Urbanomics

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.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sun, 12 Apr 2026 02:52:00 +0000

1. Jesse Norman has this brilliant oped on the lessons from Francis Bacon for the Age of AI.

Bacon articulated a new attitude to nature. As he famously wrote: “Knowledge itself is power.” Nature was not to be revered but interrogated, understood and ultimately controlled... Bacon’s further insight was that the production of knowledge itself could be organised. In The Advancement of Learning, he advocated the creation of specialist colleges of research to gather intellectual and practical knowledge. In New Atlantis, written a few years before his death, he imagined a research institution devoted to collective scientific discovery, anticipating a world in which knowledge is systematically mobilised for practical ends...

AI, in particular, is the industrialisation of Baconian induction: the extraction of patterns from vast bodies of data in order to generate prediction and control. It is, in a sense, the logical culmination of his method... AI extends our capacity to act without necessarily deepening our understanding. It risks separating power from judgment in ways Bacon himself would have recognised as dangerous... Bacon’s project demands continued scientific and technological ambition. But it also insists on discipline, humility and vigilance against error as correctives to human hubris. In New Atlantis, Bacon imagines a new kind of advanced research institution that he names Salomon’s House. Its members decide which discoveries to publish or withhold, believing that knowledge itself must be governed, not simply unleashed. It is a strikingly prescient image. Today’s AI laboratories face precisely this dilemma: how to manage the release of systems whose power is advancing faster than our ability to understand or control them.

2. Martin Wolf has a brilliant account of Viktor Orban's 16 year rule of Hungary.

3. Janan Ganesh on the Madman Theory of international relations, where leaders make extreme threats to bring opponents to the table.

4. Ruchir Sharma argues that the big difference between today and earlier oil shocks is that debt-laded governments are acutely short of policy ammunition to counter the shocks.

In the 1970s, the typical deficit in the US and other major countries was around 2 per cent of GDP. Today, the average deficit has more than doubled; as a result the average government debt level for the G7 countries has risen from 20 per cent of GDP to more than 100 per cent... Last year, driven by government borrowing, total global debt levels rose at the fastest pace since the pandemic surge, to a record $348tn, which is more than three times global GDP. That leaves very few governments in a position to roll out new stimulus. Central banks are in a similar bind. In recent decades they have worked alongside governments to extend stimulus at the first sign of trouble, but they can’t do so easily now. The US Federal Reserve has missed its 2 per cent inflation target every month for 60 months in a row. Lately, three of every four central banks in developed countries and one of two in emerging countries have been missing their targets, too. Even if the oil shock slows economies, central banks may not be able to act as the shock also pushes inflation upward. The most vulnerable nations are those with the highest government debt and deficits, and with a central bank missing its inflation target; in the developed world they include most prominently the US and the UK; in the emerging world, the most at risk are led by Brazil, Egypt and Indonesia.

5. John Burn-Murdoch points to an important difference between social media and AI, the former divides opinion whereas the latter may be converging opinions.

Social media companies make money from attention, which in practice means rewarding sensationalism and inflammatory content with little regard for truth... In contrast, as British philosopher Dan Williams argues, AI companies are competing to serve customers who are paying for accurate, objective and, well, intelligent, tools that deliver factual information, often for business-critical purposes... In Williams’s parlance, this makes them fundamentally “technocratising”, exerting the opposite force to social media’s radically democratising influence. American writer Dylan Matthews makes a similar case, arguing that where social media’s inherent mechanisms push towards personalisation and fragmentation, LLMs are innately “converging” — their underlying dynamics push them towards objective reality... Last year I used detailed data on the ideological positions of people who post on social media to show that they over-represent the radical right and left, confirming the polarisation hypothesis. Over the past week I have used the same dataset of tens of thousands of responses to questions on policy preferences and sociopolitical beliefs to test whether and how the most widely used AI chatbots shape conversations about politics and society. The results strongly support the theory of AI chatbots as depolarising and technocratising.

While different AI platforms behave in subtly different ways, all of them nudge people away from the most extreme positions and towards more moderate and expert-aligned stances.

6. India equity market facts

For the first time since the pandemic, individual investors were net sellers in the secondary market in the first 11 months of the financial year that ended in March... Much of the 19 per cent annualised, three-year return on the Nifty Smallcap 100 Index came from bumper performance in 2023 and early 2024. That will soon vanish. If the benchmark stalls at current levels, the new three-year return in March 2027 will be just 1.3 per cent... Last year, more than 60 per cent of the IPO fundraising in India ended up giving exits to firms’ original sponsors. The money didn’t create fresh assets. In fact, a lot of it may have left the country. Overall, overseas investors have sold $22 billion of Indian equities over the past year.

And this.

Foreign Institutional Investors (FIIs) executed an unprecedented sell-off in Indian equities during March 2026, marking one of the largest monthly capital outflows in recent history,” said Pabitro Mukherjee of Bajaj Broking. The total withdrawal was almost $12bn, he said, “reflecting a sharp shift in global investor sentiment towards a ‘risk-off’ approach”.

And rupee's crawling peg.

7. The rise and rise of private capital, touching $22 trillion in assets with $2 trillion in private credit.

Over the past two decades, private loans such as those made by the Blackstone debt fund and many others have helped finance a record frenzy in private equity takeovers struck at ever higher valuations, with annualised returns of nearly 10 per cent since 2004. Large and midsized banks have been happy to lubricate the activity by offering additional financing. Insurance companies, increasingly owned by private capital giants themselves after a wave of takeovers, have also entered the market, putting portfolios intended to provide safe income to retirees into opaque private assets. Taken together, private capital, once little more than a cottage industry, has grown into a giant part of the financial system, holding $22tn in assets, largely outside the purview of banking regulators... the “retailisation” of private capital continues, following Donald Trump’s decision to allow 401(k) retirement savings accounts to invest in such assets...

Moody’s has estimated that banks have lent $300bn to the private credit industry and another $285bn to private equity funds as of June 2025. The US Treasury’s Office of Financial Research reckons lending to private credit funds by banks and other lenders could now be as high as $540bn, while noting that the data showed “leverage risk overall appears limited”.

This is a sobering note on private equity.

Private capital’s difficulties with exiting investments have caused industry-wide returns to plummet since central banks started raising interest rates in 2021... Fundraising for private equity deals has now declined by about half from the 2021 peak... Roughly a quarter of private equity funds raised since 2015 have failed to earn the rate of return at which firms earn performance fees, according to the hedge fund Davidson Kempner.

The problems are partly structural. Private equity groups have often used a standard template to consolidate assets as diverse as car washes, veterinary clinics and insurance brokerages, often using a single company to accumulate such acquisitions. Such businesses have proved too complex to sell to regular corporate buyers. The underlying financial health of private equity-owned companies has also been pummelled by higher rates and geopolitical turmoil. Over 10 per cent of such groups have chosen to increase their debt rather than making their interest payments in cash. The industry’s outsized exposure to software deals threatened by Al has already added to the malaise.

8. Batteries provided 12.3 GW of California electricity, a record 42.8% of demand on March 29.

Some thoughts on catalysing India's chip design market

noreply@blogger.com (Urbanomics) — Thu, 09 Apr 2026 23:30:00 +0000

Given its massive capital requirements, amounting to several billions of dollars, and highly specialised manufacturing ecosystem, establishing semiconductor chip fabrication facilities in India poses several insurmountable challenges. In the circumstances, and also given its far lower capital requirements and the country’s comparative human capital advantages (it is estimated that 30-40% of global chip design talent is Indian) in software development, it has been suggested that India should focus on fabless chip design.

There is no doubt that there are Indian startups with the requisite expertise and talent to design chips and products. But there are perhaps two binding constraints to the emergence of chip and product design companies in India – its acutely deficient risk funding ecosystem and, more critically, the absence of domestic companies (OEMs, etc.) that can deploy these designs in their products.

I blogged here on industrial policy for semiconductor chips.

Semiconductor chip design and manufacturing are among the most daunting of industrial activities. This sums up the complexity.

A typical integrated circuit chip can involve over 500 distinct production stages and cross as many as 70 international boundaries before it reaches the consumer. Across this complicated global supply chain, the scale of interdependencies is vast: China has a monopoly over certain critical minerals, the US and UK have a combined monopoly over chip design tools, and so on. Moreover, there are dozens of hyper-specialised suppliers spread across the world who hold virtual monopolies over critical process technologies needed to manufacture chips. They can act as technological ‘choke points’.

Underlining the complexity, it must be noted that semiconductor chips are perhaps the only major area where China has struggled to make much headway despite spending hundreds of billions of dollars. Apart from the high-end chips fabrication, the biggest challenge is with chip manufacturing equipment, which is dominated by the US and Japan, and where China is a marginal player despite being the largest buyer.

Tracxn has estimated 117 semiconductor chip design firms in India by the end of 2024. The Design-Linked Incentive (DLI) scheme of the MEITY, introduced in 2021, had an allocation of just Rs 1000 Cr (of the total of Rs 76,000 earmarked for semiconductors) to nurture 100 chip design companies over five years and ensure at least 20 such companies have a turnover of Rs 1,500 Cr or more. The maximum funding available to a firm is Rs 15 Cr.

This has proved inadequate since it requires at least $10 million (Rs 90 Cr) to build even a basic chip, much less the several tens of millions for a more sophisticated chip. Just licensing the IPs required to design a chip alone will cost a few million. Private sector funding, too, has been scarce.

Similar levels of funding are calculated from other sources (and this) too. In 2024, seven chip design startups raised $28 mn.

The analysis of funding shows that most of the deals are seed or pre-seed stage, with just one or two in the pre-Series A or Series A stages.

The Ken has a very useful interview with P Raja Manickam, former head of Tata Electronics’ outsourced services unit, where he describes how China entered the semiconductor market.

The Chinese government arm-twisted Qualcomm and said, “Look, I’m giving you this huge market in cell phones. You’re selling to Huawei, Oppo, Xiaomi, and others. I have a fab; you build those chips here, at least some of the lower end stuff.” As a result, Qualcomm now has quite a bit of business with SMIC. China didn’t stop with that; they said now that you are building the wafers, also do the packaging in China. Qualcomm is not a manufacturing company, it could have said, “We don’t do packaging. We just give it to somebody else.” But China forced them to bring a supplier, Amkor [Technologies], and invest in them just to fulfil the Chinese demand. So, the thought process is this: if we have a fab in India, we could do the same and go to Qualcomm. And I think it makes sense now because Qualcomm is searching for a market. They’re getting thrown out of China.

He divides the global wafer market into three categories - 30% going to memory, 30% to the 3-4 nm chips (a few products made by very few companies); and the 40% going to mass market electronics (microcontrollers, MOSFETs, DC/AC converters etc.) which largely sit in the 130-180nm range.

Manickam describes why despite the presence of over 50,000 chip designer engineers working in India, Indian firms and startups struggle to develop products.

One, the experience of building a product company did not exist in India. Just because you are a designer in a TI or a similar company doesn’t mean that you know how to build a company… Even if you work for these companies in India, you will never be able to make an entire chip. They certainly don’t expose you to marketing and selling and all such aspects. Secondly, the moment you finish your design and ship it to Taiwan or some other fab, your door closes. You have no idea how to work with TSMC or how to get the product done. And that is why I always say we need a fab in India. You can never build a product company without a fab. Why is Taiwan successful? A small country with very few people. Look at Mediatek (a Taiwanese fabless semicon firm); they gave Qualcomm a run for the money… they can compete with TI sitting in Taiwan because they have access to the fab. They can tweak their process with the fab. A lot of startups in Taiwan come from TSMC, not from design companies… Startups create some IP, run out of cash, and VCs never invest in these guys because they don’t see them becoming a hundred-million or a billion-dollar company. So, they sell their IP to somebody.

