Urbanomics

Analysing the challenges facing China’s economy

noreply@blogger.com (Urbanomics) — Sun, 01 Nov 2026 23:30:00 +0000

China’s economy is unique in multiple respects. And its economic growth presents a conundrum.

Arguably, the biggest structural anomaly with the Chinese economy is its ultra-low consumption share compared to any other country. The other side of this is the very high investment share.

Ken Rogoff has this anecdotal measure of the investment-driven growth reliance.

China has built more square metres of residential property per capita than either the United Kingdom or France, despite still being a much poorer country. Its road and railway networks are on par with those of the world’s most advanced economies and, in many ways, far superior to America’s.

But this investment-based growth is a diminishing returns story and finds its limits. This is clearly reflected in its declining contribution to the GDP growth. Not only is the investment rate itself declining, but its incremental impact on output growth is falling too.

Fixed asset investment declined 7.2 per cent year on year in the first nine months of 2026. Assuming fixed investment at 40% of GDP, this means that the rest of the economy must grow at 3 percentage points more just to prevent contraction. Even the traditional workhorses, like infrastructure investment, are declining.

The new driver of growth is exports, where the trade surplus hit $1.2 trillion in 2025. Net exports supplied a staggering 32.7% of 2025 growth (it was 30% in 2024), and the value-added embodied in exports is ~17–18% of GDP and underpins tens of millions of jobs. More on this latter.

The declining investment contribution to GDP growth also points to less and less efficiency in capital utilisation. This is captured in the incremental capital-output ratio (ICOR), what a unit of investment buys in terms of GDP growth. The ICOR has more than doubled since the 2000s. China is now roughly twice (or thrice if independent estimates are taken) as capital-hungry as Korea or Taiwan at the same stage, or as India today.

This investment is increasingly being funded by debt. The total social financing (TSF) has reached 315% of GDP. And this debt sits overwhelmingly in corporates, state firms, and local-government vehicles, hitherto the drivers of investment and growth.

The public debt is much higher if the off-balance sheet vehicles of the local governments are added. A new study from the Conference Board says that debt servicing payments alone are expected to account for 19.2% of the central government’s general public budget this year, up from 12% in 2014. Local government debt interest payments have risen 16% annually over the same period. Morgan Stanley estimates the public debt-to-GDP ratio to hit 122% by the end of 2026.

To put this debt accumulation in a global perspective, China now accounts for more than half the rise in the world’s debt-to-GDP ratio since 2008.

The danger is that once it reaches these levels, each incremental unit of credit buys less and less. Unsurprisingly, in 2025, one yuan of GDP required ¥6 of credit, as credit growth was double the nominal GDP growth rate. New lending increasingly refinances old liabilities rather than funding new output. Local-government vehicles alone owe ¥60tn (48% of GDP), much of it against land whose value has fallen. The credit boom's real legacy is a banking system propping up unproductive firms.

All this cascades into output growth trends.

The government has targeted the 2026-27 growth target at 4.5-5%, and the official estimates indicate that the economy grew 4.5% in the third quarter of 2026 and 4.6% for the first nine months. But several independent reconstructions put China’s true 2025 growth at roughly half the official figure.

One estimate is this.

Capital Economics estimates that growth in China in the third quarter was 2%, dragged down by declining industrial activity, particularly in construction and petrochemicals. Its model draws on hundreds of lower-profile official data series, like intercity passenger traffic and industrial electricity consumption, which the firm says makes them less susceptible to manipulation.

Another puts it lower still.

Rhodium Group estimates that full-year GDP will be around 0% in 2026, arguing that it is impossible for China to hit 4.5% growth with sluggish retail sales growth and steep drops in fixed-asset investment.

On NBS accounting, net exports added about 1.5–1.6 points to growth in 2024 and 2025. But that is inflated by collapsing imports. If we strip that out, the genuine external contribution is between a fifth and a quarter. Either way, remove net exports and domestic-demand growth falls to 3.4–4.0% on official data, and to 1–1.8% on independently-estimated growth.

But this reliance on exports is a big vulnerability, given the rising backlash against cheap Chinese imports destroying manufacturing bases in both developed and developing countries, and the protectionist barriers that are being erected by them. It is safe to say that the export markets will be squeezed in the immediate future.

Besides, the race to capture export markets has also spawned an unhealthy race to the bottom among companies, also spurred by equally intense competition among local governments.

The electric vehicle (EV) market is emblematic of this trend, with local governments pouring billions into creating local champions, resulting in a staggering 143 EV brands selling at least one model at the end of 2025. Since factory closures mean job losses and admission of failure, besides also impacting the promotion prospects of senior city leaders, cities are reluctant to pull the plug and continue to support them. Exports have emerged as a convenient outlet to channel the excess capacity, and production has continued to rise. Exports are expected to touch 12 million units of passenger vehicles, up from less than a million units at the turn of the decade, thereby overtaking Japan as the world’s biggest auto exporter.

However, the intensity of the competition has meant that even as Chinese EVs are capturing the global market, their EV companies are struggling to remain profitable. As an example, NIO, one of the leaders, has been losing more than a billion dollars each year since 2021, and its share price has fallen by 95%. In the first eight months of this year, the industry’s profit margin fell to a multiyear low of 3.6%, as companies compete in a pricing race to the bottom. Chinese officials call this price competition neijuan or involution.

Worse still, globally, the cut-throat pricing has also forced price reductions by Western car makers, thereby triggering a race to the bottom globally in the industry. For example, BYD is selling its flagship Seal hybrid sedan for the equivalent of around $44,000 in the UK, more than $10,000 less than a similarly equipped Volkswagen Passat.

On the one hand, there is the weakening consumer demand, which has resulted in 22% decline in the domestic sales of passenger vehicles in September (compared to the same period last year), and sales for the full year are estimated to reach only 18.5 million units, the worst performance since 2014. This must be seen against the backdrop of an annual production capacity of around 63 million light vehicles, more than triple the number of cars expected to be sold in the domestic market.

So what does all this portend for China’s future?

China is facing a prolonged real estate slump, dismal consumer expectations, falling retail sales (and that too in a country with private consumption at two-thirds of peers), declining fixed investment, and struggling corporate profitability (due to intense competition).

A recent FT essay argued that the combination of persistent deflation, weakening economy, dismal consumer sentiments, rising public and private debt, and ageing population means that China is facing its Japanification.

According to Goldman Sachs, an updated version of the Japanisation index — a gauge originally devised by the late economist Takatoshi Ito — shows that for the past five years, China has been consistently more “Japanised” than Japan itself… Japan’s population started to shrink in 2009; China’s decline began in 2022 and is on track to be steeper, worsening the country’s economic prospects... In another echo of Japan’s post 1990s-slump, the IMF warned last week of growing numbers of “zombie” companies across Asia, kept alive only by lenient banks. This is now evident across China’s heavily subsidised manufacturing economy. Outside favoured sectors, companies are increasingly refusing to invest while households hoard cash instead of spending... Consumers are deleveraging, with bank lending to households as of August this year declining outright for the first time in history... China’s weakening economic conditions meant that up to 10.6 per cent of the adult population had overdue loans last year, compared with about 7.8 per cent a year earlier, according to a report by Gavekal Dragonomics analyst Xiaoxi Zhang...

Phrases coined in 1990s Japan, such as “job hunting ice age” and “price destruction”, are creeping into China’s vernacular... economists can see the signals of Japanification in the data... Restaurants across China are competing to offer meals for under Rmb10 ($1.50). This too is redolent of Japan, where restaurants entered a margin-crushing price war to attract an ever-shrinking pool of consumer spending as deflation took hold. The price of a basic bowl of rice and beef at the nation’s leading gyudon chain hit a high of ¥400 ($2.50 at current exchange rates) at the end of 1990 before falling. It only reached ¥400 again in 2021... The “expectation channel”, where households and businesses saw no prospect of longer-term growth, created a vicious circle of reduced consumption and investment in Japan which in turn lowered expectations...
China’s real estate bubble was the largest in history, outpacing even Japan’s speculative frenzy of the late 1980s and at its peak accounting for a third of the country’s economy. The contraction since it burst in 2021 has been dramatic, with new housing starts down 78 per cent from their peak, according to Macquarie. That compares with a 73 per cent fall in the US between 2005 and 2009 and Japan’s 65 per cent drop between 1996 and 2025. The collapse of the property market has set off what Richard Koo, the Nomura Research Institute’s chief economist, calls a “balance sheet recession” — a term he originally coined in the 1990s to describe the tendency of Japanese companies and individuals to pay down debt rather than borrow to invest or spend. Weaker demand and deflation then worsen the debt burden, leading to a vicious cycle. Investment opportunities decline, the labour market calcifies and salaries stagnate... The ultimate sign of China’s weak credit demand is the 1.7 per cent yield on 10-year government bonds, which Nomura’s Koo describes as “absolutely ridiculous”...
One reason for Beijing’s reluctance to resort to domestic stimulus, economists believe, is China’s strong export performance. The trade surplus hit $1.2tn last year — the biggest recorded by any country, ever — and may meet or exceed that level this year. Policymakers in Beijing think the country’s export performance will buy China time while it waits for the property market to stabilise. In the meantime, they are pursuing investment in areas such as chipmaking and AI as the country competes with the US for geopolitical dominance... Gross fixed capital formation — the acquisition of assets for the production of goods and services — was 40 per cent of GDP in 2024 against Japan’s 28 per cent and the OECD average of 22 per cent, fuelled by an augmented fiscal deficit that Goldman Sachs forecasts will hit 11 per cent of GDP this year. No one knows when this debt will become unsustainable.

