FIIs) allocation to the Indian technology sector stood at an all-time low of 7.3% at the end of March compared to 10.1% at the end of FY25, according to brokerage Motilal Oswal Financial Services... So far in 2026, FIIs have sold $21.6 billion of Indian equities – more than the $18.9 billion they sold in all of 2025 – of which $2.4 billion worth of net sales have been of Indian IT stocks (until April 15). As a result, FII holdings in the IT sector reduced to $41.4 billion from $59.8 billion at the end of 2025.

11. TIDCO stake in Titan Company.

This state government-owned industrial promotion agency, TIDCO, has a 27.88% stake in Titan Company Ltd. That’s more than the combined 25.02% share of the Tata Group through its holding company and various subsidiaries. It makes TIDCO the main promoter of Titan, which was established in 1984 as a joint venture for manufacturing quartz analog watches at Hosur on the Tamil Nadu-Karnataka border. That company — originally Titan Watches Ltd — has today grown to a premier lifestyle accessories maker with a product portfolio spanning watches and wearables (Titan, Fastrack and Sonata brands), jewellery (Tanishq and CaratLane), eyecare, women’s bags (IRTH) and ethnic wear (Taneira sarees and tops). Titan Company earned a net profit after tax of Rs 3,337 crore on a total income of Rs 60,942 crore during the year ended March 31, 2025... at the share’s closing traded price on May 6... TIDCO’s 27.88% holding in Titan will alone be valued at Rs 1,07,873 crore... if TIDCO were to sell its entire stake in Titan Company, the Tamil Nadu government would be able to mobilise upwards of Rs 1 lakh crore and bring down its outstanding debt by roughly a tenth. The annual savings in interest outgo resulting from it will far exceed the Rs 272 crore that TIDCO received as dividend for 2024-25 from its 27.88% shareholding in Titan Company.

12. Ruchir Sharma makes some very important points about the critical role being played by retail investors in the US equity markets. Some numbers.

The share of US households that own stocks has surged this decade to nearly 60 per cent, the highest proportion in any country. Americans are all in on the market, holding more wealth in stocks than in their homes for the first time. And retail is now the most active class of traders as well. Retail’s share of daily trading in US stocks doubled in the past 15 years to 36 per cent, surpassing that of big banks or hedge funds, and making them the market price-setters. Last year US retail trading topped $5tn, exceeding the pandemic high, only this time Americans weren’t stuck at home or flush with savings.

He points to contributors to the rise of retail investors.

Three forces are encouraging small investors’ deep faith in the stock market: stimulus, bailouts and technology. Record sums of money pouring out of government and central banks, intended to lift the fortunes of the real economy, have instead been used by households (particularly the richer ones) to invest in the stock market. With policymakers rushing to rescue the economy at the slightest hint of trouble, investors have come to believe the government will always bail them out. And low-cost, mobile trading platforms have given everyone easy access to investments of all kinds.

Finally, a very important political economy dynamic arises from this trend.

The larger the retail community gets, the more pressure builds on politicians to support the market. What was said of Wall Street banks after the crisis of 2008 can now be said of the stock market as a whole: it’s “too big to fail”.

13. The rise and rise of stock market concentration in the US.

Analysts at UBS said that a measure of how many stocks were materially contributing to the index’s performance — so-called “effective constituents” — hit a record low of 42 last week, far below the level of about 100 that has been typical in recent decades.

14. Nice interactive story of how oil from the Gulf reaches Japan, gets refined, and is distributed.

15. The $725 bn capex spending projected by the Big Tech (Amazon, Alphabet, Microsoft and Meta) is estimated to leave them with their lowest free cash flow since 2014.

16. Fascinating 5km split of Sebastian Sawe's sub-two-hour marathon.

Some low hanging fuits in urban planning

noreply@blogger.com (Urbanomics) — Wed, 06 May 2026 02:18:00 +0000

I have blogged on multiple occasions, highlighting the importance of instruments of urban planning in shaping the form of urban development, urban renewal, economic growth, and resource mobilisation.

This post will point to nine urban planning levers that are low-hanging fruits whose implementation can go a long way in creating the conditions for sustainable urban development.

1. Higher FAR (without restrictive conditions) - The objective should be to incentivise more built-up area on a plot of land, especially in built-up cities. Today, a reform involving an increase in FAR is often gated by minimum plot size and minimum road width requirements, which prevent most plots from qualifying. The reform should focus on relaxing these conditions, to the extent possible, so that more plots can be built vertically, easing housing supply and using land more efficiently. A proposal in this regard is here.

2. TDR for land foregone and a trading platform - When a landowner gives up land for public use (road, green belt, community facility, etc.), pay them not in cash but in a Transferable Development Rights (TDR) Certificate, which can be used elsewhere to build extra. This avoids land acquisition disputes, eliminates fiscal expenditures for the government, and gets roads and amenities built faster. This should be facilitated with a simple online exchange (like a stock market for TDRs) where buyers and sellers find each other transparently and in a regulated market. For each city, the numbers and values of TDRs allocated should be monitored.

3. TDR for affordable housing / urban renewal - Use the same TDR mechanism to incentivise specific outcomes, such as affordable housing units, slum redevelopment, and heritage preservation. The critical requirement here is to be generous with the provision of the TDR to incentivise the outcome. The TDRs would be issued and transacted on a platform. The number and value of such TDRs allocated should be monitored.

4. Purchaseable FAR and a digital transacting platform - Treat the basic FAR (say, 1.5) as a property right of the landowner, but make the remainder of the master-plan FAR (say, up to 3.5) available for purchase from the city. This generates substantial revenue for ULBs, gives developers a clear, predictable path to higher density, and removes the discretion-driven approvals that breed corruption. The purchasable FAR can, in turn, be sold at a lower rate to encourage certain outcomes, as with TDRs for affordable housing or urban renewal. The number and value of FAR purchases should be monitored.

5. Transit-oriented development (TOD) - Allow significantly higher FAR within walking distance (typically 500m) of metro and RRTS stations. The result would be that people living and working close to transit drive less, congestion eases, and the public investment in transit gets repaid in higher tax revenue and ridership. This should be made a mandatory requirement before sanctioning of any mass transit project. The number of stations and the extent of area covered, and the incremental FAR claimed, should be monitored.

6. Mixed-use on/beside metro stations - Build offices, shops, and homes directly above or right next to metro stations, and not several minutes' walk away in the sun. This is how Hong Kong, Tokyo, and Singapore work. In India, DDA's Karkardooma (1,800 flats) is the lone meaningful example. Every other metro/RRTS station is a missed opportunity. The numbers and descriptions of such developments should be captured and disseminated widely for emulation.

7. Land Value Capture (LVC) - When public infrastructure (a metro line, an expressway, a flyover) raises nearby land values, capture some of that uplift through a betterment levy or impact fee, and use it to repay the infrastructure investment. Hyderabad ORR is the Indian benchmark. Today, most of the value uplift goes to private landowners. Mandate the incorporation of the LVC framework of the MoHUA in the Development Control Regulations of all cities. The city-wise numbers of LVC tools in place and the amount of revenues collected should be monitored.

8. Business Improvement District (BID) / Tax Increment Financing (TIF) - Both are forms of LVC. In the case of BID, the businesses in a defined commercial area collectively agree to pay an extra small levy that is ring-fenced for upgrading and maintaining their own area - cleaning, lighting, security, beautification, etc. In the case of TIF, the future tax growth from a regenerated area is earmarked upfront to finance the regeneration itself. Both require enabling state legislation, and neither exists in India yet. The number of such BID/TIF, their area extents, and their respective annual realisations should be monitored.

9. Town Planning Scheme (TPS) - It is a land readjustment mechanism used for planning urban development by pooling adjacent land parcels, developing the consolidated area with infrastructure like roads, parks, and utilities, and returning a portion (usually half) of the developed, serviced land to the original owners. This is used extensively in Gujarat. Its adoption should be encouraged in the initial stages with incentives for the development using TPS. The numbers, landowners involved, and extents of land should be monitored.

While many states in India will claim to have issued rules adopting these, very few have implemented them in any meaningful manner to generate outcomes. Some have not been implemented at all in any city. The details matter for their effective implementation (or non-implementation). It is for this reason that the outcome metrics outlined above for each of these reforms should be monitored closely. This would force attention to the constraints that prevent their effective adoption.

None of these is likely to bear significant outcomes immediately. But they are the plumbing for sustainable urban development and address intractable problems like affordable housing, traffic congestion, and municipal revenue augmentation. There’s a strong case for central and state governments to mandate or incentivise the effective implementation of these reforms.

The problem of managing Chinese FDI to prevent another dependency

noreply@blogger.com (Urbanomics) — Mon, 04 May 2026 04:13:00 +0000

While most of the attention has been focused on addressing the flood of Chinese manufacturing imports, another issue that is rapidly emerging as a matter of concern is the rising Chinese FDI globally. The investment problem is rapidly emerging as an important issue, just as the trade issue. It is also an opportunity to ensure that opening up to Chinese FDI does not end up creating another dependency like that which has happened with Chinese imports.

The investment dimension assumes great importance given the rising wall of trade barriers that restrict access to imports from China. In many countries, this includes rising measures to trace and restrict trade re-routing through third countries to avoid barriers. Further, China’s near-complete dominance in industrial metals and many other manufacturing inputs, in addition to manufactured products, means that dependence on Chinese firms is unavoidable for the foreseeable future.

China’s sheer scale of production, especially its ability to supply metals and inputs at prices lower than almost anyone else, has pushed other producers and countries to the margins. This creates a real dilemma: if you try to restrict or control these imports, downstream industries struggle to survive due to higher costs; but if you don’t, dependence only deepens, and domestic capability erodes further. It’s a classic Catch-22, with no easy way out.

Complicating matters is the increasing strategic dimension of China’s manufacturing dominance. The former US Secretary of State Jake Sullivan has recently written that China is pursuing a theory of power that “places production, scale, and control of critical inputs at the centre of its national strategy”.

Chinese leaders are seeking to make the rest of the world dependent on China while making China independent from everyone else. And they have assessed that to achieve this, China does not need to lead in every frontier domain. Instead, it needs to control nodes of leverage—that is, the inputs and systems that advanced economies and militaries depend on to function. Beijing has already captured several of these nodes, including processed rare earths, precursor ingredients for pharmaceuticals, and batteries, and it is striving to capture others, such as robotics.

On the investment side, China is now a major outward investor globally. The graphic below shows that even as its inbound FDI has dived, China’s outbound FDI has surged.

Debashis Basu provides some interesting numbers.

With a cumulative overseas investment stock of $3 trillion-3.5 trillion and annual outflows in the range of $160 billion-190 billion, China is a major FDI player across every region. Asia absorbs close to 70 per cent of China’s outward investment stock — roughly $2 trillion-2.2 trillion — largely into Southeast Asia, where Chinese firms have transplanted entire manufacturing ecosystems, particularly in electronics, textiles, electric vehicles, and intermediate goods. Latin America is the second major destination, with a cumulative Chinese investment estimated at $300 billion-500 billion. Europe, while smaller in share, has still absorbed between $100 billion and $200 billion. Africa, though accounting for a smaller share — perhaps $50 billion–100 billion — occupies a strategic position. West Asia, meanwhile, has attracted multi-billion-dollar annual investment in energy, petrochemicals, and, increasingly, renewables.

While the US under President Trump has gone the way of imposing strict restrictions, others, including the EU, have been grappling with wooing Chinese FDI, but with conditions. In fact, the EU has emerged as Ground Zero on this issue. Electric Vehicles and battery manufacturing are the most high-profile examples.

Complicating matters is a collective action problem. While the EU as a whole commits to striving for reducing supply chain dependencies, individual members have an interest in benefiting from Chinese FDI and allowing their countries to be used as the source for exporting to the EU common market area. This has played into China’s hands, as it has pushed low-value-added assembly into these countries. Viktor Orban’s Hungary and Pedro Sanchez’s Spain have been the two Trojan horses for Chinese FDI into the EU.

Another example is the UK’s decision to allow China’s Lomon Billions (LB) Group, the world’s largest producer of titanium dioxide (TDO), to buy a bankrupt TDO plant in Teesside owned by Venator Materials UK for $70 million. The Teesside plant went into administration last October with the loss of 270 jobs after more than 50 years making TDO, an industrial whitening agent used in paints and plastics as well as strategic defence and green energy supply chains. TDO is also an input to make titanium metal, a key component in the defence industry.

The deal has faced strong criticism from European and US TDO producers who fear that the LB Group will use the plant as a source to flood the European markets with cheap TDO and drive out its manufacturers. As an illustration, the LB Group produced titanium dioxide at $1,500 a tonne in China, including subsidies, nearly half the estimated $2,800 a tonne cost to produce in the UK.

The scenario posed by critics is real since TDO is a good illustration of how cheap Chinese exports have destroyed manufacturing capacities globally.

LB Group produced titanium dioxide at $1,500 a tonne in China, including subsidies, nearly half the estimated $2,800 a tonne cost to produce in the UK... China became a net exporter of titanium dioxide after 2010, with exports rising from just 48,000 tonnes that year to more than 1.7mn tonnes in 2025, creating a global glut of excess production that coincided with a wave of factory closures outside China. Over those 15 years, factories with a combined capacity of nearly 1.3mn tonnes were shut down in Asia, Europe and the US, according to data compiled by industry analyst Reg Adams, who has tracked titanium dioxide markets since 1993. Chinese capacity hit 5.7mn tonnes at the end 2025.

In fact, the LB Group has made explicit its market strategy.

“By establishing new factories overseas, the company can directly connect with end-markets for production and sales, radiate out to surrounding markets . . . and circumvent high anti-dumping duties.”

The challenge then is to manage Chinese FDI in a manner that it does not end up replacing one dependence with another, Chinese imports with Chinese firms. Instead, the objective should be to use Chinese FDI to build domestic capabilities and reduce reliance on China’s supply chain.

This is going to be easier said than done. Chinese investments are unlikely to come cheaply.

Since President Xi Jinping has already made it clear that China sees supply chain dependence as a strategic security lever (or “weaponised”), Chinese firms will obviously resist and stonewall efforts to use interdependence them to reduce supply chain dependence. In the circumstances, this is going to be a game of cat and mouse where the best that can be expected is a long drawn series of extractions and concessions. China’s FDI hosts should strive for two steps forward and one step backwards.