The lack of large firms and an ecosystem, and the stranglehold of majors, also mean that Indian chip design firms spend 50-80% more for taping out chips than their counterparts elsewhere, like NXP Semiconductors.

Skilled manpower is a major constraint. A Ken report states that the $115 bn electronics manufacturing sector in India is expected to touch $500 bn by FY30. It is expected to create about 12 million jobs over the next two years across operational roles like technical troubleshooting, electronics design, running Surface Mount Technology (SMT) lines, and operating CNC (computerised numerical control) machines. The report also points to a Teamlease finding that at least 10 million of these potential hires may lack relevant practical skills.

Skills necessary to run electronics production lines and semiconductor operations are rarely taught in the current academic curriculums… Not many would know how a printed circuit board works or what a 3D laser inspection is… In mid-2023, Macdermid Alpha set up a production line for components at IIT Madras where students can get hands-on training to develop necessary skills. Bhatkal was inspired by similar models in US universities, like the Georgia Tech Manufacturing Institute in Atlanta. The motive was simple: upskill the talent so their recruiters could cut down on the time and resources spent on training them… The institute runs an 11-day workshop, which is open to students from the Industrial Training Institute (ITI) and even employed engineers who want to upgrade their skills… So far, over 340 students have completed the training and found jobs at various companies—the likes of autocomponent maker Uno Minda, printed-circuit-assembly maker Syrma SGS, and even one of the Tata group companies… Macdermid runs a similar course at the College of Engineering, Pune, in partnership with two-wheeler maker Bajaj Auto and US-based electronics manufacturer Jabil. NMTronics, a Noida-based electronics-solutions provider, also runs one at IIT Kanpur… it cost companies nearly Rs 4–5 crore ($466,000–582,000) to set up each of these centres.

This article about getting Micron to establish a chip ATMP facility at Sanand in Gujarat points to the challenges associated with attracting such investments, even with 70% of the $2.7 billion investment being a public subsidy.

What does all this mean for the development of India’s chip design market?

The US semiconductor chip industry has developed on the back of seed grant financing of hundreds of startups by the government and plentiful VC funding of promising startups. Two critical factors contributed to the success of this strategy: the presence of deep and risk-taking VC investors and OEMs with a massive volume of demand for these chips and designs. Since neither of these two factors is available in India, Indian chip and design startups face a daunting challenge. This is the real valley of death facing even the most promising and technologically advanced Indian startups.

Let’s look at the capital requirement. As the figure below shows, the one-time Non-Recurring Engineering (NRE) cost with a chip design is very high. The prototype must license technologies on controllers, interfaces, communications, etc., and then do multiple tape-outs on silicon to get to a robust enough quality that can meet commercial requirements. It is therefore not surprising that there are several startups even in the US that raised $200-300 million in funding but have failed to commercialise.

There are five stages in the chip development. Stage 1 is the drawing-board phase — what should the chip do, what architecture, what licensed IP blocks to buy. Stage 2 is where the actual design is written in code (RTL) and exhaustively simulated — this is the longest and most expensive phase of the entire lifecycle, absorbing 40–60% of all non-recurring engineering cost. Stage 3 is the FPGA sanity-check — running the design on a reprogrammable chip to shake out software and integration bugs before committing to expensive silicon. Stage 4 is tapeout — the design is frozen and handed to a foundry like TSMC, which etches it onto wafers using costly photomasks; any bug found here requires a full respin. Stage 5 is where the chip actually reaches customers — first in small pilot batches for qualification, then at scale, with economics that only work once volume is high enough to spread the NRE costs. The key insight connecting all five: each stage is a gate. A mistake at Stage 2 that slips through costs a hundred times more to fix at Stage 4, and a mistake at Stage 4 costs a year and tens of millions to fix at Stage 5.

India cannot replicate the US VC industry, at least for the foreseeable future. India’s angel funding industry does not invest in high-risk sectors like the chip design industry. Indian VCs are still at a seed stage ($1M-$3M) and cannot fund at the levels needed to succeed. Further, as mentioned earlier, VC funding in India for chip design is tiny compared to the requirement.

Nor does it have global companies that can offer commercialisation platforms for its startups. Further, global OEMs already have long-term partnerships with established and reliable chip design suppliers and will, therefore, be reluctant to experiment with a new chip designer. New chip design companies will also not be able to signal reliability in terms of meeting the massive volumes demanded by OEMs, the exacting standards and upgrade requirements, etc.

Given the aforesaid, it’s therefore not prudent to throw scarce public finance at startups purely in the hope that the demand-side (for these chip/product design startups) will emerge on its own after some time. The best use of scarce public funds in this context is to derisk and expand the envelope of private capital that might be interested in investing in risky chip design startups.

In the circumstances, one strategy would be to emulate parts of the Chinese playbook. There, the government supplemented the funding of startups with active market development interventions. However, there are limits to how much of it can be done in India, given the size of financing required (China is estimated to have spent $250 bn on the semiconductor chip industry) and the market-making efforts.

However, as a strategy, the Government of India could start by targeting 3-4 large-volume electronic products that are being procured by the government or are in demand in the Indian market. It can bring together promising (chip or product) design startups and product OEMs (and their manufacturing partners, EMCs). The OEMs could be supported to either buyout or license technology from the startups and adopt these domestic designs.

Electricity smart meters, surveillance cameras, fixed wireless access (FWA) devices, and automobile and heavy equipment chips are examples with very large domestic demand, where the aforesaid strategy can be pursued to catalyse domestically designed chips and OEMs. Unlike mobile phones or routers, these product markets are large enough and may have slightly lower entry barriers for domestic companies.

But this will require very high-level commitment and tight coordination by the central government, involving multiple departments, to integrate this strategy with public procurements, for market consolidation, mandating of product standards, expediting regulatory enablers and permissions, etc. Besides, the government must also work closely with private manufacturers and OEMs, even supporting them in their business development.

In the case of public procurements, this would involve effectively picking winners and giving them large multi-year contracts. For example, in the case of smart meters, the meter supply and O&M contractors (6-9 year TOTEX contracts) could be mandated to supply domestically designed and manufactured meters. They should be supported to bring together OEM/EMC and chip and product design startups. The support provided by the Ministry of Power for smart meter installations under the Atmanirbhar Bharat Scheme could be leveraged to catalyse domestic chip and meter design.

Surveillance camera manufacturers require regulatory approvals. These approvals could be linked to the use of domestically designed chips. This requirement can be gradually phased in to allow domestic design capabilities to emerge.

In conclusion, the best use of public policy to catalyse semiconductor chip design in India may be on the market-making side to complement the limited public funds to support startups.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sun, 05 Apr 2026 16:18:00 +0000

1. Good chronicle of Trump at War in the NYT.

2. List of a few impacts of the Gulf War from across the world.

3. Foreign national government holdings of US Treasuries drop to their lowest value in years as they sell the Treasuries to prop up their economies and currencies.

4. For all its cultural salience and ubiquity, Bollywood box office receipts were $1.45 bn in 2025!

Interesting that video subscription revenues rose 61% in 2025 to $1.56 bn, according to EY.

Bollywood is another example of an Indian private sector/industry struggling in the face of global competition.

One top producer who has worked with many of Bollywood’s top actors says the combination of cultural drift and waning star power is a deadly one. “If you’re bankrupt on creativity, then the only thing you’re banking on is stars,” he says. “Nobody’s coming to the movie theatre to watch a star any more.” This, he adds, is a major reason why several international studios abandoned their attempts to enter the Indian industry...

Bollywood has remained resistant to outsiders. International studios such as Fox Star, Paramount and Sony entered the country more than a decade ago, looking to streamline the world’s largest movie-producing market, which remains parochial and dominated by family-run production houses. But through either mergers or losses, almost none exist in the country any more. Its films have also struggled to find audiences overseas. Unlike K-dramas from South Korea or Turkish soap series, Bollywood is yet to find breakout success globally, beyond the south Asian diaspora.

And this is an important market failure

The decline in Bollywood stars’ pulling power has not been reflected in either their remuneration or their creative influence. Male leads in particular wield immense power over which films get made and command salaries that are far in excess of what female actors can demand. Although Bollywood budgets are much smaller overall than those of the big five studios in the US, male stars often demand half or more of a film’s budget — compared with at most a quarter in Hollywood. The eminent producer says the industry still wants to “helicopter the star, do the least amount of work [possible] and try and do some razzmatazz, and everyone’s followed the herd mentality”. Shailesh Kapoor, chief executive of Ormax, says the multimillion-dollar fees that some top actors demand are driven by the free market. “Stars do not downgrade their fee if their last movie doesn’t work well . . . because somebody is willing to pay.”

5. Gulf war scenarios.

Oxford Economics said this week it estimates a six-month interruption of flows through the Strait of Hormuz would create a 13mn barrels per day gap in global oil supplies, triggering a worldwide recession. “That represents an unprecedented shortage of around 12 per cent of consumption, leading to widespread rationing concentrated in emerging economies, with significant hits to activity and supply chain disruption,” said the advisory group.

The Strait of Hormuz chokehold provides China with enough ideas on how to implement a similar strategy in the Taiwan Straits.

Beijing would declare the right to control who and what comes and goes from the island. China could demonstrate resolve by firing missiles or bullets and declaring “exclusion zones”. Even short of outright conflict, if escalation risk seemed high, private carriers would face pressure to avoid the waters and airspace around Taiwan. The standard “Five Powers Clause” in commercial war-risk insurance terminates coverage in any conflict between the US and China. If it has proved hard to persuade shipping companies to risk sailing amid a few unguided Iranian drones, imagine asking them to take on the People’s Liberation Army.

Observations on China's 15th Five Year Plan

noreply@blogger.com (Urbanomics) — Mon, 30 Mar 2026 02:13:00 +0000

The formal adoption of China’s 15th Five-Year Plan has generated much scrutiny and analysis.

The central theme is the development of a modernised industrial system, elevating it above the regular headline of technological innovation. The sequencing reflects a practical focus: turning laboratory breakthroughs into scalable, high-value production capacity. Frontier sectors such as advanced manufacturing, semiconductors, next-generation information technology and aerospace are prioritised. The plan aims to achieve breakthroughs in critical areas, including semiconductors, industrial machinery, advanced materials, biotechnology, and foundational software, and to deepen integration between scientific and industrial innovation.

Importantly, it does start to acknowledge the role of the structural imbalances in the economy. For example, under the overarching banner of “common prosperity”, it links household-centred policies to growth resilience: employment, childcare, education and social safety nets are no longer simply "livelihood" issues — they are productivity and confidence issues. But this focus on structural empowerment appears, as I discuss later, to be done in a more roundabout manner.

The Plan has some clear departures from earlier versions, prompted by internal and external challenges. As mentioned, the elevation of the industrial system before innovation indicates a shift from the lab to the factory floor. Related is the focus from making breakthroughs to applying them at scale. It offers an opening up of high-technology sectors and deepening cooperation in specific regions and industries.

In short, the 15th Five-Year Plan appears to mark a subtle shift from scaling up to sharpening China's edge — a strategy designed for a world of intensifying great-power competition, supply chain fragmentation, and technological rivalry. Its effects will be felt well beyond China's borders, influencing global trade flows, technology standards, and the competitive landscape across nearly every advanced industry.

Kyle Chan has an excellent analysis of the technology and innovation focus of the Plan. It focuses on strategic emerging industries and future industries as “new quality productive forces” to achieve the income level of a moderately developed country by 2035 (or socialist modernisation).

A less discussed feature of China’s economic success is the long-term planning and persistent pursuit of the plan objectives.

What makes China’s tech-industrial policy remarkable is not some hundred-year master plan for technological supremacy or meticulously engineered blueprint for success. It’s China’s sustained focus on a set of obviously critical technologies over years and even decades. While the strategies and tactics—and even the technologies themselves—may change, China’s overarching persistence has yielded steady gains that have allowed it to catch up and even achieve global leadership in key technologies. China’s new 15th Five-Year Plan is but the latest chapter in a much longer technology story.