Michael Nicoletos has an excellent post whose conclusion is worth reproducing.

Household debt is rising, defaults are accelerating, the population is shrinking and aging, and precautionary savings behavior suggests Chinese citizens understand their economy better than policymakers do. The question is not whether China can rebalance. Structurally, it can, if it allows wealth redistribution to work, implements genuine pension reform, and expands healthcare spending. The question is whether it will. Current policy signals suggest the answer is no.
Until that changes, China will remain trapped in the same pattern: high investment, low consumption, rising debt, shrinking population, slowing growth, and increasing vulnerability to external pressure on its export lifeline… The demographic projections make this even more dire. A country that is losing 3 million people per year now will be losing 14 million per year by 2062. A workforce that shrinks by 225 million cannot sustain the growth rates Beijing demands. An aging population that nearly doubles its dependency ratio cannot suddenly transform into a consumption-driven economy…
The Chinese government will have a tough time boosting domestic consumption. Consider what it is up against: households that are over-indebted, scared, and saving at record rates; a population set to shrink by up to 280 million by 2050 and potentially by half by 2100; a dependency ratio that will nearly double, leaving just 1.2 workers to support each retiree; an export machine that relies on rerouting through third countries to avoid tariffs, with that loophole closing; and an energy import bill exceeding $450 billion a year, payable in foreign currency… Demographics make this worse, not better. You cannot boost consumption when your population is shrinking and aging. You cannot grow your way out of debt when your labor force is declining by 225 million workers. You cannot fund pensions and healthcare when the worker-to-retiree ratio collapses from 4:1 to 1.2:1.

All this means that catching up with the US GDP will most likely remain elusive, unless the US GDP itself starts falling. Even escaping the middle-income trap may become a challenge.

China’s investment-led growth model started with the likes of textiles and footwear, and gradually moved up into more sophisticated products like consumer durables, heavy equipment, renewables, transportation, and now technology goods. Heavy doses of financial repression, massive subsidies, and real estate revenues financed this model. The prolonged real estate market downturn has seriously strained the model and now threatens to upend it.

In conclusion, it is hard not to argue that any economy which has seen over ten quarters of deflation, an enduring property bust (housing starts down 78% from peak), total debt past 300% of GDP, a population shrinking ~3mn/year, and ageing toward 1.2 workers per retiree, is facing a reckoning. Each raises the ICOR further and shrinks the base that services the debt. The investment led growth model has run its course. Goldman’s Japanisation index already reads China as more “Japanised” than Japan. The export surplus is merely buying time and kicking the can down the road. Even that, too, is already getting squeezed. Factory closures and job losses are not far away. When that starts to happen in a meaningful manner, the tenuous contract between the Party and the citizens will be strained. It remains to be seen how China will navigate this inflection point. In the circumstances, Carl Minzner points to a long twilight.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 31 Oct 2026 02:47:08 +0000

1. Mint's N Madhavan discovers Kerala's national highways paradox.

The state boasts an extensive network of 11 national highways and 83 state highways. Yet, on the ground, these vital arteries remain choked, narrow two-lane bottlenecks. Traversing the 650-km expanse of National Highway 66 takes an agonizing 14 to 16 hours—double the time required to cover a similar distance between Delhi and Prayagraj in Uttar Pradesh. While the rest of the country races ahead with multi-lane, access-controlled expressways, Keralam is only now pushing through its first six-lane upgrade along National Highway 66—a delayed ₹66,000-crore project that experts note is arriving very late... To test the state of Keralam’s road connectivity and infrastructure—critical for the growth and investment it seeks—I decide to drive from Vizhinjam, near the southern tip, to the state’s border with Karnataka in the north. The distance of 769 km will take 21 gruelling hours. The average speed across the entire journey? A sluggish 33 km per hour.

2. Kerala takes to an ageing society with innovative policy responses like day care cenres and timebanks to address problems of loneliness among the elderly.

Started in 2021, the Kunduparambu Pakalveedu was the first daycare centre for senior citizens set up by the Kozhikode Corporation. In 2025, it won the best ‘Pakalveedu’ award among the 150 that are operational in Keralam today... Fun trips are arranged periodically... The seven fully funded Pakalveedu facilities the Kozhikode Corporation runs are just one part of its efforts in elderly care. The corporation spends 10% of its ₹132 crore annual outlay on the welfare of senior citizens, who account for 17% of the city’s population... According to a study jointly conducted by the Population Foundation of India (PFI) and International Institute of Migration and Development (IIMD) in 2025, 18.6% of Keralam’s population is today aged 60 years and above as against the India average of 10.8%... By 2051, almost one in three people in Keralam will be a senior citizen. The PFI-IIMD study puts the number at 30.6%. In comparison, the India average will be 20.4%.

The state has steadily strengthened its social safety net for the elderly. The previous Left Democratic Front government pioneered an ‘elderly budget’ to track interdepartmental spending and established a quasi-judicial elderly commission to safeguard senior rights. Backing these policies with substantial resources, the state ramped up its commitment in the 2026–27 budget, allocating 19% of its total outlay exclusively to senior citizens. The new United Democratic Front (UDF) government led by Satheesan is formulating policies to take these efforts forward. It has set up a separate department for elderly welfare... The new Keralam government has adopted an ‘aging in place’ model that allows elderly citizens to live in their neighborhood and social environment rather than shift to an institutional facility or an oldage home. It is the Japanese model and Keralam is studying it closely...

Keralam is just 1.5 children per woman, as against the replacement level (the average number of children per woman needed for a population to replace itself from one generation to the next) of 2.1 children. Life expectancy is also higher at 75.1 years compared to the India average of around 72 years. What complicates the process for Keralam is its high level of migration, especially among the younger population. As per the 2023 Kerala Migration Survey, 2.2 million people have migrated to other countries and another 0.5 million have done so to other parts of India. This means senior citizens are left behind.

3. Good long read on the Rs 2 trillion (initially estimated at Rs 1.08 trillion in 2017) Mumbai-Ahmedabad high speed rail.

4. Make in India update.

Under the Electronics Components Manufacturing Scheme, or ECMS, ₹69,000 crore of investment has come in, exceeding the scheme’s original investment target by ₹10,000 crore. The government has approved 106 projects, to make speakers, microphones, camera modules, displays, relays, coils, rare earth magnets and so on... Domestic manufacturing now meets India’s requirement for some products, such as plastic enclosures, anode materials, optical transceivers and relays. Local factories meet 60% of lithium-ion-cell demand, 80% of laminate demand and 75% of connector demand. Some components, including networking equipment, relays, LED lighting parts and automotive electronics are beginning to be exported to China, Vietnam, Singapore, Italy, The Netherlands and other countries... But for all the gleaming new production lines, local value addition in India remains modest, at 15–18%, versus 40% in China. Critical chips continue to be imported. Printed circuit boards, sensors, and specialized materials are only beginning to be produced locally at scale. Precision components that go into earbuds, hearables, wearables, smartphones et al. depend on imports... Plastics, heat sinks, shielding covers, battery packs, chargers and cables are already increasingly local. The next round includes PCBs, display modules, camera modules, passive electronic components and semiconductor packaging.

5. It is hard to displace America as the pre-eminent economic power. Sample this, even amidst all the dysfunction.

One Trumpian key performance indicator is what you might call the national cash flow statement. Gross payments entering America of all kinds hit a huge 30 per cent of GDP in the second quarter. Reflecting the aim of monetisation, not autarky, America is more globalised than at almost any point in history other than the prelude to the 2007-09 crisis. Energy exports have exploded. Weapons sales overseas are rising at a double-digit rate. Tech and financial firms are printing money abroad. Capital inflows, mainly from portfolios, loans and firms, are staggering, although exceeded as a share of GDP by the pre-2007 mania. While America is now spending almost as much on AI chips and tech hardware imports as on defence, the current account deficit has eased to 3 per cent of GDP. The payments of all kinds leaving the US must balance those entering, but investment outflows are often orchestrated by Wall Street, boosting the US’s role as the world epicentre of capital allocation.

6. The always excellent Simon Kuper is spot on about French politics.

The French tend to talk radical but act conservative. This is a country where 57 per cent are homeowners, and many people spend their lives looking forward to retirement. They rely on the state. They want it to function. Revolutionary language is in part just a bow to French heritage. Even many of the voters who backed radicals in past elections quietly wanted an overeducated technocrat to win. Then they could spend five years protesting against him. The 1968 “revolution” culminated in the election of centre-rightist Georges Pompidou, product of the École Normale Supérieure. But last Saturday was a dramatisation of a new French political alignment, in which technocrats, with Emmanuel Macron as their final incarnation, risk being chased from the stage...