So what are the strategies being pursued by countries to attract Chinese FDI?

The most comprehensive action plan has been outlined by the EU. The EU’s recently announced Industrial Accelerator Act (IAA) aims at increasing European manufacturing competitiveness and reducing supply-chain dependencies, and includes provisions to exercise control over foreign investment. Member states can veto any FDI exceeding €100mn in strategic sectors if the investor is from a country with more than 40 per cent of global manufacturing capacity.

Further, these FDI projects must fill at least half of their jobs with EU workers and satisfy three of five other conditions. The five conditions are a 49% limit on foreign ownership or voting share, a joint venture structure of the investment with EU partners, licensing of IP and technology to the EU target or asset, incur R&D expenditure of at least 1% of gross annual revenue within the EU, and source at least 30% of inputs from the EU.

An FT article nicely sums up the backdrop for the announcement of IAA.

The law is seen as the EU’s answer to decades of practices in China requiring foreign companies to invest alongside joint-venture partners and transfer their technology to local manufacturers. As Chinese manufacturers have acquired technology and been able to make higher-value products, rivals in Europe complain that they can no longer compete.

China has predictably reacted strongly to the new law and threatened countermeasures. This response is delightfully ironic in coming from a country that did the same for nearly three decades in its journey to establish manufacturing dominance. China’s commerce ministry put out a statement

…runs counter to basic market economy principles such as commercial voluntariness and fair competition… the act violated a range of WTO principles and international agreements governing intellectual property rights and subsidies… It will drag down the EU’s green transition process, damage fair competition in the EU market and bring new shocks to multilateral trade rules… (the EU should delete) “discriminatory requirements against foreign investors, local content requirements, mandatory transfer of intellectual property rights and technology requirements, public procurement restrictive policies, and other content.

There’s a deep irony in these measures coming from Europe, and they also represent the wheel turning the full circle. In their early years of industrialisation, the US and Europe pursued infant industry protection policies to build domestic manufacturing capabilities. Once they became dominant, they embraced the principles of free trade and forced developing countries to lower tariffs and open up their markets. Now, having given up their manufacturing dominance to China, the same countries are back to pursuing protectionist policies to safeguard their industries from Chinese competition.

Another example of Chinese investments that should be watched with interest is that made in Indonesia’s nickel processing and refining, and now being made in the same country’s alumina processing and aluminium manufacturing.

In 2014, Indonesia banned the export of raw Nickel, with a total ban from 2020, thereby encouraging Chinese companies, led by the steel giant Tsingshan Holding Group, to set up processing plants across the country. The transformation since has been remarkable for a country that, a decade ago, was not even a major nickel producer.

Although Indonesia held the world’s largest reserves… most of it was low-grade nickel that it had not yet figured out how to process efficiently… Before 2014, most of Indonesia’s nickel ore was sold to nickel and steel manufacturing plants in China… Huge investments came from Chinese steel, nickel and battery manufacturers, including Tsingshan, CATL and Lygend, who partnered with Indonesian mining companies to set up processing facilities. Chinese stakeholders control over 75 per cent of Indonesia’s refining capacity, according to a recent report by C4ADS, a Washington-based security non profit. Not only did the companies bring capital, they also brought the knowledge to process Indonesia’s low-grade nickel reserves quickly and profitably… The Chinese had made advancements in rotary kiln electric furnaces, which turns nickel ore into raw material for steel. They had also mastered the high-pressure acid leach technology, a refining process that converts low grade nickel ore to battery-grade — a procedure that western companies had struggled with for years…
Indonesia has gained control of the market and cemented itself as the epicentre of global nickel production for years to come. Last year, Indonesia accounted for 61 per cent of the global refined nickel supply up from just 6 per cent in 2015… Its market share is expected to grow to 74 per cent by 2028. This means Indonesia now controls more of the world’s supply of nickel than Opec did of oil at the cartel’s peak in the 1970s — then around half of global crude oil output.
And it has achieved this position of market dominance just at the moment when new customers are desperately trying to secure reliable supplies. Not only are carmakers like Tesla, Ford and Volkswagen racing to source the metal for lithium-ion batteries, nickel is also widely used in smartphones and other electronics — as well as being a vital ingredient in stainless steel… Surging production in Indonesia has wiped out competition from companies such as Australian mining group BHP and dramatically reshaped the global supply chain. By flooding the market and driving down prices, the Sino-Indonesian partnership has made it much harder for rivals to produce the metal economically elsewhere in the world.

Similarly, in 2023, Indonesia banned the export of bauxite, the mineral used to make Aluminium, forcing companies to establish domestic refining (bauxite to alumina) and smelting (alumina to aluminium) facilities. Chinese processors, already facing restrictions on capacity expansion in China, moved to Indonesia to invest in the high-margin industry. A combination of Chinese production caps, sanctions on Russian smelters, closures in Africa and Australia due to rising energy costs, and now the damage to facilities in the Gulf has squeezed supply and is driving up prices. This, in turn, could accelerate Indonesia’s smelters build out, especially by the Chinese companies. The country produced 5.9mn tonnes of alumina last year, up from 3.3mn in 2022.

The Indonesian experiment with Nickel and Aluminium export bans and forced domestic processing, primarily with Chinese investments, is a test case for leveraging Chinese companies and their technologies. The extent of localisation and domestic value addition, and technology transfer and spill-overs that have happened in these two industries is not known. Clearly, given the strategic nature of these metals and the attendant leverage, the Indonesians may have missed a trick by not insisting on joint ventures with domestic firms.

Infrastructure is sometimes considered another destination for Chinese FDI. However, as I have blogged here, China is unlikely to undertake FDI in infrastructure. Instead, its primary channel for funding infrastructure is through loans to governments, as has been institutionalised through the Belt and Road Initiative (BRI). This channel is filled with pitfalls and problems that are well documented.

Even equity investments in infrastructure come with strategic risks. An illustration of this is that in ports.

Chinese firms now operate or have a financial stake in at least 129 ports outside China, and have spent at least $80bn on port construction from Antigua to Tanzania, with many of the investments tied to bilateral trade and regional shipping agreements. More than a third of China’s overseas ports are near maritime chokepoints, including the Strait of Malacca, the Strait of Hormuz and the Suez Canal, making them indispensable operators in strategic areas. China’s firm grip on global ports has rattled Western governments. MERICS, a think-tank in Berlin, found that after a terminal operating contract is signed, total trade with China rises by more than a fifth, while countries that allow Chinese firms to run all their terminals at one of their ports see a 19% drop in exports to the rest of the world. Operating ports allowed Chinese firms to prioritise their cargo and vessels and speed up customs and logistics...

China’s reach extends beyond physical infrastructure. LOGINK, a Chinese government-run logistics-management software, is used in at least 24 countries and 86 ports (America banned its use in 2023). LOGINK shares data with CargoSmart, another shipping-management software firm owned by COSCO, another Chinese state-owned firm, and in turn gives it access to the whereabouts of 90% of the world’s container ships. It also has a tie-up with CaiNiao, a logistics provider with hundreds of warehouses around the world... Chinese firms are also building industrial parks and manufacturing facilities close to their existing ports in Africa and Europe.

So what does all this mean for India?

Debashis Basu again provides these numbers on FDI from China.

Chinese FDI in India amounts to a trivial $2.51 billion, or 0.32 per cent of India’s cumulative equity inflows, since 2000. Even if one broadens the definition to include venture-capital investment and indirect flows routed through third countries, the total rises only to $15 billion-20 billion.

The Economic Survey 2023-24 also proposed that India should seek to attract Chinese FDI to benefit from the ‘China plus one’ strategy embraced by foreign multinationals seeking to diversify away from that country.

The challenge, like with all things in public policy, is about how to do it. For a start, it might be useful to study the EU’s IAA. It is important to prepare a multi-track strategy that places different conditions for sectors depending on their importance and the extent of Chinese dominance. I had blogged here outlining some mitigation strategies for India as it grapples with chokepoints in trade.

It must be a conscious strategy of attracting Chinese investors with some broad requirements and then gradually tightening the conditions to first increase domestic value addition and then gradually technology transfer to domestic suppliers. This will be a game of hardball, and India must be prepared to play it with China.

It has had opportunities to pursue this strategy earlier. In 2020, one analysis reported that 16 out of India’s then 29 unicorns had Chinese investors, with them being lead investors in eight. Tencent and Alibaba were the largest investors. As relations soured, these investors were forced out or left.

Basu’s description of how China itself courted foreign investment is appealing in theory, but very hard to execute for several reasons, especially given the current circumstances of countries having to deal with China.

Beginning in the 1990s and accelerating through the 2000s, China actively courted FDI and technology, particularly from Japan, the United States, and Europe, in a period known as “reform and opening up” (gaige kaifang). China did not see foreign capital as a threat; it saw it as an instrument of transformation if the state retained strategic control over direction. Multinationals were often required to form joint ventures, localise production, and, in many cases, transfer technology — the phrase “bring it in” (yin jin lai) capturing this mindset. To take full advantage of this, special economic zones provided infrastructure, policy stability, and export incentives, enabling China to integrate into global manufacturing networks and develop deep supplier ecosystems, skilled labour pools, and process expertise. China used this phase to absorb technology, build domestic champions, and gradually move up the value chain, eventually becoming both an exporter and an investor in the next phase — “go out” (zou chu qu).

I’m not sure that Chinese manufacturing firms will come in with low minority stakes just because of the Indian market size. Historically, it has not happened, even in much larger and more attractive markets like the US and Europe. And Chinese FDI has generally steered clear of India.

This strategy will require high institutional capabilities that track emerging FDI trends and global developments, and dynamically shape and steer India’s FDI policy, especially with respect to China (or countries with land borders). This will have to be quite a different approach from that which has generally been followed by India.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 02 May 2026 05:38:00 +0000

1. China's beggar-thy-neighbour trade policy, titanium dioxide edition.

LB Group produced titanium dioxide at $1,500 a tonne in China, including subsidies, nearly half the estimated $2,800 a tonne cost to produce in the UK... China became a net exporter of titanium dioxide after 2010, with exports rising from just 48,000 tonnes that year to more than 1.7mn tonnes in 2025, creating a global glut of excess production that coincided with a wave of factory closures outside China. Over that 15-year period, factories with a combined capacity of nearly 1.3mn tonnes were shut down in Asia, Europe and the US, according to data compiled by industry analyst Reg Adams, who has tracked titanium dioxide markets since 1993. Chinese capacity hit 5.7mn tonnes at the end 2025.

2. John Burn-Murdoch points to the aspiration gap among today's youth, or the gap between their actual incomes and their expectations.

Even though today’s young adults, and graduates in particular, are over-represented in the top quartile of the earnings distribution, they are also far more likely to be at the bottom than the top for earnings relative to reasonable expectations. In both the UK and US, even though only 10 percent of graduates are in the lowest earnings quartile, one in three is in the bottom bracket for earnings relative to expectations.

The average thirty-something university graduate in the UK today sits at the same rank of the earnings ladder as the average high school graduate did in 1995 and the average high school graduate today sits at the same rank as someone who never completed school in 1995.

Are today’s twenty- and thirty-somethings earning more than their parents did at the same age? Yes. But their relative position in society is lower than their parents’ was, and their position relative to their peers and expectations is significantly lower. Since it’s the latter that drives satisfaction, young adult malaise should come as no surprise.

3. The US AI spending estimates pale in comparison to the money spent on railways in the late nineteenth century.

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.

4. McKinsey Global Institute have identified 18 future arenas of growth.

Their performance over the 2022-25 period validates their prioritisation.

They added about $18 trillion in market capitalisation in the last three years.

5. The 2 hour mark in a marathon is broken as Sebastian Sawe of Kenya wins the London marathon.

Both Sawe and Assefa were wearing Adizero Pro Evo 3 shoes, which were only unveiled a few days before the race. Known as “supershoes”, such ultralight, high-tech trainers cost hundreds of dollars a pair, but are worn only once in competition races by elite runners. Since the release of the Nike Vaporfly, the first supershoe, in 2017, the number of men and women breaking new time barriers has risen sharply. Based on a UK size 8.5, the new shoes worn on Sunday by Sawe and Assefa weigh just 97 grams, according to Adidas, making them 30 per cent lighter than the German sportswear company’s previous design. They also cost $500 a pair.

Also this.

6. Power subsidy facts of the week.

7. Ajay Shah points to an important opportunity in the Gulf as the post-war reconstruction starts.

The region of the Persian Gulf will have capital expenditure for massive construction and engineering projects, expanding to perhaps $150 billion annually. Simultaneously, the geopolitical environment dictates investment in military capability. Procuring new defence systems to protect against drone and missile attacks will require approximately $100 billion annually. We may then envision this combination of engineering and defence procurement as a new pathway for demand of $250 billion a year into the global economy from the GCC... A lot of the projects in West Asia will be done by global firms, using Indian workers. Remittances from Indian workers will do well. Renewables, drones and missiles, oil and gas engineering: These three areas are important in export markets. The domestic environment in these areas is relatively subdued. Indian firms will do well by trying to obtain revenues from the coming engineering boom in the West Asia, and from the global boom in renewables and defence.

8. So far Apple has ploughed back its massive cash surpluses to buyback more than 40% of its outstanding shares!

This is an important moat for Apple (its profit after tax is set to touch $125 bn this year!).

Around 40 per cent of Apple’s profits now come from services, led by App Store commissions and Apple’s cut of the revenue Google makes on its gadgets. This makes it look less like an innovative tech leader and more like a powerful gatekeeper able to extract tolls from those who want to reach the estimated 1.5bn people with iPhones... Apple’s shares are still close to their all-time highs, reflecting the market’s generally sanguine view that it doesn’t need to join the ruinously expensive AI race that is consuming much of the tech world. Instead it can just sit back and take a cut from distributing the AI services of others to its massive user base.

9. Xiaomi is trying to compete with Tesla et al in the European premium brand market.

Just two years after building its first car, China’s largest smartphone maker has already delivered 650,000 electric vehicles — on par with the number of Tesla vehicles sold last year in the world’s largest automotive market. Xiaomi founder Lei Jun, who has earned comparisons with Steve Jobs, now aims to take on Elon Musk’s company in Europe with its premium EVs known for their breakneck acceleration and advanced features... Since Lei announced his plan to build a car in 2021, Xiaomi stunned the global car industry with the launch of its first model — the Speed Ultra 7 sports sedan — just three years later... After the SU7 became one of China’s best-selling cars, its second model, the $35,000 YU7 that rivals Tesla’s Model Y with designs resembling Ferrari’s Purosangue model, received 200,000 pre-orders in just three minutes at last year’s launch...