The Five-Year Plans have shifted from top-down guidance to a broader strategic guidance framework.

The aim of the earlier Plans was rapid industrialisation and catch-up with a focus on heavy industry… Today’s Five-Year Plans serve as strategic roadmaps for China’s development and include a mix of qualitative goals and hard quantitative targets. Each part of the Five-Year Plan is broken down by sector and annually. Central government bodies and local governments then break down the Five-Year Plan and develop their own implementation plans. Local government officials are evaluated in part on their performance in meeting the national plan’s goals and targets. In general, China’s Five-Year Plans are best understood today not as rigid, top-down “plans,” but as high-level signaling mechanisms that guide local governments and the private sector to align their efforts with national priorities.

In this context, in an earlier post, Kyle Chan had pointed to China’s industrial policy strategy of creating interlocking industrial ecosystems that allow it to play across the manufacturing spectrum.

China doesn’t just have a smartphone industry or a battery industry or an electric vehicle industry. It has all of these industries and more. China’s strength across multiple overlapping industries creates a compounding effect for its industrial policy efforts… If you’re trying to develop a target industry, it helps to have the technology and manufacturing capacity in surrounding industrial domains… industrial policy is like a jigsaw puzzle. The more pieces you already have in terms of technology and domestic manufacturing capacity, the closer you are to filling in the remaining gaps. And if you’re already strong in multiple overlapping industries, then this creates a mutually reinforcing feedback loop that further strengthens your position in all of these connected industries… As China becomes stronger in some industries, this tightens its grip on others…
Having existing domestic suppliers in upstream industries can make it easier to source parts and work directly with suppliers to modify specifications to suit industry needs… Having an existing set of domestic buyers in downstream industries can provide a ready source of market demand and industry revenue… Technical knowledge and manufacturing know-how can be useful across industries. Investments in R&D and manufacturing techniques in one industry can have returns across other related industries… If you have a product that’s an input for multiple industries, then having all of those industries domestically allows for greater economies of scale for that product.

Another notable insight from the Plan is its focus on higher-quality cultural and consumer goods as a national priority. Innovation extends as a cross-cutting policy mandate, underpinning everything from public welfare and soft power to trade and defence. The Plan talks about boosting “cultural confidence”, whereby Chinese citizens (and the world) feel pride in, and aspiration toward, Chinese-made goods and cultural products, not just Western ones. It refers to building a “cute, respectable image of China” through overseas Chinese film festivals, museum upgrades, high-quality art and literature, video games, animation, exhibitions, cultural tourism, and new public cultural spaces. It also includes the phrase “enable the people to enjoy a higher quality cultural life.”

The Plan’s emphasis on stimulating domestic demand offers longer-term opportunities in sectors tied to lifestyle upgrades- dine-in consumption, fitness, outdoor sports, live entertainment, cultural activities, gaming, and digital content, and high-end dining, boutique travel, wellness services, and premium lifestyle experiences. This is a definitive signal that China has now openly embraced the lifestyle of capitalism.

Carolyn Marie Yim has a good post that draws attention to the idea of Cool China as one where the country is increasingly producing things people want to buy, emulate, and follow, much as Japan made a similar transition from "cheap copy" to global design leader in the 1970s–80s. She writes,

This does not mean every Chinese consumer product will win, or that the world will wake up one morning and consciously decide to prefer Chinese made goods. Historical transitions are less theatrical than that. More likely, Chinese-made and designed goods will become globally normal the way post-war Japanese and German products normalized from cheap into high quality signifiers of quality and manufacturing. Moreover, consumers will not necessarily experience this as geopolitical preference. They will experience it as the increasingly common sensation that the nice plate, the good lamp, the respectable glasses, the favorite sweater, the pleasant cafe, the fun Chengdu trip, all seem to come from the same logistical and economic base.

This focus on cultural capital is, I suspect, coming from an interest in the promotion of soft power and is less about addressing the structural imbalances. The resultant policies, for sure, will have some impact on the consumption side and might even be interpreted as a focus on addressing the structural imbalances. I’m not sure.

The 15th Plan comes at a time when the economy is slowing, and the limits to the input-based model are becoming evident. Credit-fuelled investment has been the primary driver of economic growth.

Remarkably, all through the quarter century, even as the private sector has emerged as a major partner in economic growth, public spending has remained elevated at more than half of the output, and has hardly budged from 53.4% of the total GFCF to 52.5%.

Raising questions about the quality of public spending, since 2010, the Incremental Capital Output Ratio (ICOR), a measure of investment quality, has steadily risen and nearly doubled since 2010 to 7.6 in 2024. It appears that, economy-wide, the efficiency of China’s investment quality has declined alarmingly.

This backdrop is important insofar as it offers valuable lessons. The central failing of China’s economic growth model has been its perpetuation of a structural imbalance between consumption and investment. In the first phase, it was about loading investments into physical infrastructure, including housing and the development of greenfield townships. The excess capacity built up on the infrastructure supply-side was sought to be exported globally through the Belt and Road Initiative (BRI).

Since 2015, the 13th Plan period has seen an increase in industrial focus and investments. This got amplified following the 2021 bursting of the housing bubble, with the government going into overdrive on manufacturing capacity expansion, with a focus on frontier technology areas. It also spawned massive increases in investments in R&D and innovation in areas like green technologies, electro-tech, semiconductor chips, and AI. Again, borrowing the playbook from BRI, the excess capacity was exported globally, resulting in the country’s trade surplus hitting $1.2 trillion in 2025.

In both these phases, the domestic structural imbalances were sought to be papered over by focusing on building capacity and exporting the production globally. It was like China decided to make infrastructure and industrial capacity at home for the world. Never mind whether the world wanted it that way or not.

Now, as growth flags and as structural imbalances continue to persist, the 15th Plan has proposed that the “new quality productive forces” emerging from strategic emerging industries and future industries can be the driver of growth to realise an income level of a moderately developed country by 2035. An important political (and economic) signal is that the Plan aims to maintain growth between 4.5-5% for 2026, a compulsion that is an important factor driving the growth strategies pursued. In simple terms, it is about shifting focus to the development of advanced industrial ecosystems in frontier technology areas. It has the added imperative and justification of the new Cold War with the US and the West.

If we go by the track record, the assumption among Beijing’s policy makers is that it would lead to another Plan period of more or less similar inputs-based industrial growth (albeit in frontier technology areas), fuelled both by domestic demand and global markets.

I’m not sure whether these assumptions will hold. This time may well be different. As I blogged here, there are now emerging hard limits to the inputs-driven growth model. Further, as geopolitical tensions rise and the Cold War deepens, China’s access to advanced technologies and equipment will become scarce, forcing Beijing to pour more resources into developing the same internally. Given the technologies involved, the nature of the resource allocation challenge, especially to do so efficiently and effectively, is much bigger and more complex than throwing resources into developing infrastructure and industrial capabilities. I’m not sure that pouring resources into large public and private companies, even with the most militantly patriotic and idealistic motives, can help create the conditions to deepen links between innovation and the manufacturing industry and foster the deployment of frontier technologies.

This would be like one country trying to mobilise all the resources to compete with the world at large in developing its own proprietary frontier technologies. The Soviet example, which did not end too well, notwithstanding very important differences, is not to be ignored.

The external market access, even in developing countries, is facing strong pushback or is rapidly closing. No large middle-income developing country, those with the markets to meaningfully absorb the Chinese excess capacities, will countenance a flood of cheap imports that will not only make them acutely dependent on another country in strategically important sectors, but also weaken and destroy their own domestic industrial capabilities. The rising backlash from the world economy’s China problem is another salient limiting factor to the pursuit of export-based economic growth strategies.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 28 Mar 2026 04:58:00 +0000

1. Jemima Kelly calls out the delusion among the successful Silicon Valley venture capitalists about the limits to their knowledge.

“If you go back, like, 400 years ago it never would have occurred to anybody to be introspective,” said a great sage of Silicon Valley last week, during the modern-day equivalent of a Socratic dialogue (a podcast). “Great men of history didn’t sit around doing this stuff.” The sage was none other than Marc Andreessen — venture capitalist, crypto enthusiast, devoted Democrat turned Donald Trump adviser, and author of the 2023 late-capitalist cry for help, the “Techno-Optimist Manifesto” (“love doesn’t scale . . . let’s stick with money”). The man who bet big on Web3 (remember that?) and NFTs (remember them?), and who once described criticisms of the metaverse as “reality privilege”. (Meta, on whose board Andreessen sits, announced this week it was all but pulling the plug on the metaverse.) The a16z founder was proudly explaining to Founders podcast host David Senra that he had “zero” levels of introspection. “Move forward. Go,” was his own anti-introspective mantra. “I’ve found that people who dwell on the past get stuck in the past. It’s a problem at work and it’s a problem at home.” He went on to claim that the very concept of the individual was only invented a few hundred years ago and that it wasn’t until the start of the 20th century that we started to believe in guilt and self-criticism.

She says something which more people should be talking about.

Andreessen seems to conflate the idea of overthinking, and even of guilt, with introspection, a word deriving from Latin that simply means “looking within”... He also fails to realise that the current era is the only one in which we would even have the option of not being introspective; the only one in which the a16z-backed merchants of the attention economy have made non-optional boredom extinct. In a recent X post, Andreessen described his “information consumption” thus: “1/4 X, 1/4 podcast interviews of the smartest practitioners, 1/4 talking to the leading AI models, and 1/4 reading old books. The opportunity cost of anything else is far too high, and rising daily.” (One wonders whether he reads the old books, or asks those leading AI models for their summaries.) My main issue with Andreessen is not so much that he’s wrong; it’s that he’s so confident about it. He sounded similarly confident when he told us that bitcoin represented a breakthrough akin to the internet, that Web3 was the future and that we shouldn’t fear AI because “the moral of every story is the good guys win”. We seem to believe, as a society, that wealth, influence and confidence can be equated with wisdom.

2. The market does not think that the war is about to end anytime soon.

In the last two weeks, there has been a big build-up of call options — which give a holder the right, but not the obligation, to buy an underlying futures contract — compared with put options, which give the holder the right to sell a futures contract. In the first week of the conflict, the opposite was true. That suggests the market believes we are in for further upside in oil prices rather than downside. The average strike for call options expiring in June expiration was $126 a barrel of oil whereas for put options it is $81. Worth noting, there is a small build in call options with a June strike price of $450 a barrel.

3. Off-grid energy is on the rise in the US to power data centres.

By the end of 2025, an estimated 39 percent of the gas power capacity being developed in the United States was designed to serve data centers on-site, according to the Global Energy Monitor, a nonprofit organization that tracks energy projects. That is up from 5 percent at the end of 2024...

Wait times vary by region, but it now takes an average of four years or more for data centers to connect to U.S. grids, according to JLL, a real estate services firm... Companies are gravitating to gas because it can theoretically generate electricity all day, unlike the wind or sun. And smaller gas generators and engines can be installed much faster than nuclear power plants... Industry analysts and executives also question whether power plants built alongside data centers will remain competitive if it becomes easier to connect to the grid.

3. Paul Graham has a brilliant essay on how the brand has become the product itself, illustrated with the example of Swiss watch makers.

The most striking thing to me about the brand age is the sheer strangeness of it. The zombie watch brands that appear to be independent and even have their own retail stores, and yet are all owned by a few holding companies. The giant, awkwardly shaped watches that reverse 500 years of progress in making them smaller. The business model that requires a company to rebuy their own watches on the secondary market to catch rogue customers. The very concept of rogue customers. It's all so strange. And the reason it's strange is that there's no function for form to follow.