Macron has governed as a high-handed leader — “Jupiterian”, in his own description — who rarely consults. “Macron’s Achilles heel is that he’s not good at dealing with negotiation,” Philippe Aghion, the French economist who won last year’s economics Nobel, told me. “They don’t know how to deal with social movements. Or they don’t have the patience.” This is a Macronian flaw, but it’s also baked into France’s “vertical” political system, says the philosopher Gaspard Koenig. He pulls out his copy of Tocqueville’s Recollections, about the 1848 revolution, and reads: “But there is one institution that cannot be destroyed: centralisation.” Koenig says that demonstrators typically aspire only to replace France’s mighty leader with a different mighty leader.

And this is a problem for governments across the world, as electorates are unwilling to accommodate.

France’s deficits are becoming a slow-burn crisis. Public debt of 120 per cent of GDP would be manageable if parliament could agree to start cutting the deficit. Jean Tirole of the Toulouse School of Economics, the economics Nobel laureate for 2014, says: “I think what financial markets are worried about is the fact that nothing is happening.” He contrasts France with Greece during its 2010s’ debt crisis: “The Greeks at some point realised that things were very bad. I’m afraid we are not at this stage.” Popular support for balanced budgets appears weak. Government spending is 57.3 per cent of GDP, joint highest in the western world with Finland, and Tirole notes that even with deficits of 5 per cent, many accuse Macron of “austerity”.

7. The shortening of US debt tenors.

US Treasury secretary Scott Bessent appears to be reducing the average weighted maturities of Treasuries. These currently stand under six years (compared to 13 years in the UK, or around eight years in Germany, France and Japan)... One reason, Treasury officials tell me, is that — unlike with credit cards — short-term rates are currently lower than long-term ones. Another is that recent structural shifts in finance are boosting demand for short-term debt. The fast-expanding stablecoin sector, for example, is gobbling up short-term dollar debt — and now holds more Treasuries than Saudi Arabia and Germany combined. The maturity of debt bought and held by the Federal Reserve is also declining. And foreign investors are tilting short-term too, either because they are wary of making long-term bets on the US or because of foreign hedge fund trading strategies. Indeed, Fed research shows that hedge funds doubled their US debt holdings between 2023 and 2025, and now control about 8.5 per cent of the market — more than the official holdings of Japanese, Chinese and Saudi Arabian investors combined.

8. China's battery competitiveness in numbers.

China's battery manufacturers -- CATL, BYD, Gotion, CALB and Sungrow -- are able to build a gigafactory — the industry term for the plants making cells used in EVs, AI data storage centres and power grid backup systems — in China for about a third of the cost and three times faster than building the same type of facility in Europe.

9. Indian states are paying exorbitant subsidies to attract data centres.

And the investment is all coming from foreign firms.

10. Rama Bijapurkar points to an important aspect of the battle at Tata Sons and raises pertinent questions.

That a CEO with no shareholding backing, along with board members who do not represent chunks of shareholding, can challenge a promoter with a 66 per cent holding and pressure it to dilute its stake, and not have sway over decisions is a first-time challenge to power structures — which have stood the test of time, tradition, convention, and culture, rightly or wrongly. It brings a fresh round of calibration, especially by promoters, of their terms of endearment and engagement with professional CEOs, not to mention boards. More so, if their shareholding is well below 51 per cent... Given the promoter-friendly, promoter-respectful and promoter-on-top ethos of corporate governance that has existed and continues to exist in India, this departure from the norm against none other than the venerated, iconic Tata promoter group with its track record of trusteeship and larger good over personal gain has rocked the comfort boat all around.

The ripples it will cause are yet to become clear — will promoters be nervous seeing such a coup by the professional hire? How will they respond? Will they pick boards like in the old days, based on loyalty and narrow subject-matter expertise? Especially as the law of the land and the market regulator push more power and accountability in the hands of independent directors? Will boards be now placed under more pressure from external directives on which way to vote, getting trapped between the rock and the hard place of the promoter and the proverbial hand of God? Will CEOs have less freedom to operate and more fetters? And does this add to the bad rap that India has been getting of late as a safe, stable place to invest in for the long term? Probably yes to all.

11. Akash Prakash provides some home truths on India's equity markets.

Since the Indian market’s peak in September 2024, we have seen $65 billion in net outflows by foreign portfolio investors (FPIs). Over the last decade, India has received zero net-foreign flows. The stock of Indian equities owned by foreigners has fallen from $930 billion to about $675 billion, and foreign ownership as a percentage of the market is now at a 15-year low. India is now a consensus underweight for all global investors and our weighting itself has shrunk from 21 per cent in September 2024 to about 10 per cent today (MSCI Emerging Market index). One company, TSMC, has a benchmark weight 50 per cent higher than that of all of India! The three EM heavyweights — TSMC, Samsung Electronics, and SK Hynix — together account for 30 per cent of the index, but have almost three times India’s weighting...

Since the peak in September 2024, Indian equities are down about 25 per cent in dollar terms, even as the EM indices are up about 50 per cent. We have, therefore, underperformed by 7,500 basis points (75 percentage points) in the last two years alone. I have never in my career seen this quantum of underperformance in this short a period. It has destroyed careers and blown up funds. There are numerous funds that have destroyed 10-year track records in the last 24 months by simply being overweight India... for the first time I am now being asked about the need for an India-dedicated allocation. Many allocators no longer think India is important enough to warrant dedicated exposure.

12. India's battery energy storage systems (BESS) capacity is surging.

On 3 September this year, the CEA proposed mandating two-hour battery energy storage systems (BESS), with capacity equivalent to at least 10% of installed capacity, for all new solar and onshore wind projects commissioned after 1 July 2027. These systems can store solar and wind energy when it is generated for use later. India currently has only 8.6 gigawatt hour (GWh) of BESS capacity. Another 42.53 GWh is under construction, 38.42 GWh has been awarded, and 65.57 GWh is in the tendering process. That amounts to 155.12 GWh of existing and planned BESS capacity, while the CEA projects a requirement of 236 GWh by 2032.

The boom in solar generation is now creating problems like excess supply and the need for curtailment during day times.

According to Ember, a Norway-based think tank focused on energy transition, transmission constraints led to the loss of 300 GWh of clean electricity in India in the first quarter of 2026 (January–March), particularly at grid pooling stations in the northern and western regions. On 30 March alone, India lost 34 GWh of clean generation, equivalent to the daily electricity use of about 5 million urban middle-class households, Ember said in a report in May. The analysis also found that total renewable energy curtailment in Q1 2026 reached around 470 GWh, of which 300 GWh stemmed directly from transmission constraints. The northern region accounted for 178 GWh and the western region for 122 GWh. The southern region recorded none, reflecting better synchronisation between generation and grid expansion...

Inadequate transmission capacity has left about 40GW of power purchase agreements (PPAs) and power sale agreements (PSAs) unsigned, according to the Ember report... Inadequate energy storage has also led to an oversupply of solar power, primarily between 11 am and 3.30 pm, forcing discoms into distress sales on power exchanges, according to executives with power developers. Power prices fell below ₹0.05 per unit 31 times in the first quarter of FY27, hitting zero on 1 May, according to data from the Indian Energy Exchange. In the year-earlier first quarter, power prices had dropped below ₹0.05 per unit six times... The bulk of India’s electricity is sold under long-term power purchase agreements at fixed schedules outside the exchange. Only about 13% of the country’s power is traded on the market.

13. Weight loss drugs are impacting the economy in unexpected ways.

As of June, roughly 38mn people in the US were actively using them, according to pollster Gallup. In the UK... People on weight-loss drugs are changing what they eat, do and buy, distorting traditional patterns of consumer spending. For certain sectors, such as gyms and healthcare supplements, GLP-1s are creating new customers and opportunities for expansion... Brands from restaurant chains to alcohol are trying to protect their margins by selling less of their product for the same price — or higher... In the UK, GLP-1s have cut grocery spending by an estimated £780mn per year at current uptake rates, according to Worldpanel by Numerator, a research group... Weight-loss drugs are part of what now looks like a broader, permanent shift in consumer behaviour, analysts say, as people fixate on health — on eating protein, taking supplements and tracking nutrition and exercise, while cutting back on alcohol.

And this

A 10 per cent average weight reduction among the 178 passengers on a Boeing 737 Max 8 would shave 2 per cent from the aircraft’s take-off weight, she found. For the four large US carriers combined, these savings could equate to about $580mn per year... The Magnum Ice Cream Company is focusing on bite-size and small portions and ice cream enriched with protein, which users are advised to eat more of to offset the muscle loss associated with the drugs.

14. The evolution of India's capital gains taxation regime for equities.

And STT in various countries.

15. Immigration in Spain under the Socialist Prime Minister Pedro Sanchez.

Between 2019 — the prime minister’s first full year in power — and 2026, the number of foreign-born residents in Spain surged by 3.5mn to 10mn, taking the country’s population to almost 50mn, according to the national statistics agency. Sánchez says immigrants have helped make Spain the rich world’s fastest-growing big economy, although growth in GDP per capita has been less impressive.

Some thoughts on navigating the dilemma with Chinese FDI

noreply@blogger.com (Urbanomics) — Wed, 28 Oct 2026 02:36:23 +0000

The FT has a long read that describes how China’s battery manufacturers are building supply chains outside the country.