Xiaomi established an EV research and development centre in Munich last year, hiring more than 75 engineers. Many Chinese brands have rapidly expanded into Europe with prices roughly double those in China, yet they remain affordable due to advanced software... At its only EV factory in China, Xiaomi has deployed its own manufacturing methods and materials to bring down production costs while strengthening the durability of its vehicles. The plant, which produces a car every 76 seconds, has a 91 per cent automation rate with hundreds of robotic arms to assemble the cars while “autonomous mobile robots” carry car parts around the factory.

10. Announced Vs actual Trump tariffs.

11. EV prices are falling and ranges are rising.

Prices for lithium-ion batteries, the primary type used for E.V.s, have fallen to around $100 per kilowatt-hour in 2025, from $1,000 in the early 2010s, according to BloombergNEF. Battery density has gone up too. As battery costs fell and manufacturers built more E.V.s, ranges rose and prices fell. Tesla’s cheapest Model 3 climbed to a range of 321 miles this year, up from 220 when it was launched in the late 2010s, while its inflation-adjusted price decreased. Or consider the Leaf, which debuted 15 years ago. By 2016, the cheapest Leaf had 84 miles of range and cost around $30,000, the equivalent of $40,000 today. Nissan’s $32,000 2026 Leaf has a range of more than 300 miles.

12. Facts about German rearmament.

After loosening its constitutional debt brake last year to unlock virtually unlimited spending on the sector, Berlin intends to allocate €779bn to defence between 2026 and 2030 — more than double the previous five years. By the end of the decade — more than five years ahead of the 2035 target date — the country would surpass Nato’s goal of spending 3.5 per cent of GDP on the military, with an annual budget reaching almost €190bn.

13. The Strait Hormuz is one of the biggest global trade chokepoints.

The loss of oil supply is the highest in history.

And it has impacted the prices of several commodities.

14. Microsoft, Meta, Alphabet and Amazon are set to invest $700 bn this year on AI infrastructure.

15. Nice illustration of the conflict of interest problem that bedevils health care.

A graphical summary of chokepoints in global trade

noreply@blogger.com (Urbanomics) — Fri, 01 May 2026 00:00:00 +0000

After China’s rare earth minerals export restrictions and Iran’s blockade of the Strait of Hormuz, chokepoints in international trade have become a hot topic. Never mind that the biggest chokepoint in the world economy has long been the US stranglehold through the threat of sanctions.

Martin Wolf has an excellent oped that illustrates the importance of the Strait of Hormuz.

I have used it as an opportunity to do a deep dive into chokepoints using Claude AI.

Among maritime routes, the Strait of Malacca stands out as the most important chokepoint in terms of sheer volume. The Panama Canal is critical for the US.

The table below maps each chokepoint across eight dimensions. Note that the Turkish Straits punch above their weight. While it carries only 3% of global seaborne trade, that includes around 20% of global wheat exports from Ukraine, Russia, and Romania, making them a food security flashpoint. The Taiwan Strait is classified as "critical (latent)", with 40% of the world's container fleet passing through it, and any escalation would instantly cascade through semiconductor and electronics supply chains globally.

This is a list of alternative routes and their respective detour costs. As can be seen, there is no viable alternative to Hormuz for Gulf states. A closure is modelled to push oil prices to $120–150/bbl.

Among companies, ASML (monopoly in EUV lithography machines), TSMC (64% of global pure play foundry, and almost all 3 nm and 5 nm), and Nvidia (92% of data centre GPUs) are standout corporate chokepoints. China, for materials and several inputs to manufacturers globally, stands out as the foremost national chokepoint. However, the mother of all chokepoints may perhaps be the SWIFT money transfer system controlled by the US.

There are nine corporate chokepoints. The Western chokepoints tend to be policy-leveraged through export controls and sanctions. The Chinese chokepoints are leveraged through state-controlled industrial policy and export licensing.

The hardest substitutability problems aren't the ones with the highest market shares, but those with the longest replacement timelines. ASML and heavy rare earths both require over ten years to replicate at scale.

Let’s now examine India’s external vulnerabilities. India’s most acute dependencies are in the sectors of energy & fertilisers, pharmaceuticals, critical minerals & battery materials, and electronics & semiconductors, with China being the chokepoint country in all but the first.

In defence, while India’s dependencies have grown more diversified, the vulnerabilities are widely known. The hidden defence vulnerability is naval gas turbines from Ukraine's Zorya-Mashproekt, and rare earth magnets used in radars and missile guidance - both of which sit on geopolitical fault lines.

The pattern of leverage shows a sharp dichotomy: India's strategic vulnerability is concentrated in two countries - China (electronics, pharma APIs, rare earths, critical minerals processing, batteries) and Russia (oil, defence, fertilisers) - while its geographical chokepoint exposure sits at Hormuz, Bab el-Mandeb, and Malacca. The most acute vulnerabilities feature single companies as well: TSMC for advanced chips, CATL for batteries, Saudi Aramco/ADNOC for Gulf oil.

So how can these vulnerabilities be mitigated?

The table below has the proposed diversification measures categorised into three: short-term (focused on supplier diversification, strategic stockpiles, and emergency tariff calibration), medium-term (activate PLI schemes, trade agreements, and government-to-government deals (Saudi DAP 5-yr contract, Argentina lithium, Australia rare earths), and long-term (aim for genuine strategic autonomy).

In conclusion, like any other economy today, small or large, India cannot eliminate dependencies. But it can change the politics of dependency by making suppliers compete and by retaining genuine substitutes for each input. The most successful precedent is the SIPRI defence data showing Russia’s share collapsing from 72% to 36% in just a decade, achieved through sustained policy effort and friend-shoring.

Some thoughts on the RBI's exchange rate management policy

noreply@blogger.com (Urbanomics) — Wed, 29 Apr 2026 00:00:00 +0000

The pressure on the rupee in the aftermath of the Gulf War has generated considerable attention and discussion. I have blogged here on the implications of the Gulf War on India’s external account.

This may also be a good time to examine the dynamics driving the rupee downward. The rupee’s weakness is nothing new. Since the beginning of 2025, the rupee has been the weakest-performing EM currency, behind only the Turkish lira. As reported here, the rupee has weakened from 107 in early 2025 to 92 in the 40-country trade-weighted real effective exchange rate index, despite the RBI intervening heavily to backstop the decline. In fact, since October 2024, foreign investors have pulled out at least $45 billion, and their shareholding in Indian equities is currently at a 15-year low.

The graphic shows that the rupee held steady for two years, from at least the beginning of 2023 to the end of 2024, on the back of rupee purchases to prevent it from depreciating and find its level. In fact, compared to an annual USD-INR volatility of 5% in the 2000-22 period, the INR-USD volatility fell to just 1.8% during this period, the lowest in over 20 years, lower even than the 2000-2004 period when INR was effectively pegged!

This drastic volatility suppression, combined with India’s higher inflation (CPI averaging ~5%) vs trading partners (2-3%), produced the biggest REER overvaluation build-up in the emerging-market universe during this cycle. The rupee’s 40-currency REER (base 2015-16) peaked at 108.14 in November 2024, and since then has depreciated sharply to below 95 by March 2026. This depreciation has been far in excess of any peer.

Similar trend is visible with respect to USD too. The rupee stands out for its unique flat trajectory through 2022-24 even as peers depreciated substantially in response to the Fed tightening cycle. However, since Oct 2024 the rupee has depreciated steeply, overtaking several peers.

It becomes clear that the rupee was held artificially overvalued for over two years. This, by itself, should have been reason enough that pressure mounted for a corrective depreciation. In addition, there was the pressure from the spike in oil prices (and associated worsening of the external account, already weakening from the tariffs and FPI repatriation) and the general trend of risk-off and capital flight to the safety and liquidity of the dollar.

By itself, the Gulf War would have put enough pressure on the currency. But its combination with the stress built up due to the forced overvaluation amplified the capital flight induced by the Gulf War, thereby exacerbating the pressure on the rupee and worsening the depreciation when it happened.

The table below is a quantified decomposition of what drove the 11.9% depreciation. It shows two alternative decompositions at the peak (Mar 2026), which capture the overshoot moment, and at current levels (Apr 2026), after partial reversion.

At peak (Mar 2026), the biggest driver by far was the overvaluation correction (63% of the fall), which is the “hidden cliff” the RBI’s peg concealed and which was unique to the rupee. The general market volatility (36%), experienced by all peers, was a secondary driver, reflecting genuine dollar/EM repricing. The net overshoot, at least till now, has been negligible.

Has there been a Dornbush overshoot? Rudiger Dornbusch's 1976 overshooting model predicts that when exchange rates are flexible, but goods prices are sticky, a monetary or policy shock causes the exchange rate to overshoot its long-run equilibrium before reverting. In simple terms, if the currency has been artificially propped up, the "stickiness" is extreme, and therefore, when the adjustment finally comes, the overshoot magnitude is larger than in a regime of continuous flexibility. However, the Dornbusch overshoot and reversion are not yet visible. The reversion might happen in the coming weeks.

So what are the lessons?

By maintaining the rupee as a de facto pegged currency from 2023 to October 2024, the RBI accumulated an 8% REER overvaluation that had to be corrected. When the regime shifted — Trump election, FPI outflows, US tariffs, Iran war — the correction was both deeper and faster than peers experienced, precisely because the catch-up component (8pp) was additive to normal drift (3.8pp). The rupee is now at or near its new equilibrium of ~94-95, down 11.9% from Oct 2024.

The RBI’s 2022-24 intervention pattern - buying ~$400bn in forex reserves while keeping the rupee rigid - converted exchange-rate risk into reserve-allocation risk. When the regime shifted, reserves fell by $80bn in four months without preventing the correction. Further, the sharp Mar 2026 overshoot caused imported inflation, margin stress on exporters who had hedged at 84, and a sudden repricing of corporate foreign-currency debt. A gradual depreciation path through 2023-24 (releasing 3% per year against the peer-consistent rate) would have spread this adjustment at much lower systemic cost. The rupee has done exactly what a freely-floating currency would have done gradually over 3 years, but compressed into 18 months because the peg delayed adjustment, and with serious credibility cost (for investors).

The speed of adjustment was consistent with Dornbusch dynamics (7.2% in a single month from Feb to Mar 2026 is unprecedented for INR). However, the second half of the Dornbusch pattern - reversion toward long-run equilibrium - has not so far materialised, though it could yet in the coming weeks. The rupee is currently 94.10, only 0.8% below its 94.86 peak. This is within noise, not meaningful reversion.

This is a teachable moment on currency management for central banks. Policies that keep a currency overvalued are always counter-productive, especially for developing countries that are always at risk of being caught in an episode of sudden stop and capital flight. When such episodes are triggered, the overvalued currency invariably experiences a steeper slide and greater overshoot, with all attendant consequences. Most importantly, steep devaluations convey a macroeconomic instability signal to investors. It increases the country risk for investors, who must now factor in the likelihood of episodes of sharp depreciation risks while making their investments. It is a dent in the central bank’s credibility.

The rupee is going through one such episode. The original sin may have been committed in the 2023-24 period.

Impact of policy interventions and shocks on India's economic growth

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

The sustainable growth rate of any economy is that which strips out the positive effects of the government’s fiscal interventions and the negative effects of economic shocks. This blog has held that, given its deficient human, physical, and financial capital, India’s neutral growth rate is about 5-5.5%.

This post provides a framework to figure out the underlying economic growth rate by stripping these positive and negative contributors.

So, what has been India’s underlying neutral (stripped of the impact of policy interventions) economic growth rate?

Answering this requires us to identify the specific interventions and events that have contributed to the positive and negative shocks, and to try to figure out their respective economic impacts.

In the last decade or so, the economy has faced three large negative shocks: demonetisation, the introduction of GST and associated efforts to formalise the economy, and the pandemic. In addition, on the external front, it has faced the oil shocks from the Ukraine and Iran wars, and the Trump tariffs.

The economy as a whole has benefited from three fiscal events - corporate tax rate reduction, income tax rate reduction and rationalisation, and the GST rate reduction.

While it is now clear that the government suffered revenue loss from the corporate tax rate reduction, the income tax rate reduction, and rationalisation appear to have boosted the tax base and increased revenues. It appears (at least for now) that the existing corporate tax rate was on the left side of the Laffer curve, whereas the direct tax rate was on the right side.

The government clearly benefited from three positive fiscal events: the long period of low oil prices (increased excise tax revenues due to not passing through the reduced oil prices), the surge in RBI dividends, and the large additional fiscal space from discarding the FRBM framework.

The net boost to fiscal balance resulted in a sharp spike in capital expenditure. It is to the credit of the government that it eschewed the subsidies and revenue expenditure route. This increase in capex includes taking on the budget account capital expenditures of NHAI and Railways. In addition, there has been the introduction of the zero-interest 50-year loan to state governments under the Special Assistance to States for Capital Investments (SASCI).

What have been their respective contributions to the output growth? Here is a graphical summary.

This table captures a brief description of the assumptions and estimations used.

On the positive boosts to the government’s fiscal position, the contributions of the three factors are shown below.

On the capital expenditure side, the government assumed in the budget the expenditures on railways and highways.

The fifty-year interest-free loan to states under SASCI was a new addition, amounting to about Rs 1.5 lakh Cr each year.

This explains how the increase in capex could be disaggregated and distributed among the different parts discussed above.

The disaggregated impact of the positive and negative factors on the economic output is shown below.

Based on the above, the underlying neutral economic growth appears to be in the range of 5-5.5%.

Clearly, since the pandemic, policy interventions have played an important role in boosting the economic output.

The important point here is that while policy interventions may have boosted economic growth for some time, it remains to be seen in the coming years whether they have shifted the economy onto a higher underlying steady state growth trajectory. This is especially important since the headroom for further interventions, like fiscal space for more capex or tax cuts, may have shrunk, and we may be entering a world of increasing uncertainties and headwinds for the foreseeable future.

In the final analysis, the balance sheet of the policy interventions will boil down to this question. Did the fiscal transfers of the last few years create the conditions (by broadbasing economic growth or increasing capital accumulation, for example) for a shift to a higher trajectory of growth, or was it a case of merely providing a temporary boost to the national output?