Up to the end of the golden age, mechanical watches were necessary. You needed them to know the time. And that constraint gave both the watches and the watchmaking industry a meaningful shape. There were certainly some strange-looking watches made during the golden age. They weren't all beautifully minimal. But when golden age watchmakers made a strange-looking watch, they knew they were doing it. In fact they give the impression of having done it as a deliberate exercise, to avoid getting into a rut.

That's not why brand age watches look strange. Brand age watches look strange because they have no practical function. Their function is to express brand, and while that is certainly a constraint, it's not the clean kind of constraint that generates good things. The constraints imposed by brand ultimately depend on some of the worst features of human psychology. So when you have a world defined only by brand, it's going to be a weird, bad world.

4. Interesting correlation between Truth Social posts of President Trump and oil market actions.

Traders made bets worth half a billion dollars in the oil market about 15 minutes before Donald Trump’s post touting “productive” talks with Iran sent the price of crude tumbling and ignited volatility in other assets. Roughly 6,200 Brent and West Texas Intermediate futures contracts changed hands between 6.49am and 6.50am New York time on Monday, just a quarter of an hour ahead of the US president’s post on Truth Social that there had in recent days been “productive conversations” with Tehran to end the war in Iran. The notional value of those trades was $580mn, according to FT calculations based on Bloomberg data... It was not known whether one entity or several entities were behind Monday’s trades. Trump’s announcement at 7.04am triggered a sharp sell-off across global energy markets and jumps in S&P 500 stock index futures and European equities as investors dialled back bets of a prolonged conflict.

The well-timed trades echoed the flurry of large highly profitable bets made on prediction market Polymarket on the timing of the US’s attacks in recent months on Iran and Venezuela... Several hedge funds noted that this was one of a number of examples in recent months of large trades being made ahead of official US government announcements. One trader at a major hedge fund said energy consultants had recently noticed several large block trades that they found to be unusually timed. Another portfolio manager said a series of large and well-timed trades had created a “level of frustration” among investors. “My gut from watching markets for the last 25 years is this is really abnormal,” he added. “It’s Monday morning, there’s no important data today, there aren’t any Fed speakers you’d want to front run. It’s an unusually large trade for a day with no event risk . . . Somebody just got a lot richer.”

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 21 Mar 2026 05:06:00 +0000

1. Private equity has outperformed public markets.

2. The Karnataka government has announced the implementation of an Alcohol-in-Beverage (AIB) based excise duty. As per this, the globally recognised practice for alcohol taxation, percentage of alcohot in a liquor brand will determine the duty levied.

In Karnataka, alcoholic products currently fall under 16 slabs. A product was designated to a particular slab based on the Declared Price, the selling price determined by the distiller. The Additional Excise Duty levied by the government was dependent on the price per litre of the product, due to which the price of the premium liquor segment was on the higher side... Over the next four years, the government plans to abolish the slab system of excise duty collection completely. For FY 2026-27, the government will merge multiple slabs and reduce their number from 16 to eight... Currently, the duty levied for a bulk litre of say, McDowell’s – which is at the lower end, and Blue Label – which is at the higher end, is different and is based on the Declared Price. Both have 42% alcohol. Under the new system, both drinks will attract the same percentage of additional excise duty irrespective of the declared price

3. Japan lifestyle facts of the week.

The nation’s stock of 2.2mn drinks vending machines is down 23 per cent from its bubble-era peak in 1985, according to the Japan Vending System Manufacturers Association... Japan loved vending machines for their convenience despite higher prices. But three years of rising inflation has driven consumers to greater thriftiness. Well-known brands of tea and coffee can be 20 per cent cheaper in nearby convenience stores, which have also stepped up sales of freshly brewed coffee, while drugstores and supermarkets sell discount private-label brands. In 2024 just 42mn cases of drinks were sold via vending machines, down from 72mn at the 1997 peak, according to data from Inryo Souken, a Tokyo-based research institute. Vending machines also still need people to keep them stocked — and Japan has a chronic shortage of truck drivers.

4. Global crude landscape (HT: Adam Tooze)

As the war rages on, and the blockade of the Strait of Hormuz bites, oil prices are becoming a binding constraint on the world economy. Oil demand is highly inelastic.

Oil demand is, on average, highly inelastic in the short run because most end uses have few immediate substitutes — factory boilers rely on fuel oil, aircraft require jet fuel, and most cars still run on gasoline. Our estimate of the short‑run price elasticity of global oil demand is −0.024, implying that a roughly 40% price increase above 12‑month highs is needed to reduce total consumption by 1%. The response, however, varies materially by product. Naphtha is most sensitive because petrochemical plants can partially substitute ethane in cracking operations. Jet fuel is also relatively responsive, as airlines can cancel lightly loaded flights when fuel costs spike. By contrast, fuel oil is least elastic given its role in essential services like home heating, marine transport, and power generation.

The worst impacted by the 20% reduction in oil supply and 15% in LNG supply is Asia

Most crude shipments through the Strait of Hormuz are bound for Asia, with China, India, Japan, and South Korea as the principal buyers. In total, Asia takes about 11.2 mbd of crude and 1.4 mbd of refined products that transit the Strait. As a result, the immediate physical shortfall is concentrated in Asian markets, where reliance on Gulf barrels is greatest. Early signs of demand destruction are emerging in Asia as product prices surge and spot barrels become prohibitively expensive. Timing effects further reinforce this divergence. A typical voyage from the GCC to Asia takes approximately 10-15 days, while shipments to Europe require closer to 25-30 days via the Suez Canal, or even 35-45 days if rerouted around the Cape of Good Hope. As a result, the impact of disrupted Gulf flows will hit Asian markets earlier and more acutely, whereas Atlantic basin benchmarks such as Brent and WTI will remain cushioned for longer by inventory overhangs and slower supply adjustments.

India's dependence on Strait of Hormuz 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. Gideon Rachman writes that Iran may have achieved a major strategic leverage going forward by demonstrating the chokehold that any restrictions on the Strait of Hormuz can have on the world economy.

The strait’s closure creates both an immediate crisis and a long-term strategic quandary. The current problem is that the longer it is closed, the greater the threat of a global recession. 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. A measure of how much Israeli politics has become radicalised.

Israel should destroy all Iran’s oilfields and flatten the energy infrastructure on the island that functions as Tehran’s main oil export hub... the demands... came from Yair Lapid, the silver-haired former premier and television host who heads the centrist Yesh Atid party, and draws much of his support from liberal bastions such as Tel Aviv. Lapid’s message reflects how the fight in Israeli politics, for all Zionist parties in government and opposition, is not over whether to confront Iran but over who will prosecute the war better than Netanyahu. Israel’s offensive has higher public support than almost any other issue in the country’s fractious politics — even after two and a half years of multifront fighting that has disrupted daily life for millions of Israelis. Although Israel’s Arab parties staunchly oppose the war with Iran, polls suggest more than 90 per cent of Jewish Israelis back it, and the country’s Zionist opposition groups have fallen in behind it in unison.

7. Canadian pension funds' PE bets are souring, losing money on their PE investments.

Ontario Teachers’ Pension Plan, which manages C$279bn ($206bn) of assets, and the C$145bn Ontario Municipal Employees Retirement System reported returns of minus 5.3 per cent and minus 2.5 per cent respectively for their private equity portfolios in 2025. For OTPP, it was the worst performance for this asset class since 2008 and for Omers since 2020. La Caisse, Quebec’s C$517bn state pension fund, also reported weak private equity results. The group said its PE portfolio returned 2.3 per cent last year, well below the 12.6 per cent gain in its benchmark index, half of which is made up of listed stocks. The Healthcare of Ontario Pension Plan, which published results this week alongside OTPP, reported private equity returns of 3.6 per cent in 2025. Its broader private markets portfolio returned 2.1 per cent, compared with 11.7 per cent for its listed holdings.

8. Thames Water gets new offer from its senior creditors to take over the struggling utility, committing up to £6.55bn of debt and £3.35bn of equity. It is now with Ofwat for regulatory approval.

Lenders including hedge fund Elliott Management and private capital group Apollo Global Management are locked in negotiations with the regulator as they attempt to take formal ownership of the UK’s largest water provider. The creditors have proposed a new management plan, which could lead to a stock market listing as soon as 2030... The creditor’s £6.55bn debt figure is made up of £3.25bn that will be made available to Thames Water on day one of their ownership, up from £2.25bn previously proposed, and up to an extra £3.3bn that will be made available to the utility over the funding period. The new debt would come in addition to £3bn of emergency financing approved last year to prevent Thames from being renationalised under the government’s special administration regime... The increased debt offering would come on top of an equity injection that has been revised upwards to £3.35bn from £3.15bn... Under the terms of the new proposal, Thames Water’s class A creditors would take a 30 per cent writedown on their existing debt, on top of “a write-off in full of the Class B Debt and any subordinated debt or equity held by existing shareholders”.

9. TJXX is the fourth-largest retail chain in the US and the fourth most profitable global fashion retailer.

10. Rana Faroohar writes about the concierge economy in the US, where the rich can get to the front of the que and buy convenience at a price. She points to the gold-plated subscription healthcare service that comes with minimal wait times for specialists, 24/7 access to physicians, longer sessions with doctors, and which is a $20 bn global business with roughly 40% in the US.

The market for personal travel planners, high-end club memberships, private wealth managers and educational consultants has in recent years grown by high single to double digits. Fractional aviation subscription services (think NetJets) are growing by about 10 per cent a year. Those with Clear (the airport service that speeds you through security if you must fly commercial) have tripled since 2022. It’s all part of a burgeoning “concierge” economy that caters to affluent consumers who don’t wait — or want — for anything. The global “lifestyle concierge” services market — that’s the part of the business that gets you the right hotel, colourist, Pilates instructor or front-row tickets to the must-see football game — is expected to grow from $16bn to about $36bn by 2035. It’s about saving time, yes, and it’s also about making sure the rich get to speak to human beings who can fix problems and meet high expectations, rather than dealing with search algorithms, AI bots and monotone-voiced teleworkers, like everyone else. Concierge services are about convenience and access, but they are also about bringing ease and luxury to areas that have become digital commodities or suffer from high levels of consumer dissatisfaction, such as healthcare or financial services.

11. India's AIF market is surging.

From about 160 AIFs in 2015, with less than Rs 28,000 crore in commitments, they’ve grown to over 1,740 in number as of January, spread across three categories and with nearly Rs 15 lakh crore in committed capital, according to Sebi... Category-II funds, which include private-credit, real-estate, venture-debt, and private-equity funds, had become the default recommendation... The Indian alternative-investments industry has grown at a compound annual rate of 49% in ten years to September, according to data from PMS Bazaar. Category-II, III funds have grown at over 50% growth rate... category-II funds account for about two-thirds of the total Rs 15 lakh crore commitment... the US, where hedge funds (category-III funds in Sebi parlance) dominate the alternative-investment space... In India, though, a majority of AIF investors come from family-business backgrounds... A mutual fund would deliver 12–14% returns on a long-term basis, and here, AIFs were promising close to 25% internal rate of return for funds in which investor capital was locked-in for eight to 10 years... Reportedly, two-thirds of the money raised by Indian AIFs comes from domestic investors.

12. Global LNG market.

13. Italian judicial reforms face a referendum.

To insulate judges from political pressure, the constitution established the Supreme Council of Magistrates as an autonomous, self-governing body, comprised of two-thirds serving magistrates, elected by their peers, and one-third parliamentary appointees. The council handles the selection, postings, promotions and disciplinary proceedings of all Italy’s magistrates, now numbering around 10,000... In Italy, resolving contentious civil cases through all three levels of the justice system currently takes an average of 2,217 days — six years and one month. That is better than a decade ago, when it took about eight years but still far slower than the EU average of 795 days, or two years and two months...