There are two main drivers of this trend. One is to overcome the protectionist barriers being erected by its major trading partners. In recent weeks, the European Union has announced localisation rules to take effect from next year and slapped quotas on hybrid EV imports. The EU also wants to fully localise its battery supply chain by the end of the decade. And these restrictions will only get tighter and more widespread geographically with time. Second is the profitability squeeze on manufacturers due to the excessive domestic supply of EVs and energy storage battery-making capacity that is forcing them to look outward. All the battery makers are struggling, with CATL missing third-quarter results, and its shares have almost halved since early June.

For now, they are maximising exports from domestic factories, but realise that localisation is the way forward. To this extent, they are also pushing their Chinese suppliers to invest in overseas facilities.

As a headline, the likes of CATL, BYD, Sungrow, CALB, and Gotion have announced investments of $12 bn across 14 deals this year, taking investments since 2023 to about $90 bn, composed of $52 bn in cell manufacturing and $38 bn in materials manufacturing.

The investments are geographically spread out, covering all major regions. The glaring exception is South Asia. In simple terms, given the overwhelming dominance of China, India appears almost completely absent from the battery supply chain.

This is disturbing also because not only is China currently dominant, its dominance in technology, battery materials, and price competitiveness is such that it is expected to continue well into the next decade.

While the Indian market is significant, it may not be big enough by itself, and the bigger attraction for the Chinese manufacturers would be to use it as a hub for exports. Here, India might have a competitive advantage with its lower construction and ramp-up costs compared to the US and Europe.

Battery manufacturing may perhaps be an extreme illustration of how shunning Chinese manufacturers threatens to cut India out of the global battery supply chain. But the same risk exists in many other industries where domestic capabilities are weak and Chinese dominance is too big to be surmounted for the foreseeable future.

This is a teachable illustration of the formidable dilemma that countries like India face. On the one hand, it must not allow its domestic manufacturing base to be destroyed by Chinese imports and become dependent on China. But on the other hand, it must not only not miss out on frontier technologies but also build its domestic industrial capabilities.

This was the exact dilemma China faced with the Western manufacturers in the late nineties and early noughties. It played the long game of luring the biggest Western multinationals (Apple, Tesla, Volkswagen, and GE are only some examples) by dangling the country’s large domestic market and skilled workforce, and with attractive bespoke deals. In due course, it extracted joint ventures, forced technology transfers, cultivated its own domestic champions across industries, and finally forced out the foreigners.

This trajectory of localisation requires three things. One, the government displayed single-minded dedication and purpose, along with high state capability, in dictating the pathway and calibrating policy accordingly. Two, its companies played their part by learning diligently and quickly, and exhibiting an ambition and risk appetite that matched the government’s objectives. Three, the foreign multinationals were both complacent and greedy enough to fall for it and share technology with their Chinese partners.

The best example of this kind of localisation is the story of Apple and the iPhone in China. As I have blogged here, Apple made the iPhone in China, and the iPhone made China!

So how have other countries been responding?

Indonesia has been the most successful example of forced localisation by leveraging its raw material resource base, specifically nickel and cobalt. It is part of its hilirisasi strategy to promote downstream development. The goal is to ensure that the value generated by Indonesia’s vast reserves stays in Indonesia, not in the factories and refineries of foreign investors. Starting in 2014, it banned the export of nickel ore and forced Chinese stainless steel makers to localise refining and processing. In 2020, it extended the ban to similarly force Chinese EV battery makers to establish local manufacturing facilities.

The most consequential step was the establishment in 2021 of two high-pressure acid leaching (HPAL) facilities in Central Sulawesi’s PT Indonesia Morowali Industrial Park (IMIP), as a joint venture between a Chinese consortium of Tsingshan, GEM, CATL, and Hanwa, and Bintang Delapan Group, a prominent local mining and energy conglomerate, as a minority partner that facilitates local operations, land concessions, and mining logistics. Since then, CATL and partners broke ground in 2025 on a $6 billion integrated project spanning the entire chain from mining to recycling. Indonesia has also drawn non-Chinese capital, from an LG Energy Solution–Hyundai integrated battery deal worth $9.8 billion. It has also established the state-owned Indonesia Battery Corporation to partner with foreign investors. In April 2026, President Prabowo broke ground on 13 new natural resource processing projects worth $7.6 billion.

Spain is another example worth studying. There are at least three joint ventures —Ebro Motors-Chery, Stellantis-CATL, and Santana Motors-BAIC — of note. The JVs require meeting two benchmarks — procurement from Spanish suppliers and technology transfer.

The Europeans are now trying to emulate China with its draft Industrial Accelerator Act (IAA) that seeks to lift manufacturing to at least 20% of EU GDP by 2035 from 14% in 2024. While its details are not finalised, it proposes local content requirements to qualify for selling in the EU, and access state incentives and public procurements. For vehicles accessing incentives or public procurements, it sets a three-level definition of a “European vehicle” - assembly in the EU, an immediate 70% local content threshold for automotive production in the region, and a 50% threshold for critical components - to be achieved within three years. It also proposes a pre-approval regime for FDI in strategic manufacturing to ensure that it strengthens EU capacity rather than merely assembly. It is pertinent that the EU is proposing this despite it being clearly in violation of WTO regulations.

The real test of these efforts is genuine technology transfers and serious localisation. Chinese firms, and more importantly, Beijing, will do its best to avoid this so as to prolong its dominance. The Indonesian example offers cautionary notes. The localisation of production has not translated to localisation of ownership or know-how, with Chinese firms controlling roughly 75% of Indonesia’s refining capacity.

Much the same applies to the Spanish JVs. It now emerges that CATL plans to send 2,000 of its own skilled workers to the €4.1bn Zaragoza plant to commission it, and Stellantis feels that the Chinese don’t want to share the know-how required to set up a battery factory. It is also becoming apparent that CATL and Chery will license their technology rather than transfer it outright, with no clear timeline for shifting underlying IP to Spanish ownership and no targets for local R&D.

The clear lessons from these case studies are that while market access and raw-material gates are powerful enough to compel a Chinese firm to locate production and even enter a JV, they do not, by themselves, compel it to surrender the crown-jewel know-how — they control the pace of transfer and can substitute licensing, expatriate labour, and retain process secrets for genuine capability-building. The genuine transfer of technology to Indonesian and Spanish firms has been thin. This risks replacing an export dependency with a manufacturing dependency and defeats the objective of moving upmarket to higher value-added segments.

However, Indonesia is also showing the way how leverage can be exercised once the Chinese investments are sunk, in much the same way China has done to foreign investors. It has gradually introduced several regulatory restrictions aimed at increasing domestic value capture. They include an increase in taxes and levies, a requirement to retain forex earnings onshore, a reduction in nickel ore production quotas, and increased restrictions on work visas.

The Chinese firms, having invested nearly $14 bn over the last decade in smelters, HPAL processing plants, and integrated supply chains calibrated to Indonesian ore, know that these assets cannot be relocated.

The Ministry of Energy and Mineral Resources set the 2026 national nickel ore quota at 260-270 million wet metric tonnes, down from 379 million the year before, while reverting to an annual approval cycle that gives the government tighter, year-by-year control over supply… The combined weight of these policies, alongside rising input costs driven by conflict in the Middle East, hit three of China’s biggest players in Indonesia with concrete force in 2026.
Tsingshan, Indonesia’s largest single nickel investor, saw its flagship Weda Bay mine quota collapse from 42 million tonnes in 2025 to just 12 million tonnes in 2026, a cut of over 70%… Huayou Cobalt, operator of the Huafei project, paused roughly half of its production capacity from 1 May 2026. The revised pricing formula pushed smelting costs up by an estimated $300 per tonne… And Brunp Recycling, the battery materials subsidiary of CATL, saw its Indonesian nickel feedstock supply disrupted, threatening the upstream end of one of the world’s most critical EV battery supply chains…
In April 2026, President Prabowo broke ground on 13 new natural resource processing projects worth $7.6 billion. He called downstreaming the path to national revival, with nickel as the centerpiece. Quota controls serve the same purpose as the export ban: by concentrating ore supply toward domestically-oriented processors, Jakarta is trying to shift the value chain in its favor. Beyond controlling its own supply chain, Indonesia has pursued a more ambitious goal: becoming the OPEC of nickel… The ambition has since taken more concrete form: last month, Indonesia and the Philippines established the IndoPhil Nickel Corridor working group to coordinate mining activities. Together, Indonesia and the Philippines account for roughly 75% of global nickel production, which is in theory enough to exercise pricing power if the coordination holds..

Chinese companies, too, are accommodating in responding to the requirements of hosts. In a recent instance, Ming Yang Smart Energy, one of China’s largest wind turbine manufacturers, is seeking to address European national security concerns by placing data beyond the reach of Chinese law by establishing separate European legal entities with independent governance and IT systems. This is also to insulate its European customers from the reach of China’s National Intelligence Law requiring companies to cooperate with state agencies. The decision follows the UK government’s decision to disallow the use of its turbines in British offshore wind farms, which aborted the company’s plans for a £1.5bn factory in Scotland. Ming Yang is also responding to the UK decision by forming a joint venture with Octopus Energy, with the UK energy retailer providing software and control systems.

There are lessons for countries like India.