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 25 Apr 2026 03:21:00 +0000

1. The world's food supply chain is deeply enmeshed in fossil fuels from the Gulf.

In 2024, for instance, Saudi Arabia, Oman and Qatar together supplied more than three-quarters of India’s ammonia imports and 30 per cent of Morocco’s. As a result, food production in south Asia and north Africa has become deeply dependent on Gulf nitrogen flows... About 70 per cent of the world’s ammonia is used in fertiliser production, and just under30 per cent of global ammonia exports originate in the Middle East... Roughly half of the world’s global seaborne sulphur passes through the Strait of Hormuz, with most of this produced by the Gulf’s state-owned energy companies — above all Adnoc, QatarEnergy, the Kuwait Petroleum Corporation and Saudi Aramco... Gulf countries account for 35 per cent of global urea trade; Saudi Arabia was the world’s largest urea exporter in 2024, while Oman ranked third. Monoammonium phosphate (MAP) and diammonium phosphate (DAP), two of the principal fertilisers used to supply crops with phosphorus, are also closely tied to Gulf production and export routes. In 2024, countries upstream of Hormuz accounted for 18 per cent of global MAP and DAP trade.

As Leiden University’s Christian Henderson has recently shown, Gulf countries have also become deeply enmeshed in cross-border control of large agribusiness companies throughout the Middle East as a whole. Egypt, the world’s second-largest urea exporter, offers a clear example of what this means for the production of fertiliser. A substantial share of Egypt’s export-oriented nitrogen capacity is controlled by Fertiglobe, a company in which the UAE’s Adnoc now holds a controlling stake and that claims to be the world’s largest seaborne exporter of urea and ammonia, according to its 2024 financial results. Fertiglobe’s Egyptian assets include the Egyptian Fertilizers Company, with an annual capacity of 1.7mn tonnes of urea and 0.9mn tonnes of ammonia, alongside Egypt Basic Industries Corporation, which adds another 0.7mn tonnes of ammonia. For comparison, Misr Fertilizers Production Company (MOPCO), which operates Egypt’s largest nitrogen fertiliser plant, reported 1.7mn tonnes of urea and 1.1mn tonnes of ammonia in 2024. About 44 per cent of MOPCO is owned by Saudi and UAE investment funds.

This level of dependence on the Middle East makes claims of food security ring hollow in countries like India. These countries can exercise chokeholds that can expose countries to deep vulnerabilities in their food security system. It is an area that needs to be kept in mind and diversification strategies should be pursued.

2. European luxury houses are struggling.

So far this year, nine leading European luxury stocks have lost at least a collective €140bn in market capitalisation, a bitter blow for an industry that was riding high during the first half of this decade, when LVMH was the continent’s most valuable company... The luxury sector, which supersized between 2019 and 2023, was already grappling with some hard truths before the conflict began. Middle-class shoppers who previously spent tens of billions of dollars on luxury items pulled back once their Covid-era savings and furlough payments ran out and the cost of living rose. Some 50mn luxury consumers exited the market between 2022 and 2024, according to a report by Bain, most of them aspirational shoppers who felt left behind by skyrocketing prices... the Chinese market, the motor of growth until 2023, has been hit by relatively weak consumption in the pandemic’s aftermath.

And the problems in the Middle East will worsen matters, given that the UAE is an important market.

3. India's contract manufacturers command much higher PE valuations than their much bigger global counterparts.

Take Dixon Technologies. Over five years, its revenue has grown nearly fivefold to about Rs 18,000 crore, helped along by the PLI scheme and by assembling for companies like Xiaomi and Google... And yet, for all that scale, the economics remain surprisingly thin. Profit margins hover around 2%. A meaningful chunk of profits comes from government incentives. More tellingly, even at this scale, Dixon still depends on imported components, external designs, and global clients. India may now assemble a significant share of the world’s smartphones, but much of the value still sits outside the factory.

What happens when PLI gets phased out?

4. Sobering statistics about higher education in general and specialised fields like Agriculture.

A 2020 survey at the Tamil Nadu Agricultural University found that less than 12% of students thought of farming as a future career. Nearly 60% of students wanted to be government employees, and more than a quarter of them wanted to get into business and entrepreneurship. Only 3% said they wanted to work for private companies. And it’s not just about the students. Their goals come from practical considerations. Take the case of the University of Agricultural Sciences, Bangalore. Just a little over 16% of its total 882 students of agriculture got placed in 2023–24. It only gets slightly better in the postgraduate courses, where only 37% out of the 287 students were placed. The story is similar in other universities as well.

What does it tell us about the career prospects in specialised fields like agriculture when nearly 60% of students want to be government employees?

5. Some stock market facts on the Adani Group.

Adani Green is trading at a trailing price-to-earnings (P/E) multiple of 1,109X, compared to peer Tata Power’s 47X, according to data from market information provider Screener.in. And Adani Total Gas’s trailing P/E multiple is 473X, compared to Indraprastha Gas’ 18X... the shareholding patterns in Adani group companies... several of them shared common foreign portfolio investors (FPIs). And strangely, several of them had negligible investments in non-Adani companies. As a result, the percentage of shares effectively available for trading by the public was just about 5% in Adani Total Gas and 11% in Adani Green. The comparable figure for Indraprastha Gas is 55%, and for Tata Power, 53%... only one FPI owns more than 1% of Adani Green now, compared to 10 in December 2020. But that FPI—Asia Investment Corporation (Mauritius)—is still heavily invested in the Adani Group, with 93% of its holdings in Adani companies... LIC’s stake in multiple Adani Group companies has gone up over the last few quarters.

See also this and this on the conglomerates in the Indian economy.

6. The New Yorker essay raises the question of whether Sam Altman can be trusted.

Altman has a relentless will to power that, even among industrialists who put their names on spaceships, sets him apart. “He’s unconstrained by truth,” the board member told us. “He has two traits that are almost never seen in the same person. The first is a strong desire to please people, to be liked in any given interaction. The second is almost a sociopathic lack of concern for the consequences that may come from deceiving someone.” The board member was not the only person who, unprompted, used the word “sociopathic.” One of Altman’s batch mates in the first Y Combinator cohort was Aaron Swartz, a brilliant but troubled coder who died by suicide in 2013 and is now remembered in many tech circles as something of a sage. Not long before his death, Swartz expressed concerns about Altman to several friends. “You need to understand that Sam can never be trusted,” he told one. “He is a sociopath. He would do anything.”

This is a good portrait.

Altman is not a technical savant—according to many in his orbit, he lacks extensive expertise in coding or machine learning. Multiple engineers recalled him misusing or confusing basic technical terms. He built OpenAI, in large part, by harnessing other people’s money and technical talent. This doesn’t make him unique. It makes him a businessman. More remarkable is his ability to convince skittish engineers, investors, and a tech-skeptical public that their priorities, even when mutually exclusive, are also his priorities. When such people have tried to hinder his next move, he has often found the words to neutralize them, at least temporarily; usually, by the time they lose patience with him, he’s got what he needs. “He sets up structures that, on paper, constrain him in the future,” Wainwright, the former OpenAI researcher, said. “But then, when the future comes and it comes time to be constrained, he does away with whatever the structure was.” “He’s unbelievably persuasive. Like, Jedi mind tricks,” a tech executive who has worked with Altman said.

7. Guyana's dramatic oil-led economic transformation.

Guyana, a former British colony on the north-eastern flank of South America with a population of about 800,000, is undergoing rapid change following ExxonMobil’s 2015 discovery of about 11bn barrels of oil, one of the largest finds in decades. Crude production has since risen to more than 900,000 barrels per day, with consultancy Wood Mackenzie projecting that the government’s share of oil profits will total $41bn over the next five years. Between 2019 and 2024, Guyana’s GDP almost quintupled to $25bn.

8. India's trade balance sheet.

The cumulative exports (merchandise and services) during FY26 (April-March) are expected to be $860.09 billion, as compared to $825.26 billion in FY25 (April-March), an estimated growth of 4.22 per cent. A closer look reveals stagnation in merchandise exports over the last four years, with a negative CAGR (compound annual growth rate) of 0.42 per cent, while total export figures have been lifted by services exports, which grew at a CAGR of about 8.9 per cent over the same period... in April 2015, the government said that the objective of the Foreign Trade Policy 2015-20 was to double India’s share in global merchandise exports in five years. The reality is that since 2014, India’s merchandise exports have grown from $314 billion to $441 billion, a CAGR of 2.9 per cent, and India’s share in global merchandise exports has remained stuck at about 1.8 percent.

9. Ruchir Sharma points to the spectacular boom in South Korean and Taiwanese equity markets led by three semiconductor stocks - TSMC, Samsung, and SK Hynix.

Over the past year, these two nations accounted for 75 per cent of emerging market returns, and most of those gains came from just three stocks — all big makers of semiconductors... Together their profits are on track to top those of Apple, Amazon and Alphabet combined. Samsung is expected to increase operating profit more than sixfold this year to around $185bn, surpassing every member of the “Mag Seven” American companies other than Nvidia... TSMC is the most widely held stock, owned by 92 per cent of global equity funds. In comparison, Microsoft, the most widely owned US stock, is held by 84 per cent of those funds... Today, by some measures, emerging markets have grown even more concentrated than the US, with the leading five stocks accounting for a greater share of the index. While the top US stock (Nvidia) represents 8 per cent of the US index, the top EM stock (TSMC) accounts for a record 13 per cent of the EM index. In fact, based on MSCI methodology, TSMC now constitutes a larger share of the MSCI EM index than all the stocks in India put together.

10. China could boost consumption by cutting its high payroll taxes.

China levies European-level payroll taxes, creating a large wedge between the cost of employing a worker and their after-tax income — around 38 per cent. These taxes are also highly regressive, applied to income below a ceiling of three times the average wage. Payroll taxes raised 6.5 per cent of GDP in 2024, against just 1.1 per cent for personal income taxes. A dramatic, permanent payroll tax cut would therefore significantly boost consumption. It would put more money in workers’ pockets, especially lower-income workers with the highest propensity to spend. It would raise employment by lowering labour costs. And it would reduce informal labour by giving workers stronger incentives to participate in the social security system.

11. Striking facts about India's gold ownership.

Between 2011 and 2025, India imported approximately 12,670 tonnes of gold at a cumulative cost of roughly $609 billion. At the current spot price of $4,677 per ounce (as of 4 April 2026), that gold is now worth approximately $1.905 trillion. The $1.3 trillion appreciation alone exceeds India’s entire stock of foreign exchange reserves. No other asset class, government scheme, or financial product has generated comparable wealth for Indian households over this period. Data shows there is not a single year between 2011 and 2025 in which holdings have not at least doubled in value... Gold imported in 2015 for $35 billion is now worth $157 billion—a 350% gain... Even the pandemic year of 2020, when India imported just 430 tonnes at $22 billion, has returned $65 billion at today’s prices... Estimates from the World Gold Council suggest Indian households hold between 25,000 and 34,600 tonnes of gold. At today’s prices, that equates to a holding worth between $3.8 trillion and $5.2 trillion—roughly equivalent to India’s entire GDP.

12. Norway's brand equity of democracy and humanitarianism comes up against allegations of being a war profiteer due to rising oil prices, as it adds billions to its $2.2 trillion sovereign wealth fund.

The country has earned about $140bn more in 2022 and 2023 from petroleum following Russia’s full-scale invasion of Ukraine than it did in 2021. Now, Nordea credit investment director Robert Næss has forecast Norway has earned at least an additional $8bn from the conflict in Iran, which shows no immediate signs of ending...

Norway was something of a regional laggard in terms of support to Kyiv in the early days of the Ukraine conflict, behind the Baltic states and on some metrics neighbouring Sweden and Denmark relative to the sizes of their economies. It has since somewhat caught up but its support as a percentage of GDP is still behind Estonia and Lithuania, according to the Kiel Institut’s Ukraine Support Tracker.

13. AI bests humans in table tennis.

An AI-powered robot has beaten expert table tennis players in a landmark machine-over-human triumph in a major competitive sport. The mechanical maestro, known as Ace, uses a network of cameras and AI to achieve the rapid planning and reaction times needed to compete. The invention made by Japanese tech group Sony highlights how researchers are using AI to improve robots’ ability to adapt to physical tasks they have struggled with, particularly those involving people... Ace beat three out of five elite table tennis players who had more than ten years of training, and scored 48 points versus 70 in two defeats to professionals, according to a paper published in Nature on Wednesday. The robot had improved further, Sony said: since the paper’s submission, it had played four further matches against humans, beating two elite players and winning one out of two matches against professionals. The robot handled spin and unexpected changes in trajectory caused by the ball clipping the net on its way over, the researchers said. It outscored the elite players in aces — points won directly from serve — by 16 to eight.

14. EVs make up half of car sales in China. Of the 27.8 m cars sold in China in 2025, 13.9 m were EVs accounted for 13.9 m, a steep increases from just 1.3 m five years back.

The government aims to have 28mn public charging facilities installed by the end of next year, up from 21mn at the beginning of this year. This would be enough to power about 80mn EVs (there are already more than 50mn on China’s roads). The plan targets underserved areas such as rural communities, as well as expressway service stations and public parking lots. State media estimated the three-year investment period would drive about $28bn in spending on equipment and construction. Chinese companies are also pouring billions of dollars into research aimed at improving EV range and charging speed. CATL, the world’s biggest battery maker, on Tuesday unveiled cells that power a car for 1,500km on a single charge. As battery technology and access to charging infrastructure improves, analysts expect consumers in lower-tier cities — who number in the hundreds of millions — will favour EVs.

15. India rural-urban income facts of the week.

According to the Institute for Competitiveness’ 2025 report on Income Inequality and Labour Markets in India, in 2023-24, the top 10 per cent urban income threshold of ₹44,000 was more than double the rural equivalent of ₹21,500. The top 1 per cent urban threshold of ₹90,000 was 80 per cent higher than its rural counterpart, up from 68 per cent in 2017-18. At the bottom, the urban floor of ₹6,000 was double the rural equivalent of ₹3,000, a figure that has remained flat in nominal terms over seven years.

16. Some striking graphics from a16z. The combined market cap for the 10 largest companies in the S&P is about six times larger than it was in 2015.

Since 2023, Tech has been responsible for more than 60% of earnings growth.

While tech is big today, it’s still not nearly as big (relatively) as Transport (or Real Estate and Finance) ever were at their peaks in the 19th Century.