Under the proposed reforms, the magistrates’ council would split into three distinct bodies: one supervising prosecutors, one supervising all other magistrates, and a disciplinary court for all. It is a change that many legal experts — and politicians across the spectrum — have long advocated... the reform also envisions a more controversial change: magistrates would no longer be elected by their colleagues to serve on the self-governing bodies but would instead be chosen by lottery. Critics see this as a device to erode judicial autonomy vis-à-vis the political system.

14. Softbank's spectacular free lunch in the US-Japan trade deal.

SoftBank was set to earn ¥1tn ($6.3bn) in fees... to build and operate a $33bn gas-fired power station in Ohio... It will earn the payments over 15 to 20 years if it can reach the target capacity of 9.2 gigawatts. The idea of a fee arose because SoftBank would otherwise earn nothing for its role as developer of the project. It has no equity in the power station, which will be financed entirely by Japan and owned 50/50 by the US and Japan via a special-purpose vehicle, set up as part of the trade deal... Under the trade deal, profits from the investments made are supposed to be split 50/50 between Japan and the US until Tokyo has recouped its money. After that, the US gets 90 per cent... SoftBank has already placed large-scale orders to begin construction of the power plant in Portsmouth, Ohio, including $10bn for close to 170 turbines from GE Vernova. As developer, SoftBank plans to sell the electricity to data centres it will also operate, say people familiar with the matter. The data centres will serve customers such as OpenAI, in which the Japanese group is a significant shareholder. Japan’s funding comes from both the Japan Bank for International Cooperation and commercial lenders. Nexi, Japan’s export credit agency, will guarantee 90 per cent or more of the commercial portion.

15. Among the several negative externalities of the Trump administration is the resurgence in interest in going nuclear.

Britain’s Liberal Democrats... now want the nation to build a nuclear deterrent that is less reliant on the US... 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.

Janan Ganesh writes about how Ukraine, Iran, and Trump's weaponisation of the US security umbrella, especially the last, has revived nuclear bomb acquisition.

One is the ordeal of Ukraine. In 1994, it 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. On balance, given Ukraine’s experience, observers around the world will regard the second course as the more prudent. On top of all this is the endless unpredictability of the US. Until now, countries with the expertise and resources to build the bomb, such as Japan and several European countries, have chosen to duck under America’s nuclear umbrella instead. As Donald Trump casts doubt over whether he would ever honour those mutual defence treaties, some of which were signed a human lifetime ago, this “nuclear latency” doesn’t seem so clever.

16. Shan Jin-Wei, Kun Li, and Kelly Liu suggest that S&P index inclusion may be up for sale by showing that if you purchase a S&P ratings then the company is more likely to get listed in S&P 500 index.

Firms that had recently obtained an S&P rating were significantly more likely to gain admission to the S&P 500. For non-member firms, the unconditional likelihood of being added to the index was 15.5 per cent; for firms that had recently purchased an S&P rating, it was 21.4 per cent. One possible explanation is that S&P tends to favour fast-growing firms, and that such companies are naturally more likely to issue debt and seek credit ratings. But if that were the whole story, we would expect to see the same pattern among firms that purchased ratings from Moody’s, and we did not. If rating purchases simply reflect firm quality or growth prospects, the effect should not be specific to S&P.

Firms’ behaviour further suggests that they see a link between rating purchases and index inclusion. When mergers among S&P 500 firms create openings for new additions, large non-member firms disproportionately increase their purchases of S&P ratings. Conversely, after a 2002 rule change that made foreign firms ineligible for inclusion, non-US firms listed on US exchanges sharply reduced their purchases of S&P ratings relative to Moody’s. The implication is clear: When the prize disappears, so does demand. Taken together, these patterns suggest that firms believe purchasing S&P ratings increases their chances of joining the index.

17. Of the 937,876 candidates who took the civil services exams in 2025, just 0.1% got selected.

The situation is not much better if we take all the UPSC examinations, where of the 3.3 million candidates in 2022, the pass percentage was 0.18%.

18. The unit economics of AI tokens.

Tokens... are the most basic units of output from large language models: it takes about 1,300 tokens to generate 1,000 words of text... When OpenAI launched GPT-4 two years ago, for instance, it charged $33 for 1mn tokens. Today, it charges only 9 cents for 1mn tokens produced by its cheapest model.

Economic impacts of tax reductions

noreply@blogger.com (Urbanomics) — Thu, 19 Mar 2026 02:00:00 +0000

It has become a canon of economic orthodoxy that lowering corporate taxes will spur investment, and lowering income and indirect tax rates will spur consumption and economic activity, and both will boost tax revenues.

India’s experience with several direct and indirect tax reforms over the last decade may be a test case to evaluate this orthodoxy. This post analyses the impact of these reforms on tax revenues and the economy, especially of corporate taxes.

On 20 September 2019, the government slashed the base corporate tax rate from 34.94% to 25.17% (inclusive of surcharge and cess) for existing domestic companies, and to 17.16% for new manufacturing companies — representing a fiscal cost of roughly ₹1.45 lakh crore or 0.7% of GDP.

AK Bhattacharya has this description of the corporate tax rate reductions.

In 2016-17, new manufacturing companies incorporated on or after March 2016 were given the option to be taxed at 25 per cent plus surcharge and cess (compared to 30 per cent plus surcharge, etc.) if they did not claim profit-linked or investment-linked deductions, investment allowances, or accelerated depreciation. Additionally, the tax rate for all companies with an annual turnover of less than Rs 5 crore was brought down to 29 per cent plus surcharge and cess. In 2017-18, the tax rate for small and medium companies with an annual turnover of up to Rs 50 crore was brought down to 25 per cent. This meant about 96 per cent of companies that filed a tax return were brought under a concessional tax rate of 25 per cent plus surcharge and cess... In the following year, 2018-19, the government extended the coverage of the 25 per cent tax rate to cover all companies with an annual turnover of up to Rs 250 crore — a move that would benefit 99 per cent of companies filing tax returns... In 2019-20, the government extended the concessional tax rate of 25 per cent to all companies with an annual turnover up to Rs 400 crore, thereby covering 99.3 per cent of all companies filing tax returns. Subsequently, in September 2019, all companies not availing themselves of the various exemptions and incentives like tax holidays were allowed to be taxed at 25 per cent, inclusive of the 10 per cent surcharge and a 4 per cent cess. Moreover, manufacturing companies starting operations after October 1, 2019, were to be taxed at an overall rate of 17 per cent.

And this on its outcomes in terms of revenue impact.

Corporation tax collections used to be about 34 per cent of the Centre’s gross tax revenues in 2014-15. This share plummeted to 28 per cent in 2019-20 and further down to 23 per cent in 2020-21... the share of corporation tax in GDP has kept falling almost every year in this period — from 3.4 per cent of GDP in 2014-15 to 2.74 per cent in 2019-20 and 2.28 per cent in 2020-21... In 2014-15, about 188,000 companies in a sample size of close to 580,000 paid taxes at an effective rate of over 30 per cent and this cohort accounted for 60 per cent of the total corporation tax collected by the Centre that year. In 2018-19, thanks to the various tax concessions, only about 85,000 companies of a larger sample size of 885,000 paid taxes at the rate of over 30 per cent. And this cohort accounted for only 50 per cent of the corporation tax revenue of the Centre... In contrast, there were just about 24,000 companies in 2014-15 paying taxes at an effective rate of 25-30 per cent, accounting for only 16 per cent of the corporation tax collected by the government. Another 15,000 companies paid taxes at the rate of 20-25 per cent, but their contribution to the corporation tax revenue was only 10 per cent. By 2018-19, the number of such companies saw a huge increase, without, however, a corresponding increase in their share in total taxes collected. Companies paying taxes at 25-30 per cent numbered around 184,000 in 2018-19, but their share in corporation tax was 19 per cent. The number of companies paying tax at 20-25 per cent increased to over 46,000 and their share in total corporation tax rose to 23 per cent.
In short, the story of India’s corporation tax revenues is about how more and more companies have been taxed at a lower rate. As a result, the contribution of a large number of companies to the corporation tax kitty is getting smaller. No wonder, corporation tax buoyancy has suffered in the last seven years.

What has been the impact of corporate tax reductions on the wider economy?

In absolute value trends, there’s no perceptible spike in private sector gross fixed capital formation (GFCF) from reductions in the corporate tax rates. Nor is there any Laffer curve-type rise in corporate tax revenues.

The twin objectives of corporate tax reductions are to spur private investment and, through it, drive up corporate tax collections. However, private sector GFCF as a share of GDP has fallen sharply since the two corporate tax cuts, and corporate tax revenues as a share of GDP have also been declining. It was at 2.98% of GDP in FY25 compared to 4% in FY12!

In fact, even as profits after tax rose as a share of GDP, the share of private capex in private sector GFCF declined and has been on a secular decline since 2010-11, apart from a slight recovery from the Covid-19 dip. This should be a matter of concern.

After these reductions, manufacturers in India face one of the lowest corporate tax rates globally today, above only a tiny number of countries. The rates are lower than all major developing country peers.

How do personal income tax (PIT) collections look? Encouragingly, it has been rising impressively since the regime shift in FY21. In fact, PIT collections have gone from ₹1.69 LC in FY11 to ₹11.83 LC in FY25 — growing faster than corporate tax every year since FY20, which is a structural reversal.

This performance on PIT is confirmed by its sharp increase as a share of GDP since the regime shift. Clearly, the PIT reforms (coupled perhaps with better detections and enforcement) have been a resounding success in terms of increasing PIT from 2.51% of GDP to 3.58% of GDP, a spectacular 43% increase as a share of GDP over just four years.

However, as a share of PFCE, the trend has been muted, remaining range-bound in the 60-62% of GDP, though there’s a slight uptick since FY24, which must be watched for sustainability.

On the indirect taxes front, the revenue collections response to rationalisation and reductions have not been encouraging.

Bringing all of them together, if we take out the pandemic volatility, the decade of direct and indirect taxation reforms and rate reductions (eight episodes in total) does not appear to support the economic orthodoxy on tax reduction’s impact on investment, output, and revenues.

The launch of GST in July 2017 initially caused a dip in indirect tax collections in FY18, as businesses adjusted. The subsequent compliance surge (event F, FY22 onward) then drove indirect taxes to record levels — monthly GST collections averaging over ₹1.5 lakh crore from FY23.

The GFCF line tells a sobering story. From a peak of 36.5% of GDP in FY11, it fell steadily to 26.9% in FY20 and has recovered only modestly to about 29.5% in FY25 — still well below the FY11 peak. Neither the corporate tax cut (D) nor the post-COVID rebound has restored investment to its earlier trajectory, a point highlighted here.

The most notable pattern is that corporate taxes have shown the highest volatility among all tax revenues.

Post-COVID (FY22 onward), PIT has consistently grown 20–40% annually — far outpacing corporate tax — making personal income tax the engine of direct tax buoyancy. GST's 29% surge in FY22 and 22% in FY23 (H region) may be a reflection of the compliance dividend of digitisation and e-invoicing, more than any rate changes.

The positive revenue response of PIT compared to corporate tax is perhaps due to corporate tax cuts being a one-time rate reduction that reduced the base but boosted profitability without proportionally boosting investment, while PIT benefits from a widening formal employment base. It is also perhaps understandable that the problem with corporate tax is less about base expansion and more about avoidance and evasion, neither of which is directly addressed through rate reductions.

The private corporate sector's savings have consistently gone up — from 9.5% of GDP in FY12 to over 11% — while its investment as a share of GDP has been falling, indicating that companies have been using higher post-tax profits to build reserves rather than to invest in fresh capacity. It is not incorrect to argue that the 2019 corporate tax cut largely transferred fiscal resources to shareholders and balance-sheet strengthening rather than to productive fixed investment. This also says something about the economy’s aggregate demand growth expectations.