For one, given the dominance of Chinese firms in the supply chain from raw materials to components, there is no alternative but to rely on them for now. Even countries like the US have realised this and reconciled to accommodation, at least for some time. In the circumstances, the strategy can only be to gradually reduce the dependence.

The strategies will vary across sectors. But generally, the objective should be to start by forging joint ventures, even with minority partnerships, and encourage technology licensing. The important factor here should be the domestic partner. It is necessary to ensure they are deep-pocketed and well-connected, who can work the system both here and outside. Indian public sector units cannot play this role.

India’s case-by-case approvals to date reveal a requirement for JVs. JSW’s JV with SAIC for MG Motor India, which was cleared in 2024, and Uno Minda’s EV-components JV with Inovance Automotive of China for advanced powertrain technologies, including inverters, e-axles, motors, and combined charging systems, cleared in June 2026, are good examples. Equity-free technical alliances (licensing of technology) like Dixon Technologies with HKC for display modules, Bhagwati (Micromax) with Huaqin, and PG Electroplast with Shanghai Highly for AC compressors are less useful, but acceptable if there is no other choice.

The insistence on JVs with Indian majority shareholding, no Chinese leadership, and technology transfer is a more demanding version of what Indonesia or Spain has done. While ideal, it risks throttling Chinese FDI in India and the much-needed access to advanced manufacturing technologies. And the evidence so far concurs.

The Indonesian example also shows that once significant investments are sunk and supplier ecosystems transplanted to make relocation difficult and further expansion the natural choice, there is considerable leverage with the host country in extracting concessions. And in India’s case, the by then larger domestic market and more advanced manufacturing ecosystems would make staying and expanding more attractive. Incidentally, this is also the game that China played with Western multinationals during its manufacturing expansion journey.

The other important aspect is to encourage the biggest corporate groups into striking JVs with the Chinese. Areas like solar generation, battery energy storage systems (BESS), electric vehicles, electronics, smart meters, petrochemicals, etc., are only some examples where India’s corporate behemoths are also active. I had blogged here on how large domestic corporate groups can help with domestic manufacturing and localising value addition.

An agenda for land market reforms

noreply@blogger.com (Urbanomics) — Sun, 25 Oct 2026 23:30:00 +0000

Land is arguably the most constraining factor of production. The total developable footprint is fixed. It is also the most complex and diverse among the factors of production, given that it is a subject administered by state governments, and there are a plethora of laws and land fees/rates. I blogged here about the prohibitive cost of doing business in terms of land prices across India.

Fortunately, the diversity of state laws offers low-hanging reform opportunities just by emulating the good practices being followed in a few Indian states. This post will point to a few options.

As a framework to analyse land market distortions, I can think of thirteen, spanning four categories. On the supply side, there is the low Floor Area Ratio (FAR), idling or inefficiently used public lands, and the high cost of conversion. On the demand side, there are the high stamp duty and registration fees, and the prohibitive prices. The transaction frictions include the problems with titles, outdated surveys and land records, the separation of registration-survey-mutation, widespread land-related litigation, and corruption at sub-registrar offices. The incentive distortions cover the registration–market valuation wedge, black money, suppressed mortgages, and under-assessed property tax. The graphic below seeks to capture them with their estimated quantification.

The graphic below provides a global perspective to couple of these distortions.

A detailed discussion of these is for another time. But there are deep political economy problems with some of the reforms. In the circumstances, I can think of four realistic reforms in the first phase: increase supply, better management of records and transactions, lower cost of transactions, and reduce the dual pricing wedge.

On increasing supply, I have written several posts on the importance of promoting vertical urban growth by lowering FAR, easing setback restrictions, and increasing ground coverage thresholds.

The management of records and transactions is a low-hanging fruit. Land records, survey records, and registration constitute the plumbing of land documentation and transactions. Currently they are three standalone activities, with their own workflows and documentation. This is a problem since registration does not automatically update records (the process called mutation).

Three states have undertaken major reforms in addressing this problem. Telangana’s Dharani portal does registration-cum-mutation in a single transaction (only for agricultural land), with the Pahani/Record of Rights (RoR) auto-updating (typically within a few days). Karnataka has an automatic property mutation system that has automated the large majority of khata transfers by integrating its Kaveri and Bhoomi databases. However, in both cases, while registration and mutation are linked, the cadastral subdivision lags.

The state that has gone farthest is Andhra Pradesh, which undertakes auto-mutation for both rural (1-B/Adangal auto-update on registration) and urban (the 2026 Municipal Laws Third Amendment making municipal-record mutation automatic at registration) lands. Further, it has also linked survey records updation by mandating all registrations to be done only after sub-division.

This is a fundamental reform and must be emulated across states. It requires making registration (of sale/partition/gift) the single trigger that automatically fires a mutation in the Record of Rights and the survey/cadastral map. On the technical and process side, this in turn requires electronic integration of the three databases, digital workflow automation with deemed timelines, and validation against prohibited or encumbered lists at the registration stage itself. On the legal side, while mutation and survey/settlement are on the State List, registration is on the Concurrent List, and the Registration Act 1908 is a central Act. Therefore, any state-level amendment to the Registration Act itself to trigger auto-mutation would require a Presidential assent under Article 254(2). All three states have taken this route.

This must be complemented with a second reform to ensure that the process of changes to land records is standardised so as to eliminate disputes and litigation. A majority of land-related litigation arises from inconsistencies and discrepancies in land records, which undergo changes due to registration, inheritance, gifts, partitions, acquisition, court decrees, correction of clerical or survey errors, and mortgage or charge creation.

One-time clean-ups of land records have been unsuccessfully attempted by states over the years and are fraught with practical problems, besides not addressing the root cause. A prudent strategy would be to put in place protocols and systems to standardise changes going forward and work on incrementally improving the quality of antecedent records.

In July 2026, Andhra Pradesh did precisely this by issuing GO No 445 that created a single unified due-process procedure for making changes to recorded ownership or title, or enjoyment rights in revenue records. It treats these as rights-affecting, quasi-judicial actions requiring a documented evidentiary basis, precise identification of the affected extent, action attributable to an identifiable officer, prior notice, and a 30-day opportunity to object, a hearing, a reasoned (“speaking”) order, independent maker–checker verification, and full digital attribution and audit trail.

In essence, the Andhra Pradesh reforms involved shifting from a fragmented and sometimes opaque property-record administration toward a centralised, digitised, and traceable system with substantially stronger procedural safeguards for citizens. This, too, can be copied by other states (provided they also have the digital plumbing to support the associated processes).

An associated reform that the state did was to clean up its prohibited register, which consists of lands that cannot be transacted in the routine course for various reasons, including government, waqf, religious and charitable institutions, ceiling-surplus, etc. As per Section 22-A of the Registration Act 1908 (AP Amendment 2007), the Sub Registrar must refuse registration of any property in this register. Thanks to its non-updation, large numbers of private land parcels (like government lands assigned to various categories of people) continue to remain in the register.

In early 2026, AP issued a memo to delete five categories of lands from this register, and followed up with a special drive across districts to verify and delete them, thereby easing registration for owners who couldn’t produce a long document chain. It also issued orders that standardised what goes into the register and brought it under the control of the Registration Department, and a single unified due-process procedure for both adding and deleting property to and from the register.

Other states with similar prohibited registers could undertake a process to audit their registers for wrongly entered private lands, define deletable categories by policy (instead of ad-hoc deletions), do field verification by the revenue officials, and delete entries in the digital register, all undertaken with adequate safeguards and audit trails to prevent any abuse. And all of this should be supplemented with a mechanism to standardise and digitise future additions and deletions.

A third reform would be the reduction of land-related taxes. There are two kinds of land fees: conversion of agricultural land and registration taxes (consisting of the stamp duty and registration fees). The table below captures the rates across these three tax/fee categories.

West Bengal is the surprising leader, alongside Maharashtra. The biggest opportunities are for states like UP, Gujarat, and Rajasthan with their very high combined fees.

On a related note, an issue that is often surfaced as symptomatic of the problems with India’s land administration is the agricultural land conversion process. As the table shows, apart from high fees, it generally involves a long process, takes time, and can be rife with uncertainties and corruption. This deters economic activity in the rural areas.

A fourth reform, to address this problem, would be to simplify the process of agricultural land conversion. As the graphic above shows, Andhra Pradesh and Maharashtra are leaders in reforming the process of agricultural land conversion process, dispensing with the process itself.

AP repealed its Non-Agricultural Land Assessment Act 2006 in September 2025, and made conversion automatic, and also reduced the earlier 5% NALA fee to 2-3% external development charges (EDC). Maharashtra’s LRC Second Amendment Act 2025 further replaced it with a one-time premium capped at 0.5% of market value (graded down for smaller plots). Now, in both states, an agricultural land owner in an area master planned for a non-agricultural land use does not need to follow a separate process for agricultural land conversion, but only needs to pay the conversion charge at the layout/building permission stage to the local body.

This reform, however, needs a qualification. While Master Plans demarcate land use in urban areas, there is no similar land use plan for rural areas across the vast majority of India. There is, therefore, the risk of accelerated loss of prime agricultural land, environmental damage (e.g., drainage alterations and waterbody encroachment with flooding risks, groundwater depletion, etc.), and strain on rural infrastructure. The conversion process, with all its flaws, acted as a deliberate gate, an explicit review, that surfaced these factors.