Finally, about 70% of today's market is in industries that were tiny or non-existent in 1900. While in 1900, the economy was basically textiles, iron, coal, steel, and tobacco, the rails to transport them, and the banks to finance them, today those sectors are a tiny fraction of the overall pie.

The idea of mandatory pre-litigation mediation

noreply@blogger.com (Urbanomics) — Tue, 21 Apr 2026 23:30:00 +0000

I blogged here and here about litigation involving the government in India.

Analysis of the data from the National Judicial Data Grid (NJDG) shows that Indian courts have around 5.58 Cr pending cases as of March 2026, which clog the judicial system and delay the delivery of justice. Worse still, the numbers continue to mount as the inflows far exceed the outflows. The case clearance ratio (ratio of cleared cases and registered cases) is 55-59% for the Supreme Court, 28% for High Courts, and 40% for subordinate courts.

The primary proposed solution to address the problem is to increase the number of courts and judicial officers. However, while required, this is unlikely to meaningfully address the problem. Like with Parkinson’s law, which is evident across sectors, cases are likely to expand to fill up the increased number of courts and judges.

Here, it’s useful to bear in mind a central insight from the judicial process. Once a case is admitted, it takes years to close. For example, simple suits often take 2–5 years, property or corporate cases often take over 7–10 years, and the average High Courts’ pendency per case in 2022 was 5.47 years.

In the circumstances, the best efforts should be made to settle the case at the admission stage itself, albeit without compromising the interests of the litigants. In other words, how can the pre-litigation process, in the form of an institutionalised mediation process, become more effective in screening and settling cases? This should become a major focus of the courts and governments.

This is especially important since a major share of disputes that enter the formal legal system could be resolved outside it, at lower cost and with greater speed, if a credible, accessible, and abuse-resistant pre-litigation mechanism were in place. In this context, how about a digitally enabled, third-party delivered, court-overseen pre-registration screening and mediation (PRSM) framework that intercepts eligible disputes before they are formally filed and routes them through certified mediation?

On this, Italy, Turkey, and the US offer very good examples. Since 2010, Italy has had a mandatory pre-litigation mediation mechanism, which is delivered through private mediation centres, and has a settlement rate of 50%. It covers broad categories of civil disputes. The mediators are accredited, undergo mandatory training, and the settlements are enforceable as a court decree. Turkey has successfully adopted mandatory pre-litigation mediation since 2018, first for labour disputes and then for commercial and consumer disputes. In the US, there’s a mandatory court-annexed Alternative Dispute Resolution (ADR) framework, which is implemented through court-contracted private mediators and magistrates. It has a striking 70-85% settlement rate.

There are some important takeaways from these successful examples. One, voluntary-only is insufficient, and where mediation is optional, uptake is less than 5%. Two, to avoid coerced settlement, the mandatory requirement must be for attendance at a first session. Three, in all the successful examples, third-party delivery works. Neither courts nor government agencies need to conduct the mediation; they need only set standards and enforce compliance. Fourth, to make it attractive, mediation must be measurably faster than litigation. Fifth, the binding constraint is mediator quality. In the absence of a rigorously monitored credentialing system, mediator quality can be a big failure node.

Finally, the entire process must be done on a transparent digital workflow. This should include the random allocation of a certified mediator from the accredited registry, immediate scheduling of sessions, conduct of sessions in person or online dispute resolution (ODR) channel, digitally signed agreement (or opt-out, if the party prefers this) with the mediation log captured through an AI tool and automatically attached to the case file to be filed for orders that are enforceable under the Mediation Act 2023.

Unfortunately, India’s current pre-litigation model, revolving around the district legal services authorities (DLSA), fails on all these counts — poor credibility, under-resourced, slow, untrained, and without a digital backbone.

This prelitigation mediation system should benefit from a diverse ecosystem of certified third-party providers. Apart from private professional firms, there should be bar-affiliated mediation centres, NGO or civil society institutions, industry/sector bodies, and the existing DLSAs. The mediators must be mandated to satisfy some minimum requirements, regardless of type - some minimum number of trained mediators per office, integration with the mediation workflow, financial audit, and other disclosures and safeguards. There should be zero tolerance for abuse and manipulation by mediators. The accreditation should be for 3-5 years and done through a combination of performance parameters drawn from its digital trails in the workflow, and through qualitative evaluation.

The governance architecture should be three-tiered, covering the national, state, and district levels. There should be a single national digital platform that generates a unique Mediation Reference Number (MRN) for each dispute, links to the NJDG for court reference, and provides real-time dashboards accessible to all oversight tiers.

A big threat to the success of this endeavour will come from the political economy, specifically the legal ecosystem that currently benefits from protracted litigations and an ever-expanding pool of cases. Counsels will naturally find ways to throttle mediations.

The critical success determinant will be the value that litigants see in adopting this path. This, in turn, depends on its efficiency and effectiveness. The fairness and quality of mediation are central to establishing the requisite credibility before litigants. This brings us to the earlier-mentioned binding constraint, the quality of mediators. Unfortunately, we cannot quickly develop a supply of good-quality mediators. It must evolve, especially in systems where human resource capabilities are weak.

Without having a pipeline of good-quality mediators, mandating mediation requirements runs the risk of bad implementation and thereby tarnishing the idea itself. An illustration is the set of challenges associated with the insolvency resolution process, where inadequate capabilities and abuses by insolvency resolution professionals are major problems. Accreditation systems across facilities (clinics and hospitals, schools and colleges, ITIs and training institutions, and so on) have become compromised due to deficient capabilities and capture of accreditors.

One solution would be to start small in a few locations (districts) and that too for a few selected categories of cases, coupled with intense training and other capabilities-building support. The initiative could be expanded gradually thereafter. It would also be useful to identify ways to align counsel's interests with the mediation process. One way would be to even pay the counsels a fee for successful mediation settlements.

The second China shock and the challenge facing its trade partners

noreply@blogger.com (Urbanomics) — Sun, 19 Apr 2026 23:30:00 +0000

A China shock 2.0 is in full play. It is destroying domestic manufacturing bases, upending international trade regimes, and triggering backlashes in advanced and developing countries. In addition to its economic consequences, China’s increasing weaponisation of its manufacturing dominance and the integration of trade and national security policies are alarming its trade partners. With the US decoupling under the policies of Trump 2.0, the frontline for China shock 2.0 is in Europe and Southeast Asia.

There’s now a clear recognition that the global competitiveness of Chinese manufacturers goes much beyond their manufacturing efficiency. Instead, the former is substantively built on a massive foundation of subsidies, low-interest loans, cheap inputs, and so on. Its scale is such that these anti-competitive practices completely skew the playing field, cannot be matched by anyone else, and therefore cannot be allowed to go unrestricted. The challenge, though, is how to respond given that China holds pretty much all the cards in the manufacturing supply chain, especially all metals and intermediate inputs.

What complicates matters is that the growth strategy being pursued has boxed Beijing itself into a corner. Subsidies, cheap credit and inputs have fuelled a capacity buildup in multiples of the domestic market, leaving export market expansion as the only outlet. Any pullback risks factory closures and job losses, stoking public discontent and worsening matters in a struggling economy. It also risks a cascade of corporate defaults that could imperil the financial system. In these conditions, even efforts to recalibrate the economy towards consumption would be extremely challenging.

This post will examine these issues in greater detail, drawing from an excellent FT series on the second China shock and a new Rhodium Group report on how China came to dominate industrial metals.

1. This is a representative illustration of a story that has been playing out for years in industry after industry.

Huang Xian’s product is about the size of his fist, a sensor that detects electrical current leakage and slots into electric vehicle chargers as a safety guard between the car and the grid. The device is not just a symbol of the innovation and accomplishments of China’s high-tech sector. It also reflects a trend eviscerating high-end manufacturing across the world, to the near despair of governments from Asia to Europe and beyond. The EV boom has propelled Huang’s sensor shipments to a projected 10mn units this year, up from about 20,000 in 2019, when his company Mega-Senway Electronic Technology entered the market. Back then it was still a niche product, supplied by a handful of German and Swiss groups that sold the sensors for roughly Rmb200 (around $30) — or more per unit. Mega-Senway made its first sensors for about Rmb40 each and sold them for Rmb100, leaving Huang with a healthy margin. As Chinese competition poured in, prices started to fall. European groups gradually exited the market. Huang’s Shanghai-based company now sells some sensors for as little as Rmb10 a pop.

2. The scale of Chinese subsidies is staggering compared to the rest of the world.

Recent OECD analysis underscores the role of subsidies. Company-level analysis of Chinese industry by the 38-member organisation estimates that Chinese businesses are subsidised at between three and nine times the rate of their rich-world counterparts. As well as grants and tax breaks, the OECD data finds that the biggest subsidies come in the form of loans from Chinese state banks offering below-market rates to Chinese companies that undercut international competition.

The role of weak currency in driving the Chinese surpluses should not be underestimated.

Lower inflation relative to Chinese trading partners has led to a real exchange rate devaluation in the past three years, helping boost net exports and the current account surplus, which stood at 3.7 per cent of GDP last year. The IMF estimates the country’s real effective exchange rate — which measures the real value of the currency against a basket of competitors — is undervalued by around 16 per cent, fuelling the competitive advantage enjoyed by Chinese exporters. China has kept exports competitive by buying dollars and depreciating the currency, accumulating “shadow reserves” through a complex web of state-owned banks.

In this context, Michael Pettis makes an important point about China’s global competitiveness.

“Analysts often confuse the global competitiveness of Chinese manufacturing with manufacturing efficiency but these are two very different things. China’s manufacturing competitiveness depends on an undervalued exchange rate, very cheap financing and very low wages relative to productivity.”

3. The first China Shock, famously documented by David Autor et al as having cost nearly 2 million jobs in the US and having caused significant localised deindustrialisation, covered lower-cost clothes and footwear, consumer electronics, furniture, and appliances. The China Shock 2.0 is about high-end manufacturing, covering products such as solar panels, wind turbines, heavy equipment, electric vehicles, batteries, robots, speciality chemicals, and so on.

While the China Shock 1.0 did cause job losses in the advanced countries, it did not have the same effect as China Shock 2.0 is having since the advanced countries had been vacating the lower-end manufacturing and had been focused on high-end manufacturing, which the China Shock 2.0 threatens to upend.

4. Soumaya Keynes points to some differences between the first and second China Shocks. For one, unlike the first shock when China’s goods export prices rose by about 40% in the 2000-07 period, they were at the same level in 2025 as they were in 2018.

Another important difference is that while during the first shock, China’s imports rose as it bought the manufacturing equipment for its exports, whereas today it makes even these equipment and has not vacated the low-end manufacturing it dominated in its early stages of growth.

5. There are two sides to this phenomenon. On the external front, domestic manufacturers in advanced countries are unable to compete with the flood of cheap, high-quality Chinese-manufactured products. This is causing deindustrialisation and job losses in these countries.

On the domestic front, Chinese manufacturers, both public and private, have entered these industries in large numbers and built up massive manufacturing capacities, far in excess of domestic demand, and are competing fiercely by undercutting each other in remorseless price wars. There are over 125 EV companies and over 150 humanoid robot companies, all benefiting and kept alive by the generous flows of subsidies of all kinds. This phenomenon, described as neijuan, or involution, has resulted in a race to the bottom with steep declines in profitability. Everyone is innovating more and working harder for ever-diminishing returns, and volumes keep rising even as profits are shrinking or negative.

It forces companies like Mega-Senway to move fast. Huang explains how they cut their own costs so dramatically over just a few years. First they acquired the factory that manufactured the sensors they designed. Then he visited nearby factories to study their best practices. A worker testing their finished sensors initially did it one at a time, he says. Huang redesigned the testing jigs to test four at a time, then eight, with a worker constantly loading or unloading batches. Now he has replaced the workers with robotic arms. “We would update our processes two or three times a year,” Huang says. “The pressure came that fast.”

The five-year product cycles with annual price negotiations that the auto industry once ran on have disappeared, he says. One large automaker has cut out all middlemen and puts out tenders each month directly to manufacturers up the supply chain such as Mega-Senway. They submit prices, are told if they are the lowest or not, and submit again — round after round, until no one will go lower. Huang, in turn, has had to bring in more suppliers to pit against each other. “I’m being squeezed, so my only option is to pass my pressure on to them,” he says… Huang says he wishes he could escape the ruthless competition. “We started the company because we loved developing new products,” he says. “Now every year when I’m working through the budget, I’m asking how much can I squeeze out to invest in building something new.”

The phenomenon of involution has been amplified by similarly fierce competition among local governments and provinces.

China has a ream of policies to help companies get off the ground, with local governments in particular battling with each other to offer the best subsidies, cheap land, financing and tax breaks to lure in manufacturers and seed new industries on their turf. The competition between localities can be so great that some businesses move from one place to the next as they chase subsidies and investment. They have become known as “migratory bird enterprises”.

All this creates a self-reinforcing spiral and a bad equilibrium from which breakout is difficult.

Corporate data provider Qichacha lists 1.2mn Chinese companies with “robot” in their name or business scope. Some have recently pivoted from fields like cosmetics, green energy or semiconductors. The founder of a robotics company in western China ticked off the subsidies that have helped him get started: grants to help his customers purchase his robots, subsidies to expand his factory vertically instead of horizontally, money for rooftop solar panels and energy storage and a “smart factory” plaque from the provincial government with more attached benefits. His competitors get the same benefits, he says, acknowledging it may have contributed to the onslaught of new rivals that has forced his prices down 10 per cent over the past year… The system creates more and more companies fighting for the same piece of pie, says Huang He, whose group, Northern Light Venture Capital, is an investor in Mega-Senway. The problems arise when the government money for nurturing companies becomes what sustains them, he says. “Local governments are reluctant to let their local companies fail,” he says. “That’s why overcapacity is so hard to fix.”
The way the Chinese system works, local officials have every incentive to protect their companies. Value added tax generates nearly 40 per cent of China’s tax revenue, and the central government splits the receipts with the localities where products are made, giving them a direct stake in keeping factories running. Adding local production capacity also creates the growth that officials are largely judged on, and any large-scale lay-off could threaten social stability, Beijing’s overriding priority. “Officials are scared of missing their GDP targets. Nobody is scared of overcapacity,” says another founder, who asks to remain unnamed. “As long as you’re manufacturing, there’s VAT revenue. Whether you sell [a product] or make a profit, that doesn’t really affect them.”.. Huang of Mega-Senway suspects some of his competitors are losing money on every sensor they sell and are being sustained by investment from local government funds… The result is that companies which should exit the market keep operating, sustained by government capital, especially China’s politically favoured industries, such as solar, wind, batteries and EVs.