This experience on corporate tax reductions is in line with global experience. A meta-study of 441 estimates from 42 primary studies by Sebastian Gechert and Philipp Heimberger corrected for publication bias — which favours reporting growth-enhancing results — and found that the average effect of corporate tax cuts on GDP growth cannot be rejected from zero. The raw literature (before correction) shows 68% of studies finding a positive effect, but once publication selectivity is accounted for, this falls to about 38%, with nearly half finding a neutral result.

Interestingly, they show that “it is about 2.7 to 3 times more likely to publish a result showing a statistically significant positive impact of corporate tax cuts on growth compared to a significant negative result.” This positive bias is a big problem across economics and elsewhere, and does not get the attention it deserves.

Their main findings are worth quoting:

First, corporate tax cuts tend to be even less growth friendly when considering a short time horizon. Second, considering both rate and base changes by looking at an effective average corporate tax rate may lead to slightly more positive growth rates in response to tax cuts. However, this is an outlier as compared to the rest of the literature using effective marginal tax rates, corporate tax shares in GDP or statutory tax rates, and the result is also not entirely robust to variations in the meta-regression estimator. Third, there does not seem to be a substantial difference between OECD and non-OECD countries regarding the growth effects of corporate tax changes. Fourth, explicitly controlling for other types of taxation (personal income taxes, capital income taxes, property taxes, sale taxes) does not affect our main findings. Fifth, more recent studies tend to find less growth enhancing effects of corporate tax cuts. Finally, it matters what happens to other budgetary components in conjunction with a corporate tax change: if we hold government spending fixed, a corporate tax hike will be slightly more detrimental to growth, implying that using the additional revenues for government spending instead of fiscal consolidation may foster growth, in line with theoretical arguments from endogenous growth models and empirical evidence on substantial productivity of public capital.

The key conditional findings are: corporate tax cuts reliably attract FDI (semi-elasticity ~-2.9, robust across studies), but their effect on domestic investment is weaker. When product markets have imperfections — which is increasingly the case given rising corporate market power — firms respond to tax cuts by increasing savings and reserves rather than investment. India’s equivalent experience — corporate PAT rising to record levels while private GFCF as a share of GDP fell — is a near-perfect illustration of this theoretical mechanism.

See also this earlier blog post on the questionable virtues of lowering corporate tax rates.

To conclude, let me add to Dan Neidle’s nice description of the tax populism of right and left-wing politicians.

The tax populism of the right is that we can cut tax without anyone (or at least anyone the populists care about) being hit by cuts in services or benefits. There’s a magic money tree of government waste that can be harvested without consequence. The tax populism of the left is that we can fund services without anyone (or at least anyone these populists care about) being hit by increased tax. There’s another magic money tree, where trade-offs don’t exist.

The enduring tax populism among economists (and market experts) is that we can cut taxes and harvest a triple-win of an increase in investments, a rise in output, and higher revenue collections. There are no such free lunches. India is only the latest in the series of data points that invalidate this tax populism.

Thoughts on international development IX

noreply@blogger.com (Urbanomics) — Wed, 18 Mar 2026 02:19:00 +0000

This is in continuation to the posts consolidated here and a subsequent one here.

In the case of human-engagement intensive and quality-based interventions (or thick activities), the conventional wisdom in development revolving around evidence-based policy/program formulation and their planned implementation generally fails when the rubber hits the road. Instead, they require starting with some basic version of a program (a minimum viable product), then iterating intensely during implementation, and opportunistically building elements on the MVP that increase the likelihood of success.

Apprenticeship promotion programs are a good example. The Business Standard has an article on India’s apprentice programs.

Apprentice programs have been a constant part of skill development and job creation initiatives of the central and state governments for several decades. In recent times, there have been the National Apprenticeship Promotion Scheme (NAPS) and the National Apprenticeship Training Scheme (NATS). The news article has this assessment from a recent NITI Aayog report on the country’s apprenticeship ecosystem;

India’s apprenticeship ecosystem remains fragmented and uneven. In 2024-25, while 1.31 million candidates registered for apprenticeship, only 985,000 were engaged and barely 251,000 completed their training — exposing significant leakages between enrolment, engagement, and completion… Medium and large enterprises constitute fewer than 30 per cent of active establishments but account for over 70 per cent of apprenticeship engagement… Weak linkages between educational institutions and industry further undermine programme effectiveness… Women account for only 18.2 per cent of the apprentice pool.

It makes these suggestions

The report recommends establishing a consolidated national-apprenticeship mission, which would serve as an umbrella framework for all apprenticeship initiatives. It envisions a single-window digital interface called the national apprenticeship portal, which integrates information on diverse apprenticeship programmes and provides streamlined access through one common platform. It recommends creating an apprenticeship-engagement index to benchmark state performance, standardising evaluation and assessment protocols, and empowering district skill committees as local anchors. To widen participation, it proposes introducing an apprenticeship-linked incentive scheme that provides financial incentives to both employers and apprentices, particularly targeting aspirational districts, the Northeast, and women apprentices.
For industry, it suggests cluster-based consortia of micro, small, and medium enterprises, a startup apprenticeship programme, and expansion into gig and sunrise sectors such as electric mobility, green energy, and digital services. Targeted incentives for aspirational districts and women apprentices, alongside post-training support and social-security coverage, can be critical for improving retention and completion.

It finally suggests that if effectively implemented, these reforms can ensure the successful adoption of apprenticeships in the country. I’m not sure.

This is a good example of an intervention where inputs and processes built on even the most rigorous evidence base, and meticulous and prescriptive implementation planning cannot ensure success. It is also an illustrative example of how the discrete logistical approaches crowd out more organic engagement.

The NITI Aayog report proposes several elements of logistics - an umbrella framework, a single-window portal, an index to benchmark performance of states, standardisation of evaluation protocols, creation of district skill committees, apprenticeship-linked incentives to both apprentices and employers, targeting of women and backward areas, etc.

These elements give the form of a successful intervention, without actually ensuring desired outcomes. While such logistics elements are essential ingredients, they are not sufficient in the case of thick interventions that require behaviour and culture changes and where the quality of engagement is critical.

Worse, the overlay of well-intentioned, tightly prescriptive planning erodes local discretion and flexibility, and straitjackets the implementation. By crowding out the most critical ingredient for their success, local ownership and adaptive refinement, the program struggles.

So what could be done? For a start, we must acknowledge that such interventions cannot be one-size-fits-all nationwide programs. Second, the standard method of detailed prescriptive guidelines that revolves around implementation logistics cannot ensure effective implementation. Third, we must eschew the obsession with headline numbers and massive scale from the get-go. Such initiatives can at best scale gradually. Finally, this would require a single-minded focus on outcomes that involve changing habits and practices on the supply and demand sides. Apprenticeships should become attractive to both students and employers.

All these are hard by themselves and more so for paradigms defined around national programs. One approach could be to start in a few places by identifying firms that are already hiring apprentices or have an interest in doing so (how do we elicit this?), and engaging actively with them to declog the supply side of apprentices and ease their program access. It would also be required to work with the supply side, including educational and training institutions, to encourage and make apprenticeships attractive and desirable. This would generate a few illustrative examples of successes that can then act as lighthouses for emulation and scaling. Besides, it would also give insights about what works and does not.

Further, these are high-human-engagement intensive activities, whose success would depend critically on internal champions. Bureaucratic processes and practices alone will struggle to achieve the desired outcomes. They can only be complements to the main task of local engagement and struggles, driven by internal champions.

Other such examples of interventions would include those aimed at improving student learning outcomes, improving public health and sanitation, increasing the adoption of vocational education, the adoption of public-private partnerships in social sectors (education, health, community assets, etc.), etc.

Unlike programs that deliver specific inputs with defined processes and have a clear theory of change, these examples require behavioural and cultural shifts. No amount of top-down logistics-based inputs and processes can be a substitute for the hard grind of the bottom-up systemic engagement and collective struggles required to shift behaviours and cultures.

The logistics/procedure recipe in all these cases is mostly well-known. But there’s a never-ending search for ideas and innovations that can add to the recipe. Instead, the objective should be to bring them all together in a manner that ensures success. This is generally about implementation with a basic design, continuous iteratation, and opportunistic refinement of the design.

In this context, it is appropriate to conclude from an earlier post that, like other walks of life, implementation is all that matters.

The fundamental insight is that it’s not ideas that lead to development but their implementation, and that implementation is almost always far more daunting than the process of discovery of the idea itself. In fact, only a fraction of the pipeline of ideas ever finds its way into successful implementation… The most valuable individual and collective attributes for progress and development may be the desire and skills to tinker and embody (or institutionalise) to solve problems. In development in particular, they are far more important than the ability to ideate and innovate. Persistence and not mutation is what drives development (and much else in life)… It’s therefore apposite that development embraces and elevates the attributes, skills, and values of problem-solving through the process of tinkering, embodying, iterating, and scaling, instead of the current fetish with new ideas and innovation.

A framework for public funding of innovation and startups

noreply@blogger.com (Urbanomics) — Sun, 15 Mar 2026 23:30:00 +0000

I blogged here exploring models of innovation funding generates the greatest bang for the buck in terms of achieving the primary objective of catalysing innovation. This post will provide some analytical frameworks to formulate a policy on innovation funding. This (on the importance of portfolio management activities), this (on an industrial policy for funding startup innovation largely through grants), and this (on the success of Maharashtra’s Defence and Aerospace Fund) are other recent blogs on the topic. This post will summarise all the takeaways and outline some guidance on startup innovation funding.

The policy objective of startup financing is fundamentally to expand the envelope of investible startups and innovations and thereby crowd-in private risk capital. What is the best approach to achieve this objective?

Answering the question requires addressing the challenge of whether public innovation funding primarily expands the investable universe (genuine additionality) or primarily subsidises returns on investments that would have happened anyway (return-amplification / crowding-in of already-attracted capital).

In the context of infrastructure, I have written here arguing that India’s efforts to crowd-in private capital into infrastructure sectors through the likes of IIFCL and NIIF, and IDFC earlier, have struggled to deliver the additionality (in terms of derisking sectors outside the traditional strongholds of public private partnerships) as the new institutions have ended up competing with the private sector for investments.

What does the empirical evidence on these efforts globally report?

A useful framework for thinking about this would be to categorise funding into three buckets: seed/angel stage (one that leads to proof of concept and lab validation, TRL 2-4), technology/product development stage (includes prototypes and pilots, TRL 4-7), and commercial scaling stage (TRL 7-9). The first category is pure incubation of ideas through grants; the second is about expanding the pool of scalable innovations; and the third is about derisking and crowding in private capital to scale innovations.

The first stage, being the riskiest, will have the greatest additionality from public funding. It is invariably grant-funded, and gets the biggest share of public funding focus across countries, also because it is essential to create the pipeline of startups that can be feedstock for VCs and other investors. It is no good to have a VC ecosystem without a strong investible startup pipeline in the prioritised technologies.

In the second stage, being the “innovation valley of death”, grants may be the best option. While instruments such as a Simple Agreement for Future Equity (SAFE), popularised by Y Combinator, and other forms of convertible funding are commonly discussed in the context of technology/product development, the evidence from successful global cases points to grants, with at best hybrid forms like clawbacks or profit sharing. Interestingly, apart from India (BIRAC and MEITY MSH), no major country uses SAFE in public funding.

This is because while investors obviously favour equity instruments like SAFE in pure private market contexts, they create problems with the determination of future cap tables, significantly diluting entrepreneurs and diminishing their incentives at so early a stage of the startup’s journey, and also making them significantly unattractive for commercial investors (who generally prefer startups without the encumbrances from public shareholding).

It can be observed that those with risk capital instruments tend to kick in only at the TRL 6-7 stages.