Andhra Pradesh’s reform stands on firmer foundations insofar as the state has a Common Zoning Regulation covering lands even in rural areas. These rules establish a standardised approach to land use with a nine-fold zoning classification, a negative list of prohibited activities near residential and ecologically sensitive areas, and development control regulations. This is not true of most states, including Maharashtra, where the risks from such a reform are higher.

A fifth reform would be to eliminate a uniquely Indian land market distortion, the wedge between the market value of a land and its government-notified basic or guidance or ready reckoner value, below which registration cannot be done. This is the primary driver of black money and a source of tax evasion for sellers and laundering for buyers. Any reform to shrink the wedge will face resistance across society.

A measure of the wedge from a few cities is in the graphic below, though in some parts of cities like Delhi, it goes to multiples of 15-16.

Any reform of the wedge can only be done in a long-drawn, phased manner. One would be to target the phasing out of this wedge by committing to increasing the guidance or basic value annually by a fixed percentage over a ten-year period so that the wedge virtually disappears. For it to be meaningful and binding, such a commitment must be enshrined in a law passed by the state legislature.

An ambitious sixth reform could be to undertake a process of GIS-based cadastral survey of all land parcels, and linking their updation to the mutation process. This has been a sort of holy grail in land administration.

The Government of India has run multiple programs since the millennium to update survey records, with little to show for it. The latest SVAMITVA scheme drone-maps only abadi (inhabited village/habitation) land and issues property cards for houses, and excludes agricultural cadastre.

The standout pioneer in this again is Andhra Pradesh, with its comprehensive land resurvey scheme launched in 2020 using drones for a full ground-truthed re-survey. It involves subdividing parcels, fixing boundaries, resolving disputes, and updating both textual RoR and survey maps, with blockchain-secured pattadar passbooks issued. It has so far completed resurvey at 6,688 villages, with 26–32 lakh pattadar passbooks already issued. The remaining 9,365 villages with 68.6 lakh more passbooks are targeted to be completed by 2027.

This must count as one of the most outstanding plumbing achievements across any sector by any Indian state in recent years.

In conclusion, the policies undertaken by states like Andhra Pradesh show the path for reforms that address land market distortions. The only note of caution would be that these reforms should be accompanied by the creation of digital systems and documentation that ensure their successful implementation.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 24 Oct 2026 03:04:38 +0000

1. The semiconductor market facts of the week.

In the early 2000s some 25 firms could make the most advanced processors. Today four can, and tsmc makes nearly all of the high-end ones. Memory chips, which are also vital for ai, have gone the same way. More than 20 firms made advanced memory chips in 1990. Now only three—Samsung, sk Hynix and Micron—make almost all of them. China has produced new entrants in both processors and memory chips, but without access to the most advanced chipmaking tools, they remain behind the frontier...

TSMC's capital expenditure is expected to hit roughly $62bn this year, more than one and a half times as much as in 2025. Next year analysts expect it to be around $76bn... their outlays are modest in comparison with the windfall from AI. As a share of revenue, TSMC's capital spending is expected to fall from 44% in 2023 to 36% this year. Moreover, investments are being paid for from the cash that chipmakers are generating, rather than borrowing. This year TSMC's capacity expansions will use up a little more than half of its operating cashflow, and Samsung’s barely a fifth. The debts of these chipmakers look modest next to their swelling cash piles.

Manufacturers are enjoying a “very good pricing environment”, according to Bill Wiseman of McKinsey, a consultancy, and have every reason to pace their expansion to preserve it. DRAM, a type of memory used in nearly all electronics, costs about six times what it did in early 2023. TSMC has not cut the price of its three-nanometre manufacturing process, which it launched in late 2022, even though a process normally gets cheaper after a couple of years...

Consolidation has also given chipmakers more bargaining power, shifting who will bear the burden of any slowdown. Until recently, memory was sold mostly on the spot market or through short-term contracts. When demand slackened, customers were not obliged to keep buying and prices therefore collapsed. Now, with capacity scarce and only a few suppliers to choose from, buyers are signing up years in advance, and on the sellers’ terms. Nvidia has committed more than $250bn to securing supply and components until January 2029. In September Micron said that “take-or-pay” agreements, under which customers must buy the agreed volumes or pay anyway, had locked in 35% of its revenue through to 2030, with $32bn-worth of commitments, most of which involve cash deposits. Such prepayments help fund new factories. They also shift at least part of the risk of a bust onto buyers.

2. Corporate tax revenues fall in the US even as profits rise, a divergence arising after the tax breaks that allow firms to make larger deductions in the year they make investments.

Revenue from the corporate income tax, which applies to the profits made by the largest and most sophisticated companies in the United States, fell roughly 15 percent, to $381 billion, in the fiscal year that ended on Oct. 1, according to data released on Friday by the Treasury Department. The roughly $70 billion drop followed a similar decline the previous year. Corporate tax revenue is down more than quarter from 2024, the last full fiscal year of the Biden administration.

3. Thailand is experiencing its version of China shock from the Chinese EV imports.

For decades, Japanese automakers dominated Thailand. They arrived in the 1960s, built supply chains and transformed the country into the “Detroit of the East.” Then the Chinese automakers arrived. Today, they control about 85 percent of Thailand’s electric vehicle market, up from almost zero four years ago... Electric vehicles made up a third of new car sales in the first seven months of 2026... Japanese automakers, slow to embrace the technology, have struggled. In 2024 and 2025, Subaru and Suzuki shut down their Thai plants, while Nissan and Honda have scaled back production. Several Thai auto-parts suppliers that depended on Japanese manufacturers went bankrupt, threatening a supply chain that employs about 700,000 workers...

Thailand is a cautionary tale about the unintended consequences of opening the door to China’s electric vehicle manufacturers... In the first seven months of this year, about two-thirds of electric vehicles sold in Thailand were imported, primarily from China. The government is trying to curb the flood. Last month, it unveiled a three-tier tax system that imposes the highest rates on automakers importing vehicles with no plans for local production and the lowest on those that source a large share of their parts locally... Ruth Banomyong, a professor of supply chain management at Thammasat University in Thailand, and his colleagues have estimated that 300,000 jobs could disappear within five years if electric vehicles dominate Thailand’s auto market...

In 2022, Thailand’s prime minister at the time, Prayuth Chan-ocha, declared electric vehicles crucial to the country’s economic future and its fight against pollution. He set a target for zero-emission vehicles to account for 30 percent of the country’s vehicle production by 2030... Then the government rolled out tax cuts and subsidies and allowed electric vehicles to be imported for two years before automakers had to meet local manufacturing requirements. A free-trade agreement between China and the Association of Southeast Asian Nations meant the vehicles faced no customs duty. Within months, Chinese brands like Changan, GAC Aion, Neta and Chery were driving on Thai roads.

4. Good description of the semiconductor manufacturing supply chain.

5. Gideon Rachman worries that the world may be sleepwalking into World War III.

The Russia-Ukraine war has now been going on longer than the USSR’s war against Nazi Germany. The British government says that Russia has sustained 1.5mn casualties — killed or wounded — since the invasion began. Ukrainian casualties are less publicised but will run into the hundreds of thousands. The war in Gaza is estimated to have led to 70,000 Palestinian deaths, as well as 2,000 Israelis — in addition to the 1,200 who died as a result of the Hamas attack of October 7 2023... the International Crisis Group recently counted 65 ongoing conflicts around the world — the highest number since the end of the second world war. The conflict in Sudan, fuelled by outside powers, is particularly bloody — punctuated by massacres of civilians and the displacement of more than 14mn people.

6. Shyam Saran is spot on.

It is somewhat perverse to have a government policy that seeks to export its professional and skilled personnel abroad. In trade negotiations, India wants to be able to find opportunities for its educated and professional citizens in foreign countries. This is an admission of a continuing failure to find meaningful employment for them at home. The ugly truth is that highly educated young Indians prefer to seek their future abroad should the opportunity arise. We are investing in educating our young but the fruits of the investment are taken advantage of elsewhere. This is not good economics. In the past, one recalls that there was at least an awareness of a “brain drain” from India and that this was a loss to the country. Now the brain drain has been turned into a virtue. Rather than formulate policies to offer meaningful opportunities to our young professionals in the country itself, we are allowing the best and the brightest to seek their future abroad. This is an admission of a glaring policy failure.

7. Exports are keeping the Chinese economy afloat. In the three months to September, GDP growth was 4.5%, up from 4.3% in the previous quarter.

The actual GDP growth rate may be much lower.

8. London by the numbers.

London has six airports. There are also more than 80 Michelin-starred restaurants and, by Cvent’s count, 200 museums, 270 theatres, 857 art galleries and four Unesco World Heritage sites. If you are wondering, they are the Tower of London, the Palace (and Abbey) of Westminster, Kew Gardens and maritime Greenwich.

9. Impact of data centres in the US on electricity prices.

An August Centre for Economic Policy Research discussion paper that examined data centre expansion across US utility territories estimated that an increase of 10 data centres in a particular territory raises household electricity prices by 13 per cent, and a single large facility can raise household prices by 4 per cent.