6. The Europeans are emerging as the biggest losers from the China Shock 2.0. Their companies had maintained a competitive advantage in automobile manufacturing, engineering and high-tech manufacturing, which is now being dismantled clinically by Chinese competition. In fact, the surge in Chinese exports in the first three months of 2026 was driven by shipments to the EU by 21.1%, even as those to the US fell. High-tech products have driven the growth in Chinese exports to Europe.

China’s trade policy is also tightly integrated with its national security policy, and nowhere is this more evident than in Europe, where China is trying to establish manufacturing facilities in countries like Hungary, Serbia, and Spain, to diversify supply chains and also gain access to the large EU market.

Xi is explicit about his goal to foster foreign dependence on China’s advanced manufacturing, which Beijing sees as a source of leverage in an era of geopolitical shocks. Salvation for one country can look like the seeds of subjugation to others. The question for Europe is whether it should welcome Chinese investment or repel it… Spanish historian Florentino Portero said: “China’s trade policy is in fact part of its national security strategy. We are seeing how China is taking control of certain companies and integrating them into its own system at our expense.”

In response, taking a leaf out of the playbook that China used so effectively to catch up with the Western manufacturers, the EU recently announced a Made in Europe Bill (the Industrial Accelerator Act, IAA) that mandates Chinese manufacturers to establish facilities to share technology. There is a strong consensus among Europeans that “Europe must be a complete industrial base and not a mere assembly platform”.

The bill lets member states veto any FDI exceeding €100mn in strategic sectors if the investor is from a country with more than 40 per cent of global manufacturing capacity. Those sectors include batteries, EVs, solar panels and the extraction and processing of critical raw materials — all areas where China dominates. To win approval, investment projects must fill at least half of their jobs with EU workers and satisfy three of five other conditions. One is that the investment must be undertaken via a joint venture. Another is that the foreign partner does not own more than 49 per cent of the entity — a condition unpopular with Chinese companies, according to European officials. Other conditions cover the licensing of intellectual property rights, spending 1 per cent of revenue on research and development in the EU, and publishing a strategy for sourcing 30 per cent of inputs from the bloc. The legislation will give companies meeting its requirements access to public funding from the EU, national and regional governments. Without such financial support, Europe’s relatively high labour costs versus China make many industrial investments unviable.

7. Even more than the Europeans, the biggest losers from the China shock 2.0 may be its neighbours in South East Asia, who had been hoping to move up the industrial value chain when China shifts to ever more sophisticated products and services. But, as mentioned earlier, China seems unwilling to vacate any space in the manufacturing landscape. Worse still, its exports are destroying its manufacturing bases.

They are becoming dependent on China for lower-value products, industrial inputs for manufacturing, and also finished goods like EVs and solar panels.

China’s trade surplus with the 11-nation Asean bloc hit a record $276bn in 2025 — up 45 per cent from the year before — with strong growth in intermediate goods, including electronics and capital goods such as machinery used by manufacturers. Labour-intensive manufacturing sectors such as shoes and clothing have been particularly affected. In Indonesia, around 60 factories closed between 2022 and 2025, according to the Indonesian Textile Association… The textile association estimates that 250,000 jobs have been lost in the sector over the past four years… At the other end of the value chain, Chinese exports of EVs, batteries and solar panels to members of the Association of Southeast Asian Nations increased more than 50 per cent last year to nearly $22bn. Vietnam imported $84bn in electrical machinery and electronics from China last year, up 43 per cent, according to the Asia Society Policy Institute (ASPI) think-tank.

This flood of cheap Chinese imports and its impact on domestic manufacturing in terms of factory closures and job losses is already generating backlash in these countries.

Indonesian finance minister Purbaya Yudhi Sadewa said in March that Jakarta was considering measures to curb the growing dominance of Chinese products on the country’s e-commerce platforms. “If this continues without intervention, it would be as if we are handing over our domestic market directly to China,” Purbaya said… Liew Chin Tong, Malaysia’s deputy finance minister, has warned that Asian countries that long relied on the US as their export destination of “first and last resort” now risk crashing each other’s markets, “resulting in cut-throat price wars, involution and deindustrialisation of fellow Asian economies”.

8. There’s little to indicate that even with the rising global backlash at Chinese exports, including among developing countries, Beijing has any intention to change course and focus on domestic consumption. After the property slump and given the reluctance to rebalance towards consumption, manufacturing investments have emerged as the engine for sustaining the 5% growth target. Exports have become a convenient outlet to sustain growth and prevent domestic discontent through factory closures and job losses.

9. The solar industry is a good illustration of all these distortions.

As Chinese factories rushed into solar, production capacity skyrocketed. The country has the ability to manufacture 1,200GW of solar panels annually, roughly double the 647GW installed worldwide last year, according to the China Photovoltaic Industry Association and energy think-tank Ember… local governments poured money into building solar plants over the past five years, contributing more than 50 per cent of funding for many projects. Almost none was built without local government capital involvement…
“Why was it possible to build capacity exceeding global demand by double in such a short time?” asked Li Dongsheng, the chair of television and solar conglomerate TCL. “The key reason is the distortion of resource allocation and inappropriate local government participation,” he said in an interview with local media last month… In the solar industry, overcapacity has led to vast losses, which China’s top six publicly traded solar groups indicated would cumulatively total Rmb43bn for 2025. Yet the subsidies continue. One of those six companies, Jinko Solar, received Rmb1.3bn in subsidies in the first half of 2025 but still lost Rmb3bn in the period. Another, Trina Solar, received hundreds of millions of renminbi during the period…

10. The Rhodium Group has an excellent report on how China managed to construct an “electro-state” that has electrified power generation and transportation, and has become so utterly dominant in the manufacturing of the likes of electric vehicles and batteries. Abundant and cheap electricity enables metals processing, which is the foundation of hardware manufacturing. It attributes this outcome to Beijing’s “expansion of cheap electricity, the agglomeration of upstream materials production (metals refining, synthesis, and fabrication, which are low-margin, energy- and capital-intensive businesses), and policies that enabled China to develop a dominant position in green technologies, while maintaining its competitive advantage in manufacturing of almost anything with an electric current.”

This is a good summary of the dynamics that led to the emergence of the electro-state:

Local government incentives to invest heavily and a financial system granting cheap credit to state-owned enterprises allowed Chinese energy-intensive industries to develop much faster than the growth of domestic downstream demand… Policy choices incentivized fully localized industrial clusters regardless of the costs of maintaining them, and central planners then prioritized the expansion of power supply and grid development to facilitate these investments.

11. It describes the explosive growth in manufacturing sector's power consumption.

Nowhere is the dominance more pronounced than in metals refining.

This is a very good description of the industrial metals processing and refining ecosystem.

Ore bodies almost always host multiple metals, but the economic viability of extracting non-primary metals varies… These companion and by-product metals require specialized refining capacity to recover, which can be costly… There are several well-known examples of critical minerals that originate as byproducts of major host-metal supply chains… While some of these metals can be mined from dedicated deposits, if they are not captured during host-metal processing, they typically end up in tailings, slags, or other waste streams. Many companion and byproduct metals are traditionally considered too costly to extract, and as a result they often accumulate in waste piles outside processing facilities. Installing the additional capacities required to recover metals such as gallium, germanium, indium, or tellurium involve significant capital expenditures that are difficult to justify given the relatively small market size and historically low prices of these materials. In most markets, this makes recovery and processing uneconomic.

The challenge of the commercial viability of extraction, processing, and refining is overcome by China’s downstream manufacturing ecosystem.

Because Chinese mobile phone, battery, semiconductor, LED, and other manufacturers require stable supplies of minor metals, refiners can enter into offtake agreements that guarantee downstream demand from the domestic manufacturing ecosystem. This reduces commercial risk and allows smelters and refineries to justify capital expenditures for byproduct recovery in ways that are not feasible elsewhere. For minor metals, especially companion and byproduct metals, the offtake agreements are essential to start production. Major metals benefit from the ability to sell refined output to exchanges. Minor metals maintain a smaller set of potential customers because materials are produced for specialized purposes. Because minor-metal refineries depend on continuous operation, producing output without assured demand represents a material commercial risk that most firms are unwilling to assume.

The symbiotic relationship between refiners and manufacturers within the Chinese industrial ecosystem reduces uncertainty in upstream supply chains while also empowering incremental innovation in downstream manufacturing. The outcome is a supply chain that combines upstream metals processors with downstream metals consumers that simply does not exist anywhere else in the world… China produces 200 million televisions and 1.5 billion smartphones per year. Producing the TV sets guarantees offtake of 25 to 30 metals, while the phones require close to 60 metals. By establishing the world’s largest manufacturing base, the ecosystem ensures the greatest volume and diversity of offtake for processed metals and minerals. The total volume of downstream manufacturing enhances midstream processing competition for upstream materials to fabricate or process on behalf of downstream buyers.

There’s no way this tightly coupled ecosystem can be replicated anywhere globally. The only option is to start with this ecosystem and figure out ways to gradually diversify.

The report is essentially a warning that Western efforts to diversify critical mineral supply chains face a structural disadvantage: China's advantage is not simply about individual metals or policies, but about the integrated system that links cheap electricity, processing expertise, state-backed finance, and massive downstream manufacturing demand. Replicating any one piece is feasible; replicating the whole ecosystem is a generational challenge.

12. By illustrating with the example of the metals manufacturing ecosystem, the report highlights the dilemma faced by China’s trade partners. On the one hand, continuing business as usual access to Chinese imports will invariably destroy their local manufacturing bases. On the other hand, domestic manufacturers will not only be uncompetitive with respect to Chinese manufacturers, but they must also necessarily rely on Chinese suppliers for critical inputs like specialised materials that go into manufacturing.

When faced with such a dominant manufacturing power, there are very few choices. For sure, they must resort to tariffs and other trade barriers to restrict entry. The European IAA is a good example of an effort aimed at attracting Chinese investments on the condition that it would transfer technology and localise manufacturing, instead of mere assembly. But there are daunting barriers, including strong resistance and subversion by the Chinese investors.

While no country, including the US, can compete against China, the situation changes when countries form supply-chain alliances to diversify and decouple from China. I blogged earlier, pointing to Kurt Campbell and Rush Doshi who have argued in favour of America forging alliances with like-minded partners to create a meta-economy that can outcompete China and manufacture at scale.

To achieve scale, Washington must transform its alliance architecture from a collection of managed relationships to a platform for integrated and pooled capacity building across the military, economic, and technological domains. In practical terms, that might mean Japan and Korea help build American ships and Taiwan builds American semiconductor plants while the United States shares its best military technology with allies, and all come together to pool their markets behind a shared tariff or regulatory wall erected against China. This kind of coherent and interoperable bloc, with the United States at its core, would generate aggregate advantages that China cannot match alone.

Unfortunately, the Trump administration’s policies are pulling in exactly the opposite direction in terms of antagonising and decoupling from its traditional alliances.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 18 Apr 2026 15:10:00 +0000

1. Net FDI from India has been negative for several months now.

2. WSJ graphics on US health care system. Cost of inpatient procedures are much higher than elsewhere.

Cost of pharmaceuticals too are much higher.

3. The rise and rise of iPhone manufacturing in India.

The company assembled about 55 million iPhones in India in 2025, up from 36 million a year earlier, people familiar with the matter said, asking not to be named because the numbers aren’t public. Apple makes about 220 million to 230 million iPhones a year globally, with India’s share of the total increasing rapidly.

4. For those advocating currency depreciation as the response to a sharp increase in oil prices, Sachidanand Shukla has a cautionary note pointing to the importance of stability and credibility of the rupee.

The allure of a depreciating exchange rate lies in its simplicity: It makes ones’ goods cheaper for foreigners. However, this is often a Faustian bargain. For many emerging and developed markets alike, the reality of a currency in freefall is not a boom in exports, but often a harsh blow to purchasing power and investor confidence. Imagine yourself in the shoes of a big global financial investor. How confident will you be in investing a billion dollars if you lose 9-10 per cent in a year due to depreciation?

On a related note, as the RBI deploys an expansive toolkit to stabilise the rupee, Rajeswari Sengupta writes that RBI has engaged strongly in the forex markets, selling over $30 bn in the spot markets in March. Its other actions were intriguing.

It imposed regulatory restrictions —barring banks from taking positions in the offshore non-deliverable forward (NDF) market and capping their daily onshore FX exposure to $100 million each... The RBI did not merely restrict new positions; it required banks to unwind existing ones, reportedly at a cost of ₹4,000–5,000 crore. In effect, banks were penalised for actions that were fully legitimate at the time. Such retrospective costs risk undermining confidence and making banks more cautious in FX markets. Lower participation could reduce liquidity. And when liquidity dries up, currencies tend to become more volatile, not less.

5. The human cost of Israel's bombings of Lebanon.

On the day the cease-fire came into shaky effect — and most civilians across the region began to breathe a sigh of relief — Israel proceeded to launch one of the deadliest strikes on Lebanon ever, including in the heart of densely populated Beirut, without any warning. The operation, which the Israel Defense Forces sayattacked Hezbollah command centers, hit 100 targets in 10 minutes, killed over 350 people and wounded well over 1,000, many of them civilians... over the past six weeks, Israeli strikes in Lebanon continue, and have forced more than a million people from their homes and have left over 2,000 people dead and multiple villages in ruins.

6. The rise of China's export control measures.

China announced restrictions on exports 30 times between 2021 and 2025, the report by the EU Chamber of Commerce in China found, up from just 11 in the previous five years. Since 2020, Beijing had turned to “geoeconomic” controls — measures aimed at achieving geopolitical goals, it said. These include 10 that made use of global chokepoints in supply chains, such as China’s rare-earths exports, and 10 others aimed at coercing other countries using economic measures.

China has also announced sweeping new regulations to punish foreign companies that are trying to decouple their supply chains from China by increasing reliance on non-Chinese suppliers. These measures are part of the government's efforts to counter rising protectionism and decoupling from China.