In this context, it is worth briefly discussing the critiques of grant funding to startups. Those who critique giving grants to startups do not realise the central role of public funding in deepening the innovation ecosystem for commercial capital to then come in. In countries like India, where early-stage risk capital is tiny, public funding is critical to create a deep and broad pipeline of innovations. The concern of possible incentive distortions from giving away free money is largely minimised through milestone-based tranches or conditional grants. Critics also tend to conflate these two categories of funding with the third stage of commercial scaling capital, which we now turn to.

The dilemma between expanding the pool of capital and returns-amplification is most relevant to this stage of commercial scaling capital. The global evidence on this is mixed. The Israeli Yozma program, which deployed funds through Fund of Funds (FoFs), is thought to have catalysed the country’s vibrant VC industry.

However, other examples point to returns-amplification. A study of IFC’s blended finance deals in the 2000-20 period finds comparable financial returns to non-blended projects but “no statistically significant excess private mobilisation beyond what IFC’s standard lending would attract.” In other words, blending did not increase the quantum of private investment — it redistributed risk between IFC and private co-investors.

This finding is echoed in a 2023 study of SIDBI’s Fund of Funds for Startups (FFS) 1.0 by the Impact and Policy Research Institute (IMPRI), India’s Startup Engine: A Policy Review of the Fund of Funds Initiative. It finds that most FFS 1.0 capital went to established VC funds that would have raised capital independently. It also found “crowding-in effect was primarily reputation/signal, not financial additionality,” the government’s involvement functioned more as a validation of fund managers to private investors than as a necessary injection of capital. While FFS 1.0 delivered a 2x mobilisation ratio, it was mostly in already-functioning VC markets.

This brings us to the question of the most cost-effective approach to achieve the public finance objective while supporting commercial scaling. The options span the spectrum from directly investing in the startup to indirectly investing through FoFs.

While the former allows for targeting the riskiest innovations/startups, it creates the challenge of due diligence, which can be addressed through co-investment with professional investors that piggyback on their diligence. While the latter limits the control over who/what is funded, it allows full play for professional investment practices.

In either case, the nature of the entity that deploys the public funds is important. A fully public or majority public shareholding corporation, whether non-profit or for-profit, will struggle to deploy risk capital and will be hobbled by the restraints of the General Financial Rules (GFR) and the vigilance from oversight agencies. It is for this reason that there is no instance from India of a government-owned entity directly making risk capital investments (apart from the Maharashtra Defence and Aerospace Fund). Its alternative, a majority privately owned entity or a Category I Alternative Investment Fund (AIF) with private Limited Partners (LPs), cannot avoid the returns-amplification problem.

In the circumstances, the most prudent and effective strategy would be the FoFs route with some sharply defined conditionalities. The funds could be committed at concessional terms - subordinate equity, first loss buffer to a certain threshold, capped returns, warrants with lower liquidation preference, etc. It should be complemented by broad mandates on the nature of investments made, specifically on the TRL stages of the innovations, and pre-defined technology areas.

When public capital is subordinated to private capital in the waterfall through any of the aforesaid approaches, the public subsidy is targeted precisely at the risk premium that blocks private investment. Return-amplification is minimised because private investors bear disproportionate upside — they are not getting a free subsidy on already-viable deals.

In this context, the RDIF is instructive. For a start, all its funding is debt or equity and only for TRL 4 and above stages. It has three modes of investing based on where it stands in the returns waterfall. In the first mode, RDIF effectively absorbs the first losses and receives distributions after private investors have received their hurdle rate. In the second mode, it receives distributions pari passu with other contributors at the same hurdle rate and IRR. In the third mode, it receives distributions at a higher priority or higher IRR than private contributors.

While the first mode is a good example of concessional lending as discussed above, the second and third modes may need to be justified on other considerations. Scarce public capital should flow to those areas where it has the highest additionality. While it prescribes the broad areas of investing, it may not suffice in pre-empting returns-amplification investing.

In the circumstances, the RDIF runs the risk of ending up with the same problems as those with the likes of IDFC and NIIF in infrastructure (whose portfolios clearly indicate that they tend to compete and crowd-out rather than crowd-in private capital). It may struggle to realise the promised additionality. For instance, it is most likely that most of the funding will flow into the TRL 8-9 innovators in the less risky among the defined areas. Finally, I’m not sure how Focused Research Organisations (FRO) can deploy returnable capital in startups, unless they merely act as pass-throughs to FoFs.

If the second-level fund managers (SLFMs) of RDIF are required to meet additionality criteria (invest in TRL 6-9 companies they would not otherwise fund; report on portfolio-level additionality; face consequences for drift towards safe/commercial deals), the public mandate will be preserved. But without this discipline, every SLFM will cherry-pick the best deals, and the public capital risks becoming a subsidy for private returns. At best, public capital ends up competing with private capital and marginally expanding the large enough and growing pool of risk capital.

Finally, the biggest constraint to scaling is finding the deployment platform in a country where the indigenous product ecosystem, especially domestic OEMs, is very limited. In the circumstances, public policy must play an important role in value addition by facilitating the creation of scaling pathways. This could be through direct procurements (solar cells, smart meters, street lighting LEDs, etc.) or domestic content mandates (cameras, telecom equipment, etc.). This has been a very important pathway for commercial scaling in both the advanced countries and in China, but it will be a challenge for India’s public policy. It is also for this reason that investors should pursue proactive portfolio management in terms of actively facilitating the linking of startups with the public procurement pathways.

In conclusion, a few points to be borne in mind. One, grants at Stage 1 (TRL 1-4) are the highest-additionality instrument globally. No other instrument produces a comparable expansion of the investable universe. The evidence is unambiguous. Two, since private capital will remain scarce, public capital is critical to develop the pipeline of risky innovations and startups. Three, this nature of funding and additionality will also largely apply to the stage of technology/product development.

Four, a blended fund with a derisking public tranche and a set of sharply defined target investment-related conditions, is the highest-additionality structured instrument for commercial scaling. The public tranche absorbs the risk premium, and private capital fills behind. Five, government procurement is the highest-additionality instrument for commercial scaling for hardware companies. Procurement creates more private capital crowding-in than any equity instrument, because it proves market demand.

Finally, as public policy interventions to realise the aforesaid objectives, there are perhaps two low-hanging fruits. One, there should be a portal that consolidates all the startups financed by state and central government departments, and it should become the primary universe of the pipeline for risk capital funding. This portal should be tightly integrated with the ecosystems of VCs and other investors. Second, there should be active portfolio management at the level of all departmental funds to facilitate access to larger public risk capital funds like RDIF and SIDBI FFS 2.0. The objective should be to ensure that promising publicly financed innovations do not remain stranded.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 14 Mar 2026 14:08:00 +0000

1. Power constraints could emerge as the biggest bottleneck to America's AI growth vis-a-vis China.

Beijing has already prepared by installing an eye-popping 1,500 gigawatts of new energy capacity since 2021, taking its total to 3,891GW. However, the US has not: its installed capacity has barely risen in recent years, and now sits around 1,373GW — or less than what China added in just four years. This is shocking. Worse, China will add over 3.4 terawatts of electricity-generation capacity in the next five years, according to Bloomberg — six times as much as the US.

2. Industrial policy and infrastructure development are back again as priorities for international development actors in Africa, after couple of decades of dalliance with RCTs and small interventions.

3. The declining labour productivity growth rates.

Between 1950 and 1973, the metric, based on output per hour worked, rose at an annual average of 4 per cent across developed economies. But the rate halved to 1.9 per cent from 1973 to 2009. And since the financial crisis, it has slowed further, averaging just 1.2 per cent between 2009 and 2025.

Pension systems are grappling with increasing dependency ratios.

When the German retirement age was set at 65 in the 1910s, life expectancy was below 50. It has now increased to over 81, while the retirement age is only set to increase to 67... In the 1960s, Japan had eight or nine people aged 20 to 64 for every person aged over 65. Now it is just over one.

4. Richard Hass makes the point that since America chose the war, it must also make the choice on ending it. This is an important point.

America did have other viable options, above all diplomacy, especially as no convincing case has been made that an imminent threat had to be dealt with militarily. The contrast between Washington’s near-unlimited willingness to compromise and demonstrate patience when it comes to persuading Russia to end its aggression against Ukraine and its unrealistic demands and lack of patience with Iran in the run-up to this war is as stark as it is telling. Ukraine’s offer to help defend against Iranian drones while Russia reportedly provides intelligence to Iran only makes the double standard worse.

5. Around 14.5 million barrels of oil transit the Strait of Hormuz daily. It has shrunk rapidly.

China update - March 2026

noreply@blogger.com (Urbanomics) — Fri, 13 Mar 2026 02:09:00 +0000

The Trump chaos has been a godsend to China by deflecting attention from the world economy’s China problem. It has allowed the country the space to continue flooding the world with its heavily subsidised exports.

1. Ruchir Sharma has an excellent description of the fundamental problem with China’s growth model. First, some facts about its rising trade surplus.

This decade, Beijing has dropped export prices by nearly 20 per cent, producing a 40 per cent surge in volume. Booming exports along with weak imports increased China’s trade surplus last year by 20 per cent to a record $1.2tn. Net exports accounted for almost a third of its 2025 GDP growth, a bloated share even by China’s standards. As a share of global GDP, no nation has ever had a larger trade surplus, and that includes Japan during its 1980s heyday. China’s dumping offensive is deindustrialising rival exporters the world over, idling car factories in Thailand and textile plants in Indonesia. Across Asia, nations where Chinese imports are rising fastest also tend to have the weakest job growth. More than 50 of the world’s 70 largest economies have taken steps to defend themselves against Chinese dumping.

This has come at a prohibitive cost and engendered economy-wide distortions.

The root of the problem is the country’s growth target. Of the nearly 40 nations that rose into the developed ranks after the second world war, none faced the twin hurdles confronting China today: depopulation and massive debt. No other major nation in history has managed to sustain growth above 2 per cent with a shrinking labour force. And at 340 per cent of GDP, China’s total debts are higher than any other emerging economy by far. Beijing is trying to engineer a historically implausible miracle. Given its demographic decline, China can hit its target only by raising output per worker, but maintaining overall productivity growth near 5 per cent would be an unprecedented feat at this stage of development. Lately China has been moving in the opposite direction. Productivity growth includes contributions from labour, capital, and a critical “total factor” that aims to capture how much growth labour is squeezing out of the investment. The Conference Board estimates that this key third factor has fallen to near zero this decade, implying that China is generating growth only by investing more heavily.
China keeps pumping out credit to fund more investment, but mostly it’s getting a bigger debt pile. To generate $1 of GDP growth in China, it now takes $6 of new debt, up from $1 two decades ago. Beijing is counting on investment in new technologies including AI to boost productivity, but it’s highly unlikely that boost will be big enough to sustain productivity growth near 5 per cent. China’s real potential growth rate is probably between 2 and 3 per cent… The real problem is that investment keeps growing faster than consumption, compelling China to flood the world with its excess production. Chinese exports, now $3.8tn a year, recently surpassed US imports for the first time.

2. The record $1.2 trillion trade surplus in 2025 and the claim of having achieved 5% GDP growth rate for the year should not detract from the increasing pile of problems facing the economy. This is a good summary of the signatures of China’s faltering economy.