10. As the satellite telephony market hots up, four of Europe's largest telecom groups - Deutsche Telekom, Orange, Telefonica, and Vodafone - have announced the signing of a letter of intent to explore a potential joint bid for radio wave spectrum that would enable them to provide "direct-to-device" satellite mobile services in Europe.

In May, the European Commission proposed reserving the part of its spectrum band that allows smartphones to connect directly to satellites for European players. The so-called 2 GHz frequency band is currently used by two American companies, Viasat and EchoStar, whose licences expire next year... The initiative would mean the companies establishing the necessary ground infrastructure, or base stations, needed for satellite connectivity. However, instead of developing their own satellite constellation, they would partner with an existing provider, which is yet to be selected.

11. More reasons to be cautious about Elon Musk's Starlink.

Ukrainian troops have been caught off guard by restrictions on Elon Musk’s Starlink satellite internet systems that disrupted frontline operations, while Kyiv received no warning from its partners of a Russian missile attack on its energy facilities for the second day running, according to Ukrainian officials. Starlink terminals used by Ukrainian drone units began experiencing signal failures at speeds above 160kph, disrupting several missions early on Wednesday morning, according to military personnel and senior Ukrainian officials.

12. The rising US interest rates comes at a time when China's exposure to dollar assets is declining, thereby squeezing the offshore dollar liquidity, the weakening of other currencies, and increased rates for foreign borrowers.

The internationalisation of the renminbi is a big priority for Beijing, which is pushing the use of its currency — instead of dollar — for overseas lending and investment. Chinese banks have expanded their overseas lending denominated in renminbi. It has increased from less than 15 per cent of total overseas lending to more than half in the past four years, according to a Reserve Bank of Australia study. Given the lower interest rates on renminbi debt compared with dollar borrowing, this is supporting appetite for borrowing in reminbi, particularly in the global south. Furthermore, China’s capital outflows tend to be parked in Hong Kong, using the special instruments that Beijing has introduced that support this process, such as the Southbound Bond and Stock Connect. These allow mainland Chinese investors to trade and invest in bonds and equities in Hong Kong.

A clear sign of the excess liquidity parked in the territory is the much lower cost of funding in the Hong Kong dollar versus financing in the dollar. Given the territory’s currency is pegged to its US counterpart, the two costs should be close. But the one-month HIBOR rate for interbank lending in Hong Kong dollars is about 2.7 per cent compared with about 3.9 per cent for the dollar-denominated US Secured Overnight Financing Rate (Sofr) over the equivalent time... In other words, less of China’s trade surplus is being recycled in New York or London when there were more US listings.

13. Africa is urbanising rapidly, but with a difference that is not for the good.

Until relatively recently, Africa was predominantly rural. In 1950, nearly 90 per cent of Africans lived in the countryside and the continent had only two cities — Cairo and Alexandria — with more than 1mn people. Today nearly three-quarters of Africans live in either an urban or semiurban setting, according to new UN methodology that applies a consistent global definition. Some 42 per cent live in cities. There are 88 African cities with more than 1mn people, according to the UN, 17 in Nigeria alone. In 1950, there were 228mn people living in Africa, with about 33mn in cities. Today there are 1.6bn Africans, 19 per cent of the world’s total, of whom 670mn live in cities. Almost unnoticed, Africa has become an urban story... Africa’s rapid urbanisation bears some similarities to the world-shaking growth of Chinese cities after Deng Xiaoping launched market reforms in 1979. But it is happening even faster. When China’s urban growth peaked in the 1990s, its cities were adding roughly 14mn people a year, according to the UN’s The World Cities in 2025 report. African cities expanded by 15mn people annually in the past few years and are expected to grow by 19mn annually by 2050. That’s almost two Londons a year, or more than 50,000 new African city dwellers every day.

Yet the growth in Africa’s cities is not following a familiar path. “In China, and before that in Europe, industrialisation and job creation pulled people from the countryside,” says Jeffrey Paller of Sweden’s Uppsala University, one of the world’s foremost experts on African urbanisation. “That’s not what’s driving urbanisation in African cities.” With great variations, Africa is urbanising with a nominal average income per capita of around $2,000. Many city dwellers have to hustle for a living, carrying goods, shining shoes, cooking street food, cleaning and washing. In World Bank speak, a person hawking soft drinks to passing cars is a “micro-entrepreneur”. But in economic terms, they are shut out from a system of mass production and specialisation that characterises successful capitalist economies...

Academics call this kind of urbanisation “fast, late and poor”. With a few exceptions, most of Africa’s cities are unplanned sprawls. They lack public transport, reliable power and — especially in poorer neighbourhoods — basic services such as sewerage, rubbish collection or even a land registry. More than half of the continent’s urban residents live in informal settlements or slums... The unplanned nature squanders the efficiencies — and ultimately wealth creation — that occur in densely packed, well-planned, well-connected conurbations... “What you see in [places like these] is a kind of transfer of rural life into urban areas,” says Ken Opalo, associate professor at Georgetown University. City planners, he argues, must avoid “rurification” which deprives cities of the economic and social impetus offered by well-organised conurbations. “Many cities still have the same fertility rates as rural areas, the same levels of education, people still do farming,” he says. “We can’t just sit back and hope that urbanisation will do what it did elsewhere.”... Most African cities lack the tax base, investment and institutional capacity that enabled cities in China and elsewhere in Asia to turn large concentrations of people into a productivity surge.

Amidst the above, this is promising.

Kigali, the manicured capital of Rwanda, is practising what Kampeta Sayinzoga, former chief executive of the Development Bank of Rwanda, calls “aggressive urbanisation” by encouraging people to move to cities and forcing developers to build taller buildings to encourage density. Kigali has recently introduced bus lanes and has restricted the import of non-electric vehicles.

14. Europe enters an election cycle over the next twelve months that could define the continent's path for sometime to come. Four of the five most populous EU members as well as four small others go to polls.

There is a broad electoral shift to the right and a growing readiness among centre-right parties to share power with far-right rivals, spelling the end of so-called firewall policies of non-co-operation. The far right has itself radicalised with the arrival of new upstart parties such as National Future in Italy and the Confederation of the Polish Crown (KKP). At the same time, more established ones such as Alternative for Germany (AfD) are becoming more extreme or refusing to moderate the closer they get to power. Nathalie Tocci, professor at the European campus of Johns Hopkins School of Advanced International Studies in Bologna, says that if the nationalist right held power in Spain, France, Poland and Italy all at once, “I don’t think it’s hyperbolic to say it’s the end of the European Union as we’ve known it.”

Spain will kick off the process (Bulgarians vote for their president on October 25 but the role has limited powers) and Italy could theoretically close it with elections due by December next year, although they are likely to come earlier. In between, there are presidential and parliamentary elections in France — potentially the most consequential of them all — and legislative elections in Poland. Estonia, Finland, Greece and Slovakia will hold parliamentary votes next year. One could even include Germany in this cycle. There are no national elections in the country this year. But three regional ones in April could spell the end for Chancellor Friedrich Merz, who appears to be living on borrowed time after his Christian Democratic Union took a hammering in regional elections in eastern Germany last month.

This is an important change in the landscape of European politics.

Long-term demographic and social trends have eroded party loyalty. Party systems have fragmented. Opinion is polarised. France, for example, could end up with a presidential run-off between a far-right and far-left candidate. Perceptions of politics have been made far more negative, in part by social media and the demise of curated news sources. As a result, Europe is now experiencing unprecedented electoral volatility. More and more people do not vote for the same party in subsequent elections. Voters, especially younger ones, increasingly act as critical consumers, de Vries says. It is a market for votes made for political entrepreneurs with attractively simple messages...

Europe’s nationalist populist and far-right parties share a similar critique of the failures of liberalism and globalisation and they combine it with “crisis entrepreneurship”, reshaping themselves for the crisis of the moment. Germany’s AfD started off as a movement opposing bailouts for Greece and other southern EU members during the Eurozone debt crisis, became an anti-immigration party during the 2015-16 migrant influx, latched on to anti-vaccination sentiment during the pandemic and now uses the energy price shock to campaign against the green transition and in favour of a rapprochement with Russia. Such parties also all target those who do not feel the benefits of globalisation, especially less-educated working-class voters. In addition, the core of their policy prescription is the reassertion of national culture and control, translating into a policy of favouring, for example, French citizens for welfare, jobs or public contracts over foreign nationals, even those with residency. Finally, they are all digital-native parties, well attuned to an algorithmic information space where provocation gets views.

12. Brilliant oped from Janan Ganesh questioning the wisdom of the adults in the room in moderating erratic and extremist leaders.

13. This graphic captures the extent of advances made by China in innovation and at the technology frontier.

The business of discovering new drugs, securing the intellectual property and exporting them globally — which is the real prize in the pharma world — used to be dominated US and European companies. But in recent years, Chinese pharma groups have been developing drugs that global pharma giants want to license and export.

14. What is the impact of AI on inflation?

Earlier this month, economists at Goldman Sachs took a more systematic approach, totting up estimates of AI’s effects on different components of spending in the US, both direct and indirect. They counted four: on components and software directly relevant to AI; on electronics competing for those components; on electricity; and on the construction materials that go into making data centres. Overall, they estimated that AI-related price pressures were adding around 0.5 percentage points to annual headline inflation. That fell to around 0.3 percentage points after they stripped out some mismeasurement related to the way different spending categories were being combined in the official statistics. That’s meaningful, but not massive. And the analysts noted that since they couldn’t remove all tariff effects, the true effect could be lower.