The 18-point regulations, described in state media as an effort to “prevent security risks in industrial and supply chains,” supplement the already formidable authority afforded to Chinese regulators to investigate multinational corporations for moving supply chains out of China. Under the new rules, regulators can question employees and examine corporate records during investigations. The regulations also allow authorities to bar companies and individuals from leaving China if they are suspected of moving supply chains elsewhere under foreign pressure... The State Council, China’s cabinet, justified the measures as necessary to protect the country’s economic stability and national security — a rationale it has previously used to expand its ability to pressure companies. China has also adopted sweeping state secrets laws to prevent information from leaving the country.

7. Iran has been adapting to US sanctions.

During the pandemic, Beijing vowed to invest $400 billion in the country in the coming decades in exchange for a steady supply of oil. In 2024, it purchased 90 percent of Iran’s oil exports, according to the International Energy Agency. China also accounted for roughly a quarter of Iran’s non-oil exports from 2019 to 2024, according to data compiled by Harvard University’s Atlas of Economic Complexity, purchasing billions of dollars of Iranian chemicals and metals.

Payments are made in renminbi, China’s currency, avoiding the use of dollars and the need to involve American banks, which are often the primary entities used to help enforce sanctions violations. China, in return, appears to provide nearly 30 percent of the commodities that Iran imports, selling everything from furniture to sunflower seeds. There is another crucial layer of trade between the nations not recorded in official statistics. Both countries have engaged in a complicated barter system that involves secret financing channels. Iran ships oil to China and in return, Chinese state-backed construction companies have built airports and other infrastructure.

8. The new fragile European countries - Britain, Italy, and France (or Bifs).

9. The remarkable resilience of the European Union.

Europeans still trust the EU over their national political systems, and the margin is wider than it has been since the noughties. (More on this later.) Support for the euro, which was as low as 51 per cent in 2013, has grown to a record high of 74 per cent in the EU, and 82 per cent in the Eurozone. To repeat, that is a near-consensus in favour of the single currency at a time of economic malaise in much of the continent. As for the country-by-country findings, 21 per cent of Austrians think membership is a bad thing. That makes them the most Euro-sceptical people in the union.

10. India reached peak college education premium in 2011?

11. Jason Bordoff makes the important point that, unlike earlier, the risk of oil shocks is a less restraining factor on US supplies.

In 2012, the US was far less equipped to absorb even a small disruption. US crude production averaged just 5mn barrels a day in 2009; last year it approached 14mn. Two decades ago, the US imported about 60 per cent of its oil consumption. Today it is a net exporter and the world’s largest exporter of liquefied natural gas.

12. The data centre construction boom in the US is being held back by construction and other delays, with almost 40% of those due this year at risk of falling behind schedule.

13. Finally, excellent description of the regressive nature of income taxation especially for the richest Americans.

In 2021, ProPublica published an investigation built on a bunch of leaked tax documents revealing what the richest Americans really pay — or don’t. Warren Buffett had a true tax rate of 0.1 percent; Jeff Bezos had 0.98 percent; Michael Bloomberg had 1.3 percent... Let’s focus on Jeff Bezos because he’s much more of a classic case. Jeff Bezos started his own business. He owns a dominant amount of the stock. And over the course of the years, he has taken a salary that is no higher than $82,000. It’s been more than 20 years now, and his salary is always capped at $82,000.

You might say: Well, why would it be? He started the company — he’s the man. Why isn’t he taking a huge salary to reflect all that he put into the company? The reason is: Salaries are for suckers. When people take a salary, they’re subject to high income taxes and payroll taxes, and Jeff Bezos and a lot of our other multibillionaires have no interest in paying those taxes.

So instead, they take their benefits through the growing value of their stock — and their stock has grown enormously. And that massive growth of stock happens entirely tax free — with no time frame under our current system in which that stock will ever be subject to tax. That is because we only impose a tax if the stock is sold, and Bezos never has to sell the stock because he can simply borrow against the stock and use that money to support his lifestyle and to pay any interest that’s due on the loan... you’re just taking out one loan after another, sometimes paying one loan back with another, and you’re just doing this again and again.

The interview also makes a reference to Andrew Mellon's views on capital gains (or investment returns) taxation.

The fairness of taxing more lightly incomes from wages, salaries and professional services than the incomes from business or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it, and old age diminishes it. In the other, the source of income continues; the income may be disposed of during a man’s life, and it descends to his heirs.

Gulf War and India's external account

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

The Gulf War threatens to damage economic prospects on multiple fronts, especially on the external account, especially for oil importers. For countries like India, which are acutely dependent on imports of oil and gas, and that too from the Gulf, the increased oil prices translate into rising imported inflation, widening current account deficit, weakening rupee, and pressure to raise interest rate. A combination of all these puts pressure on the external account and leads to sudden stops (of capital inflows) and capital flights (capital outflows).

In response, economic orthodoxy advocates allowing the currency to depreciate and serve as the automatic stabiliser by squeezing imports and boosting exports. However, as Sachidananda Shukla writes, this is no free lunch. Allowing the rupee to fall runs the risk of steep declines due to overshooting, hurting investor confidence and weakening purchasing power. Episodes of sharp declines can dent credibility, whose recovery is easier said than done. As Mundell-Fleming’s Impossible Trinity shows, a country cannot pursue an independent monetary policy and hope for modest depreciation in the market for capital flows.

In this context, how does India’s external account stack up?

India entered the Gulf War with pressures building up on its external account due to net FPI outflows, zero net FDI flows, adverse global trade situation, and so on. Further, by maintaining the rupee overvalued for several years, there was no cushion available for calibrated depreciation. The only silver lining is the rising services exports.

For a long time, India was the darling of emerging market (EM) funds, who had been overweight on Indian equity markets. However, once the tide turned since October 2024, it has been a steep decline with FPIs pulling out $45 bn. FPIs are now underweight on India, ownership is at a 15-year low, it has underperformed EM equities by 50 percentage points, and it is estimated that there would be another $12-15 bn of possible selldown. But worryingly, even after the poor performance, India trade at 50% premium to EM averages. Having missed the AI story and with other markets recovering from their low baseline (just as India is declining from its high baseline), there’s no immediate reason to reverse the course on India.

The net FDI inflows has been steeply declining since FY22, after being stable in the $25-30 bn range since FY15. The sharp increase in outward FDI flows starting from FY23 is an important reason.

Gross inflows more than doubled over 15 years (from $29bn to $81bn), but repatriation quadrupled (from $13bn to $51bn) and outward FDI surged, leaving net FDI near zero by FY25. In FY26, net FDI recovered partially but repatriation is running at record monthly highs (it touched $4.9 bn in Jan 2026).

An analysis of India’s total gross foreign inflows shows that merchandise exports have shrunk from 48% in FY10 to 39.2% in FY25, whereas services exports (rose from 25.3% to 34.1% in the same period) and remittances (10.6% to 11.6%) together now account for the dominant share, while net FDI and net FPI have shrunk as shares.

In absolute value terms, the total gross foreign inflows have doubled from ~$600bn in FY10 to nearly $1.2 trillion by FY25. It has to be borne in mind that goods exports, services exports, and remittances form the major share, with FDI and FPI being secondary contributors.

India’s corporate sector actively uses overseas borrowing as a cheaper alternative to domestic credit (especially when domestic interest rates are high). Gross ECB approvals surged in FY25 to hit a record $61.2bn as domestic liquidity tightened. Repayments have also risen, constraining net ECB as a financing source. As of September 2024, the outstanding stock stood at $190.4bn, rising from $124 bn in FY21. The 50% increase in ECB stock also means higher repayment outlflows going forward. The Gulf war has raised ECB cost (higher risk premium, weaker rupee raises hedging cost) while reducing domestic alternatives.

Econ 101 teaches us that higher oil prices lead to increased current account deficit (CAD), and weakens the currency. The graph shows that this dynamics played out in each of the four crises - FY12-13 (leading up to the taper tantrum), FY 20 (pandemic), FY22 (Russia-Ukraine war), and now the Gulf War. It shows that as the basket prices rose, CAD as a % of GDP rose. It is also to be noted that the Indian economy benefited from six to seven years of low oil prices, which also allowed the government to realised higher tax revenues by limiting the pass-through in global prices to the domestic market.

And the rupee depreciated episodically by about 65% over the last 15 years.

For sometime in 2023 and 2024, the RBI was intervening heavily to suppress volatility and prevent the currency from depreciating.

INR has been a remarkably stable currency over the last two decades. From 2015 to 2025, but for a brief pandemic blip, it was the strongest currency among peers. Now since the beginning of 2025, it has become one of the weakest currencies, only ahead of Turkey and South Africa.

After being the most stable EM currency in the last seven years, the rupee’s volatility has increased sharply in 2026.

So what does this portend for the external account?

Assuming three scenarios of the Gulf War and squeeze on oil from the Strait of Hormuz - mild (4-6 weeks, $80-90/bbl, now no longer relevant), moderate (3-6 months, $95-110/bbl, which looks likely now), and severe (>6 months, $120-200/bbl), the net CAD is estimated to move from 0.6% of GDP pre-war to 2.2–2.6% in the moderate scenario and 3.2–4.0% in the severe scenario.

In stress scenarios, repatriation of FDI actually accelerates (PE exits, MNC profit remittances, Indian firms investing abroad), so net FDI can turn negative. The CAD financing need reveals a financing gap of $50-120 bn in the moderate to severe scenarios, requiring significant reserve drawdown and/or higher FCNR(B) NRI bonds. ECB borrowings are likely to remain constrained due to greater risks and higher cost of capital.

The impact on the domestic economy through inflationary pressures is significant. A 5% INR weakening adds ~25–30bps to CPI above and beyond the direct oil/food price effect, creating an amplifying loop in the severe scenario.

Bringing all this together, the radar chart shows that on 6 of 8 dimensions, India’s current external vulnerability is worse than pre-war February 2026, and comparable on the worst dimensions (oil, rupee, BOP financing) to the 2013 Taper Tantrum. The redeeming factors are the rising services surplus and the foreign exchange reserve level. The RBI faces the classic impossible trinity: defend the rupee (deplete reserves, distort adjustment) or let it depreciate (amplify inflation, undermine confidence). The optimal path — gradual managed depreciation with NRI incentives and tight communication — is the 2013 playbook, and it is available again.

In conclusion, the Gulf War poses the biggest risks for the external account since the taper tantrum episode. Therefore, the outcome of the negotiations between the US and Iran has significant implications for the Indian economy.

Some takeaways from the Gulf War

noreply@blogger.com (Urbanomics) — Mon, 13 Apr 2026 02:02:00 +0000

Now that we are past the first phase of the Gulf War and a ceasefire has taken hold (though with the breakdown of the talks and more sabre rattling by President Trump, it now looks tenuous), it may be a good time to list out a few takeaways from the war. It is also important because, at a broader level, the Trump 2.0 administration, generally and the Gulf War in particular, may have reshaped the world economy and geopolitics in many ways.

Here are some observations:

1. Arguably, the biggest takeaway from the Gulf War is one more reminder about the deeply interconnected nature of the world economy, with dependencies flung far and wide across industries and countries/regions, and associated risks and vulnerabilities. The Covid 19 pandemic was a rude awakening about the risks posed by a globalised supply chain and the extreme dependency on China’s manufacturing prowess. The Russian invasion of Ukraine exposed Europe to an energy market shock that rippled through the economy and unsettled a decades-long dependency. The Gulf War has reignited and amplified the deep energy market vulnerabilities in particular and global economic dependencies in general.

2. The world economy has been witnessing increased volatility in the oil and natural gas markets since the millennium.

Consider this about how the Gulf War may have a long-term negative shock on the global LNG markets.

Iran carried out a retaliatory missile strike on Ras Laffan, Qatar’s vast energy complex. That target produces roughly a fifth of the world’s liquefied natural gas, a transportable fuel used to heat homes, cook food, power factories and generate electricity throughout Asia and Europe… Officials and workers are still picking through the rubble, and the full extent of the damage has not been assessed. Even so, Saad Sherida al-Kaabi, Qatar’s energy minister, said Thursday that it would take up to five years to repair and would reduce the country’s export capacity 17 percent.

And more generally on the global energy markets.

Critical Gulf energy infrastructure that was presumed to be safe is now seen as vulnerable, he said. A precedent has been set. “Buyers will price that risk for longer than the initial outage itself,” Jan-Eric Fahnrich, a senior analyst at Rystad Energy, wrote in an analysis. Countries in Asia and Europe, which depend on L.N.G., are likely to face more expensive gas prices long after the Strait of Hormuz reopens.

The extensive damage suffered by oil and gas infrastructure across the Gulf means that recovery to pre-war production levels is unlikely even if the war ends now. FT Alphaville points to JP Morgan analysts who document the extent of damage, listing the roughly 50 energy infrastructure assets in the Gulf that have suffered varying degrees of damage in drone and missile strikes. Qatar’s Ras Laffan oil and gas complex, for example, may require years of repairs to restore 17% of its damaged capacity.

Even if the war ends now, a big uncertainty will be how long it will take to restore oil and gas supplies to the pre-war status quo.

3. The dependencies are not confined to energy markets. For example, it threatens to adversely impact agricultural production.

Gulf states account for 49 per cent of globally traded urea and 30 per cent of ammonia, perishable contributors to the nitrogen cycle that makes high-yield agriculture possible. When that supply chain stops, the effects accumulate quietly in soil chemistry and planting decisions over the months that follow… Before the first strike on Iran, the global food system was already running on reduced redundancy — Ukraine and Russia still represent about a quarter of global wheat trade, and some 400mn people across the Middle East and east Africa have been absorbing that supply shock for three years.

In fact, it is estimated that the impact of the Gulf War on food prices could be bigger than that due to the Ukraine war, with the channel of impact being fertiliser supply. Agriculture depends on three core nutrients - nitrogen, phosphorus, and potassium. Nitrogen fertilisers like ammonia and urea are produced from natural gas, and phosphorus depends on sulphur, a by-product of oil and gas refining.

The level of dependence on the Gulf for sulphur, urea, and ammonia is very high.

This is a striking illustration of how LNG supply disruption has triggered fertiliser plant closures across India in March 2026.

Tej Parikh has a good illustration of the vulnerabilities in the global semiconductor industry, where a chip production line can cross over 70 boundaries before reaching the consumer. The level of risk concentration is extreme and perhaps unavoidable.