The growing dichotomy between China’s thriving trade-focused sector and its anaemic domestic economy. While China’s world-conquering exporters and powerhouse innovation clusters can make the country seem like an unblemished economic success, painful technology transitions and faltering domestic demand mean that for many businesses and citizens, these are times of increasing hardship. Cities such as Shenyang, which turned itself from a centre of heavy industry to an automotive hub during market reforms in the 1990s and 2000s, are struggling to evolve. Shenyang now wants to pivot into electronics and other industries but, like many Chinese provinces, is unwilling to let favoured businesses die…
Yet investment was the weakest since the 1990s as property prices fell and new construction starts declined… A four-year real estate slump has undermined domestic demand and added to deflationary pressures. In November, retail sales growth hit a three-year low. Meanwhile, Beijing’s interventionist policies from currency depreciation to subsidies to support for favoured industries are driving overcapacity in sectors ranging from automotives and batteries to solar panels. Plunging profitability — industrial profits fell 13 per cent year-on-year in November — has made companies reluctant to hire or pay high salaries.
Zombie companies now account for more than 12 per cent of total registered companies, more than double the level in 2018 and nearly double the global proportion, according to a study led by Alicia García-Herrero, chief Asia-Pacific economist at French investment bank Natixis… Unemployment among those aged 16-24 was 17 per cent in November compared with about 11 per cent pre-pandemic. While China’s overall official unemployment rate remains stable at about 5 per cent, many ordinary Chinese people say the figures do not mirror reality.

Ironically, the rising trade surplus may carry the seeds for the weakening of the domestic economy,

As long as Beijing can rely on exports for growth, analysts expect it to let the housing market continue to deflate and to concentrate on boosting the high-tech sector to compete with the US — choices that will only deepen the economic divide.

3. Another outlet to channel domestic capacity on the face of weakening domestic demand is the projects under the Belt and Road Initiative (BRI). China’s investments under the BRI Project surged in 2025.

The surge in new investment and construction deals was dominated by gas megaprojects and green power, according to research by Australia’s Griffith University and the Green Finance & Development Center in Shanghai. Beijing signed 350 deals last year, up from 293 worth $122.6bn in 2024... Last year’s figures brought the total cumulative value of BRI contracts and investments since its launch to $1.4tn, the study found. The growth in 2025 was driven by multibillion-dollar megaprojects including a gas development in the Republic of the Congo led by Southernpec, Nigeria’s Ogidigben Gas Revolution Industrial Park led by China National Chemical Engineering and a petrochemical plant in North Kalimantan, Indonesia, led by a Chinese joint venture of Tongkun Group and Xinfengming Group.

Fossil fuel exploitation became the main focus of China’s energy engagement with its BRI partners.

The value of energy-related projects last year was $93.9bn, the highest since the BRI’s inception and more than double the 2024 level. It included $18bn in wind, solar and waste-to-energy projects, underscoring China’s lead in clean technology. Metals and mining also hit a record at $32.6bn, including a majority of spending on minerals processing abroad, highlighting how Beijing has used the BRI to secure long-term access to resources. That included a surge of investment in copper in the second half of the year.

The scale and direction of the shift in 2025 point to China tightening global mineral supply chains toward itself and excluding the US.

4. The NYT writes that China’s campaign to dominate rare earths has its origins in the 1960s. In April 1964, China discovered that an iron ore mine near Baotou, 50 miles from the Mongolian border, held the world’s largest deposit of the 17 metals that belong to the rare earth family. Today, China produces 90% of the world’s rare earths and rare earth magnets.

Deng Xiaoping, then a high-ranking Chinese Communist Party official, visited the remote desert mine, owned by a military steel maker, to inspect the massive cache.“We need to develop steel, and we also need to develop rare earths,” declared Mr. Deng, who over a decade later would emerge as China’s top leader… China’s centrality in rare earths didn’t happen by accident. It is the result of decades of planning and domestic and overseas investment, often directed from the highest levels of the party and the Chinese government. In the early 1970s, the People’s Liberation Army launched a little-known research program to develop potential military uses of rare earths.
Mr. Deng kept pushing China’s rare-earth advancement forward in the 1980s and 1990s together with Wen Jiabao, a geologist by training who went on to serve as China’s premier from 2003 to 2013. Under Mr. Wen, China consolidated what was a highly splintered web of mostly private companies into a tightly run arm of the Chinese government. Mr. Wen closed mines run by smugglers and cleaned up the industry’s most severe pollution. The sector grew in size and expertise. In 2019, seven years into his reign as China’s top leader, Xi Jinping described rare earths as “an important strategic resource.”.. In April and again in October, 2025 China enacted new export controls that allowed it to withhold supplies of rare earths and rare-earth magnets and force Mr. Trump to compromise on tariffs…

This is a fascinating account of how Deng and Co stitched together the rare earths industry in China.

The father of the industry was Xu Guangxian, a tall, thin man from Shaoxing, a town near Shanghai… Shortly after World War II, Mr. Xu completed a doctorate in chemistry at Columbia University. He returned home to teach and do research at Peking University in Beijing… Purifying rare earths is extraordinarily difficult. Early chemists named them rare not because they were hard to find — they are not — but because of the challenge of separating them from one another… At Peking University, Mr. Xu and his wife, Gao Xiaoxia, also an accomplished chemical engineer… had a revolutionary breakthrough: Rare earths could be purified using inexpensive hydrochloric acid and cheap plastic holding tanks rigged together.
Mixed rare earths were poured in one end, and specific kinds of rare earths, after binding to various solvents, emerged from different outlets at the other end. It was the first rare-earth assembly line, a crude version of a process still used today. Production costs plummeted with Mr. Xu’s techniques. Mr. Xu installed his first production lines, in Baotou and at a chemical plant in Shanghai, and started training engineers from all over China… A Five-Year Plan drafted by Mr. Deng and Vice Premier Mr. Fang Yi, covering 1981 to 1985, ordered that China “increase the production of rare-earth metals.” More than 100 towns and villages across China built rare-earth refineries in the 1980s, many of them state-owned and few with meaningful pollution controls. By 1986, China was the world’s largest producer of rare earths.

Rare earths were then used in low-tech manufacturing. Thanks to research in the US and Japan, rare earths became central to advanced manufacturing. But Chinese expertise in rare earths also owes to the strategic short-sightedness of the US.

In 1983, engineers at General Motors and the Japanese magnet maker Sumitomo Special Metals each announced they had developed powerful rare-earth magnets. The magnets were immediately put to use in electric motors in the auto industry and beyond. China lacked expertise to turn rare earths into magnets. It would purchase that know-how from the United States. General Motors had turned its discovery into a thriving magnet manufacturing subsidiary in Indiana, called Magnequench. But a decade later, G.M. decided to stop making many of its own auto parts.
Magnequench was sold in 1995 to a consortium of investors that included two Chinese companies led by sons-in-law of Mr. Deng: Wu Jianchang and Zhang Hong. Under President Bill Clinton, the U.S. government allowed the transaction to proceed because a majority of the owners were American. The American owners were mainly institutional investors. Mr. Deng’s sons-in-law had led companies with deep ties to low-cost magnet manufacturing in China. Magnequench started moving its equipment in 2001 to Tianjin and Ningbo, China, and shut down in Valparaiso, Ind., by 2004… the Chinese magnet factory at Tianjin had previously been using processes “that were at least 10 years behind” what Magnequench had developed in Valparaiso. The move by Magnequench, which was then bought in 2005 by a Canadian rare-earth processor with operations in China, taught China how to make rare-earth magnets.

Under Wen Jiabao, China focused on the pollution stemming from rare earth refineries, which were contaminating the Yellow River. In 2006, China imposed annual quotas on exports to limit processing and stem pollution, and has since consolidated companies under state ownership. Its dominance also stems from capabilities

Today, China is working to cement its lead in rare earths by churning out more trained technicians and researchers than any other country. Programs in rare earths are offered by 39 universities. The United States and Europe have no such programs — not even at Iowa State University, an institution that once trained generations of American engineers in rare earths. Iowa State has not offered a course in rare earths for the last several years and has one graduate student doing independent study in the field. It plans to offer a course next year. China has hundreds of scientists exploring rare-earth technologies.
Technicians at a refinery in Wuxi, a city near Shanghai, spent seven years doing experiments to refine dysprosium, a rare earth, to extraordinary purity. The refinery is now the world’s sole source of that rare earth, which is used in capacitors — tiny devices to control electricity — found in Nvidia’s Blackwell artificial intelligence chips. Most of the refinery’s shares were until this year owned by Neo Performance Materials, the Canadian company that acquired Magnequench in 2005. A Chinese state-controlled company bought most of the shares on April 1. Then on April 4, Beijing halted exports of dysprosium and six other kinds of rare earths to the United States and its allies… Beijing has halted most exports of rare-earth processing equipment. It has also taken away the passports of rare-earth technicians to prevent them from leaving the country with valuable information.

5. In a good illustration of regulation with Chinese characteristics, Beijing manages to strike a balance between strictly controlling sales of unregulated drugs inside the country, while allowing their massive and growing illegal exports.

FT has a story about the burgeoning trade in injectable peptide drugs that have become popular in the West due to the success of GLP-1 weight-loss peptide drugs like semaglutide and tirzepatide.

Industry insiders estimate there are about 1,000 Chinese sellers targeting overseas customers, a figure that has climbed sharply in recent months. Rising competition has pushed prices down. Sellers quoted prices such as $65 for 10 vials of BPC-157 at 10mg, or $70 for the same quantity of semaglutide — which compares to $110 and $1,000 for the same quantities on US websites… Most peptides are produced by about a dozen factories clustered in Shenzhen and Changsha, the capital of Hunan province. These facilities originally manufactured active pharmaceutical ingredients for the pharmaceutical industry before pivoting towards the grey market.
Multiple layers of intermediaries now sit between factories and consumers. “We never touch the product. We don’t know who makes it,” said one seller… one seller said he had no intention of trying the products himself. “I’m overweight, but I wouldn’t dare take these drugs,” he said, laughing. “It’s westerners who are obsessed with them. I just sell them.”… Chinese authorities have been cracking down on domestic sales of unregulated GLP-1 weight-loss drugs, arresting scores of sellers. A review of court records shows at least 40 cases of people being charged with black-market peptide sales…
Finding sellers online is easy. They advertise openly on cross-border ecommerce platforms such as Global Sources, as well as on Facebook, Telegram and WhatsApp… The FT visited the registered addresses of eight suppliers and found that most used false locations, with no functioning phone numbers or email contacts… Inside one office in China visited by the FT, a group of young women chatted with customers in Brazil, the US and Canada. They used ChatGPT to draft sales copy for WhatsApp messages and worked with western influencers who promote the products on TikTok and Facebook in exchange for commissions… Sellers also shoulder the risk of shipments being seized by logistics companies or customs authorities…

6. Scott Kennedy has a very good paper on China’s high-tech sector—some headline facts.

Chinese industrial policy spending was estimated to be 4.9 percent of GDP. More recently, an International Monetary Fund (IMF) study, applying a similar methodology to data from 2011 to 2023, found that Chinese industrial policy spending ranged between 4.0 and 5.5 percent of GDP. The authors did not compute a parallel estimate for the United States, but they found that China’s spending was over three times the amount outlaid by the European Union…
According to the World Bank, China contributed $625.2 billion in domestic value added to manufactured goods in 2004, just 8.5 percent of the world total. By 2024, China’s output had jumped to $4.7 trillion, accounting for 28.0 percent of all manufacturing value added globally… China’s share of domestic value added in manufacturing has risen across multiple industries since 2000… Critically, the share of China’s exports by foreign-invested domestic firms has dropped over the same period, from nearly 60 percent to 27 percent, meaning that this shift toward higher domestic value added is not a reflection of the influence of foreign-invested firms in China.

The report points to the wide variations in the outcomes of China’s industrial policy interventions. It uses a four-fold framework to categorise them.

Chinese EV firms are estimated to have received nearly $231 bn in fiscal support in the 2008-23 period.

An area where China’s industrial policy has struggled is in the semiconductor industry. Despite outspending competitors by a large margin…

… Chinese firms have struggled to make headway in the value chain.

7. Finally, did China really eliminate poverty?

But while the country has eliminated poverty according to the World Bank’s $3 per day income standard, its definition of poverty is much lower than what the lender considers poverty in an upper-middle-income country such as China. By 2022, more than one in five people in China remained in poverty according to the World Bank’s definition for an upper middle-income country, set at $8.30 of income per day at 2021 prices.