South Korea’s Samsung Electronics and SK Hynix dominate memory chip manufacturing, together accounting for 80 per cent of high-bandwidth memory and nearly 70 per cent of dynamic random-access memory… Taiwan’s TSMC makes 90 per cent of advanced semiconductors and virtually all of the high-end AI chips designed by Nvidia, the world’s most valuable company. Both South Korea and Taiwan depend on fossil fuels for energy, which almost entirely come from imports particularly via the Strait of Hormuz. The latter relies on the Middle East for more than one-third of its liquefied natural gas needs.

Asia’s chip industry is reliant on the Middle East for chemicals too. About one-third of global helium supply — a byproduct of natural gas processing that is used to cool silicon wafers — is from Qatar. South Korea and Taiwan get the majority of their helium from the Gulf country, which is a dominant provider of the hard-to-substitute, high-purity variety. Roughly half of global seaborne sulphur — an element used for chip cleaning and etching — transits the strait. Even before the war broke out sulphur was facing a supply squeeze, owing to high demand from the tech and electric vehicle industries. The Dead Sea is also the world’s largest source of bromine, a chemical that helps score patterns on to silicon wafers. South Korea imports virtually all of its supply from Israel.

4. The War has also shown how vulnerable the Asian economies are to global oil shocks. Hoarding, price caps, tapping reserves, restrictions on exports, rationing, and other demand management measures have become commonplace across Asia. While Gulf produces a fifth of global oil supplies, Asian countries are among the most dependent.

In 2024, nearly 21 million barrels of oil a day crossed through the Strait of Hormuz, the narrow passageway connecting the Persian Gulf to the world. Four-fifths of that supply went to Asia. China has long been the biggest purchaser of oil and gas from Persian Gulf nations. And with more than a third of its total supply coming from the region, the disruption is significant for Beijing. But other countries are almost entirely reliant on the region for their energy needs.

India’s dependence is especially acute.

Almost 50 per cent of the LPG and 30 per cent of the natural gas that India consumes comes from the Strait of Hormuz.

5. Chokepoints have become the game in global geopolitics. China’s weaponisation of its dominance in the processing and refining of critical minerals and manufacturing of rare earth magnets has single-handedly given it an insurmountable chokehold over the US. It has also clearly demonstrated its intent and success in weaponising its general dominance in manufacturing.

Geopolitically, one of the most important outcomes from the Gulf War is the realisation that the Strait of Hormuz is arguably one of the biggest global economic chokepoints. The Strait is the only passageway out of the Persian Gulf, carries 25% of the world’s seaborne oil and 20% of its natural gas, and the land pipelines can carry only a small share of the oil and gas carried through tankers. Local geopolitical concerns also deter countries from laying pipelines through another country to export their oil products.

Badr Jafar has this description of the vulnerability.

Thirty per cent of global seaborne oil flows and a fifth of the world’s liquefied natural gas trade normally transit a waterway that is 21 nautical miles wide. A third of seaborne traded fertiliser and nearly half the world’s seaborne sulphur exports depend on the same passage, with direct implications for global food security. So do significant volumes of aluminium and helium — the latter essential to semiconductor manufacturing and the global AI supply chain. The concentration of so much global commerce through a single contested corridor is an anomaly the world has tolerated for decades.

This is a good compilation of how the weaponisation of the Strait of Hormuz has impacted important supply chains.

The War has shown Iran that it has a powerful weapon in the form of the Strait of Hormuz, which it can squeeze or close whenever required. This may well also be Iran’s biggest win from a war that has reduced large parts of the country to rubble. As Gideon Rachman has written, “the future dilemma is that Iran now knows that control of the Strait of Hormuz gives it a stranglehold over the world economy. Even if it relaxes its grip in the short term, it can tighten it again in future.”

6. But chokeholds are not permanent, and there may be nothing more powerful than activating the chokehold in triggering efforts to overcome it. By exercising its chokehold over Europe’s energy markets and forcing a rapid shift towards LNG and other energy sources among Europeans, the Russians have lost one of their most important strategic levers over Europe.

As Badr Jafar writes, a similar realisation is emerging among energy producers in the Gulf region about the need to reduce reliance on the Strait and build resilience in the energy supply chain.

Saudi Arabia’s Red Sea ports and expanded pipeline capacity offer an alternative energy corridor. The UAE’s east coast provides deep-water ports and pipeline routes connecting Gulf producers to the Indian Ocean. Oman’s developments at Duqm and Sohar sit well outside the chokepoint. Goods and energy are already moving along these routes — in some cases through cross-border land bridge arrangements that would have seemed improbable just months ago. The Middle East also holds a largely untapped inheritance: pipeline infrastructure built in previous crises and mothballed for decades, road and rail corridors, cross-border electricity grids and water systems that stretch beyond established networks. With renewed co-operation, these assets could deepen regional connectivity to global markets. The crisis is doing what years of summitry could not — creating the conditions for genuine intraregional economic integration. States whose ties were strained only weeks ago are now finding common cause.

This is a repeat of what happened in the early days of the Ukraine war when the Europeans realised the chokehold Russia had on its natural gas supplies. On the same lines, the realisation of the fickleness of the US security umbrella has sent the US allies scrambling to shore up their own defence preparedness and strengthen their non-US alliances. In the long arc of history, the events of the last year may have been just the right impetus to push the Europeans (and Japan) into the pursuit of independent defence strategies.

7. In the grand scheme of things, historians may well come to regard the Gulf War as one with only losers. Iran has been devastated, and its economy has surely been put back several years, if not at least a decade. For all the outward bravado and bluster, it is hard to believe that the loss of a whole generation of leaders has not seriously impacted the country’s politics. Its proxies in Syria and Lebanon have been defanged.

This war, coming on the back of the sustained Gaza bombings, has left an Israeli society that is radicalised to a scary degree, even evoking comparisons with Weimar Germany. Polls suggest that more than 90% of Jewish Israelis back the war, and the country’s political parties have been trying to outbid each other in calling for the extermination of its enemy. History tells us that these trends will not end well for Israel and the world at large.

It has also surely alienated a generation and more of people globally, especially in Europe, including those sympathetic to its cause, who are horrified by the barbarity of the Gaza and Iran attacks. The most lasting damage may well be in the US, where the public opinion against Israel, even among the traditional support base, has suffered sharp declines.

The long period of geopolitical calm and stability that allowed the Gulf economies, especially the UAE, to prosper and become global magnets has been rudely unsettled. It is likely to be a long time before they can aspire to reclaim their pre-war status, if ever.

The fickle and whimsical nature in which President Trump conducted the war allowed Israel to dictate the agenda and subordinate the US interests to its own, and browbeat its own allies, which have all contributed to undermining the US's credibility. It does not help that it has not managed to achieve its primary objective of regime change in Iran, despite eliminating a whole generation of Iranian leadership and the massive bombardment of the country.

To this extent, the ~~Gulf War~~ Trump 2.0 administration may have rung the bell on the definitive decline of the post-war US hegemony in international politics. The US security umbrella is now punctured beyond repair.

8. While it cannot be said to have emerged as a winner, by staying quiet and allowing its main competitor to make all its mistakes, China may have enhanced its power at least in relative terms. However, due to its own political limitations, it may not have the sagacity to seize the moment.

The war highlighted China’s economic resilience and how it boosts its superpower status. It holds the world’s largest emergency reserves of petroleum, totalling a staggering 1.3 bn barrels. With electricity accounting for 30% of the country’s energy consumption, about 50% higher than the US or Europe, it is significantly insulated from oil shocks. Its firms account for at least 70% of global manufacturing capacity for major green technologies like solar, battery, and EV components, besides also dominating the extraction and refining of rare-earth elements that go into them.

This may well be the most definitive illustration of the declining image of the US and the rising one of China, with the reversals coinciding strikingly with the Trump inauguration.

9. On the economic side, the medium-term impact of the war will be on inflation and interest rates globally. The war comes on the back of supply shocks imposed by the Covid 19 pandemic and the Russian invasion of Ukraine. It had taken more than three years for the resultant surge in inflation to decline to normalcy. This process has now been reversed, and with no certainty on what lies ahead (also given the risk that the ceasefire will not hold).

In the US, expectations for at least two rate cuts have declined to just one rate cut. And if the ceasefire is broken and the supply squeeze continues, oil prices will remain elevated, and inflation will surely rise. Instead of rate cuts, the Fed may have to respond with rate hikes. In fact, in Europe, the expectations now are for rate hikes.

10. If one were to look for silver linings, the sheer unpredictability, the staggering hubris, and the utter disregard for all diplomatic norms, the Madman nature of Trump may serve as a deterrent to potential opponents and aggressors. This, coupled with the frightening display of US military prowess and its projection capabilities, is a very important signal. It would be especially relevant to China and any plans it might have to invade and annex Taiwan.

11. The Gulf War has confirmed that the surest test of the TACO (Trump always chickens out) trade is the stock market. Gillian Tett has written, “Donald Trump views equity prices as a key — if not the key — barometer of his success, more than any president before him.” The other TACO triggers are the cascading impact of energy prices on domestic gas prices and inflation. On multiple occasions during the War, including the latest ceasefire, Trump pulled back from the brink as the (equity and bond) markets roiled and threatened to unravel. So much so, one could have predicted with some degree of confidence that the deadline to “wipe out a civilisation” was extreme brinkmanship to extract the maximum concessions before the inevitable pullback.

It is another matter that these Taco episodes may have been used for market abuse and profiteering by those close to the powers that be.

12. The Gulf War offers a reminder that wars have returned to being more common. Conflict zones grew by nearly two-thirds between 2021 and 2024, with 2023 witnessing more violent conflicts than any time since World War II, and over 130 armed conflicts being recorded in 2024, a total that has doubled in just 15 years. There is a greater inclination to use military power to expand national boundaries. This also comes at a time when the Trump administration’s actions have raised serious doubts about the US security umbrella. The Europeans and Japanese, who most benefited from the alliance with the US, are now the most disturbed by the new normal.

All this is unlikely to be lost on countries that the possession of nuclear weapons may offer protection against blackmail and aggression by enemies. It has naturally reignited a wave to go nuclear.

France, whose force de frappe is truly sovereign, said this month that it would increase its stockpile of warheads. In Poland, a rare point of agreement between the prime minister and the president is their openness to going nuclear. In South Korea, public support for a deterrent has gone up to 70 per cent in recent years. Saudi Arabia, which has said that it would get one if Iran did, might not wait for such a cue now that it and other Gulf states are under conventional attack from that quarter anyway. Even the original nuclear powers are chafing at old taboos. As of last month, there is for the first time in over half a century no binding agreement to limit nuclear arms between America and Russia, which have the world’s two largest arsenals.
In 1994, Ukraine gave up the Soviet nuclear weapons that were then on its soil in exchange for certain assurances about its security. Two decades later, Moscow began its long and ongoing war against Ukraine with the annexation of Crimea. The lesson, for some, is obvious. A country with dangerous neighbours should retain or acquire the ultimate deterrent. Another salutary tale is that of Iran. It seems that an unfinished nuclear bomb is the worst of all worlds: a provocation to other states but not a deterrent. A rational government would either abandon all ambitions of that kind or realise them in full.

13. The US-Israeli bombings have clearly been intended at destroying the Iranian economy, achieve through warfare where sanctions have failed. Over 13,000 targets, going beyond military infrastructure, and covering oil and gas facilities, industrial sites, universities, transportation infrastructure have been destroyed in the bombings.

Israeli air strikes forced Iran to shut down its two largest steel plants. One of Iran’s biggest pharmaceutical manufacturers, Tofigh Darou, which produced important cancer treatments, was also destroyed by air strikes last week, the health ministry said. By striking at the heart of Iran’s industrial base, Israel has hit a vital source of non-oil export revenue for the Islamic republic. In the first 10 months of the last Iranian year, which ended in March, non-oil exports totalled $51.6bn, compared with total imports of $58.1bn, according to Iran’s customs administration. Petrochemicals account for nearly half of Iran’s non-oil exports, followed by minerals and industrial goods such as steel… On Monday, Iran accused Israel of striking Sharif University, the country’s most prestigious engineering institute. Last week, Israel bombed Tehran’s more than 100-year-old Pasteur Institute, one of its leading medical research facilities.

This has clearly put the Iranian economy back by decades. The brunt of the economic impact will be on the poor and vulnerable, thereby setting the stage for social discontent at a time of diminished resources and a weakened political system. In the circumstances, any economic recovery cannot begin without some relaxation of the sanctions. It is hard to believe that after such devastation, a country as large as Iran, with 90 million people, can continue to be left as a pariah and squeezed with sanctions, without the political instability spilling over across the region.

14. As the first round of talks has shown, there’s little wiggle room available for both sides in any negotiations. The Iranians cannot settle for anything other than at least some relaxation in the sanctions, at least some assurances in this direction. Further, in light of what has happened, they will find it difficult, even impossible, to now give up on the nuclear deterrent. These are existential issues for the regime. It has chosen to endure the 38 days of bombings instead of acceding to the US demands on the nuclear issue. It is highly unlikely that they will now climb down significantly on this issue after all the losses - over 3500 lives lost, elimination of an entire generation of leadership, and tens of billions of dollars of economic devastation.

This circumscribes the window for negotiations. For one, it would have to be something short of Iran giving up its nuclear option. But Iran will have to concede more than it has so far. The other point concerns the extent of sanctions relaxation. The negotiations cannot move forward if there is disagreement on these basic assumptions. If there’s mutual agreement on the assumptions on both issues, the negotiations would revolve around what would be an acceptable enough climbdown for the two sides.

15. Finally, there are important warfare lessons. The foremost takeaway, reinforcing the impressions from the Ukraine war, is that drones and low-cost ammunition necessitate a reexamination of conventional military strategies. Second, however, this must be contrasted with the importance of advanced technologies in establishing the near-complete air superiority of the US in the two-week war in 2025 and the current war. Third, the reasonably long drawn-out war has given the US armed forces invaluable experience of wartime action, especially compared to the Chinese.

Fourth, the use of AI has reshaped decision-making in wars. The use of Palantir’s Maven Smart System and Anthropic’s Claude model has helped the armed forces rapidly sift through voluminous intelligence data from multiple sources to plan and generate strike options in near real-time. As an illustration, the Pentagon struck more than 2000 targets in the first four days, compared to the six months taken to strike a similar number of targets in Iraq and Syria during the campaign against ISIS. Fifth, the controversy and the tiff between the US Government and Anthropic on the use of AI-generated information to make military decisions highlights the important concern with the use of AI, one that will only increase over time.