And more on the AI investment boom.

Stijn Van Nieuwerburgh of Brookings estimates the AI infrastructure boom will cost the equivalent of 3.6 per cent of US GDP a year over the eight-year period to the end of 2032 — equalling the annual spending on the railroad boom of the late 19th century, plus the interstate highway projects of the mid-20th century, plus about two-thirds of the electrification spending of the early 20th century. Total bill: $10.3tn, an estimate including only tangible expenditures, not intangibles such as software... Alphabet, Amazon, Microsoft, Meta, Oracle and SpaceX are expected to generate $760bn in cash flow this year. All of this and more will be invested, meaning “free cash flow” will be negative, a situation Wall Street expects to persist for several years, even as profits at the companies are projected to grow at a breakneck 30 per cent a year.

15. The changing face of Chinese investments in Africa.

Data from Rhodium Group, a US research firm that monitors Chinese investment worldwide, shows that in the early 2010s, Chinese funding in Africa concentrated on projects tied to natural resource extraction. Last year, however, investment in manufacturing and processing reached $7.7bn, exceeding the $4.8bn invested in extraction.

16. The combination of persistent deflation, weakening economy, dismal consumer sentiments, rising public and pivate debt, and ageing population means that China is staring at Japanification.

According to Goldman Sachs, an updated version of the Japanisation index — a gauge originally devised by the late economist Takatoshi Ito — shows that for the past five years, China has been consistently more “Japanised” than Japan itself. Looming over all of this is what economists describe as the iron law of demographics. Japan’s population started to shrink in 2009; China’s decline began in 2022 and is on track to be steeper, worsening the country’s economic prospects... In another echo of Japan’s post 1990s-slump, the IMF warned last week of growing numbers of “zombie” companies across Asia, kept alive only by lenient banks. This is now evident across China’s heavily subsidised manufacturing economy. Outside favoured sectors, companies are increasingly refusing to invest while households hoard cash instead of spending... Consumers are deleveraging, with bank lending to households as of August this year declining outright for the first time in history... China’s weakening economic conditions meant that up to 10.6 per cent of the adult population had overdue loans last year, compared with about 7.8 per cent a year earlier, according to a report by Gavekal Dragonomics analyst Xiaoxi Zhang...

Phrases coined in 1990s Japan, such as “job hunting ice age” and “price destruction”, are creeping into China’s vernacular... economists can see the signals of Japanification in the data... Restaurants across China are competing to offer meals for under Rmb10 ($1.50). This too is redolent of Japan, where restaurants entered a margin-crushing price war to attract an ever-shrinking pool of consumer spending as deflation took hold. The price of a basic bowl of rice and beef at the nation’s leading gyudon chain hit a high of ¥400 ($2.50 at current exchange rates) at the end of 1990 before falling. It only reached ¥400 again in 2021... The “expectation channel”, where households and businesses saw no prospect of longer-term growth, created a vicious circle of reduced consumption and investment in Japan which in turn lowered expectations...

China’s real estate bubble was the largest in history, outpacing even Japan’s speculative frenzy of the late 1980s and at its peak accounting for a third of the country’s economy. The contraction since it burst in 2021 has been dramatic, with new housing starts down 78 per cent from their peak, according to Macquarie. That compares with a 73 per cent fall in the US between 2005 and 2009 and Japan’s 65 per cent drop between 1996 and 2025. The collapse of the property market has set off what Richard Koo, the Nomura Research Institute’s chief economist, calls a “balance sheet recession” — a term he originally coined in the 1990s to describe the tendency of Japanese companies and individuals to pay down debt rather than borrow to invest or spend. Weaker demand and deflation then worsen the debt burden, leading to a vicious cycle. Investment opportunities decline, the labour market calcifies and salaries stagnate... The ultimate sign of China’s weak credit demand is the 1.7 per cent yield on 10-year government bonds, which Nomura’s Koo describes as “absolutely ridiculous”...

One reason for Beijing’s reluctance to resort to domestic stimulus, economists believe, is China’s strong export performance. The trade surplus hit $1.2tn last year — the biggest recorded by any country, ever — and may meet or exceed that level this year. Policymakers in Beijing think the country’s export performance will buy China time while it waits for the property market to stabilise. In the meantime, they are pursuing investment in areas such as chipmaking and AI as the country competes with the US for geopolitical dominance... Gross fixed capital formation — the acquisition of assets for the production of goods and services — was 40 per cent of GDP in 2024 against Japan’s 28 per cent and the OECD average of 22 per cent, fuelled by an augmented fiscal deficit that Goldman Sachs forecasts will hit 11 per cent of GDP this year. No one knows when this debt will become unsustainable.

17. On the RBI's defence of the rupee.

The central bank since June has already used about $90bn of the more than $140bn it raised from India’s diaspora to prop up the rupee, including through sales to the spot market and currency swaps to absorb surplus liquidity... The rupee is one of Asia’s worst-performing currencies this year, having fallen 5 per cent against the dollar... As the currency neared new lows this month, the RBI took unexpected steps to curb volatility. They included opening a special window to absorb state oil companies’ dollar purchases away from the spot market; cutting the threshold for rupee-linked derivative transactions without proof of underlying exposure; and requiring dealers to maintain a 20 per cent cash reserve on forward contracts with the central bank. Those moves, which came on top of earlier measures such as curbing short positions against the rupee and courting deposits from Indians living abroad, have helped bolster the currency... But bankers and economists said the RBI could not keep spending down its foreign exchange reserves at its current pace. The central bank’s reserves have fallen by about $60bn from an early September peak of $785bn. Its net forward dollar liabilities — dollars which it will have to pay in the future — ballooned to $200bn in August from about $137bn in July, according to official data.

18. Aliko Dangote's plans for Africa.

Dangote plans to double the capacity of the Lagos refinery — which made revenue of $22.5bn in the first nine months of this year — and to build another 700,000 b/d refinery in Kenya to serve east Africa. He is also constructing a $4bn fertiliser and petrochemicals complex in Ethiopia that will help quadruple the group’s fertiliser capacity to 12mn tonnes.

19. Finally, very good account of the TSMC's Arizona facility which is now fully operational and is ground zero for the US's reshoring of industrial capacity.

In July, TSMC announced its intention to invest a total of more than a quarter of a trillion dollarsfor 10 chip production plants, two packaging facilities and a research and development site, all in Arizona. TSMC now employs over 3,500 people in the state, including skilled Taiwanese engineers on temporary visas... TSMC Arizona is rebuilding America’s manufacturing backbone by teaching Americans the skills that they have lost... Thousands of teachers of these skills, in the form of Taiwanese engineers, have moved to north Phoenix. Many bring their families in tow... New immigrants from Taiwan more closely resemble corporate shock troops on a mission to build chips fast... TSMC sends engineers to Arizona on contracts of up to three years, which means that the first wave of families to move to the United States are returning home... TSMC Arizona’s first plant has been producing chips for two years, and its rate of output in Phoenix is comparable to that in Taiwan... the second and third factories are being built ahead of schedule. TSMC’s announcement in July that it would raise its total investment to $265 billion is an obvious sign of confidence in Arizona’s operations... TSMC is grafting a Taiwanese engineering community onto the American economy.

Metropolitan growth, mass transit, planning regimes, and institutional structures

noreply@blogger.com (Urbanomics) — Fri, 23 Oct 2026 02:16:47 +0000

I blogged here highlighting the nature of metropolitan growth.

Historically, metropolitan growth is characterised by separation of the geographies of residences and workplaces, facilitated by mass transit systems. Accordingly, all great cities are workplaces in the day. This is made possible by mass transit infrastructure that shrinks the commutes from the hinterland and expands the potential workforce for the metropolitan centre. This concentrates labour and talent and creates economies of scale, which creates the conditions for economic specialisation and innovation.

London is a great example of this phenomenon and it has been documented. Stephan Heblich, Stephen J Redding, and Daniel M Sturm have an excellent paper that demonstrates this trajectory of metropolitan growth using spatially disaggregated data for London from 1801-1921, spurred by the invention of the steam engine.

In counterfactuals, we find that removing the entire railway network reduces the population and the value of land and buildings in London by up to 51.5 and 53.3 percent respectively, and decreases net commuting into the historical center of London by more than 300,000 workers.

The figures below show the residential population trends for the City of London and Greater London, expressed as an index relative to its 1801 value. After being constant in the first half of the 19th century, the population of the City declined sharply by around 90% to 13,709 over 1851 to 1921, whereas that of the GL area rose from 2.69 million to 7.39 million. This trend is not confined to the City, but most central parts of GL.

Following the arrival of the railway, we find a reduction in population growth relative to trend in parishes close to the center of Greater London, and an increase in population growth relative to trend in parishes further from the center of Greater London.

The graphic below shows the population trends in the City over day and night, with absolute numbers.

While the residential (night) population of the central city declined sharply, workplace (day) employment increased, reflecting a shift toward a commuting-based urban structure. Lower commuting costs allowed locations to specialize: High-productivity areas became centers of employment, while areas with better living conditions became residential. Transport therefore did not simply support urban growth. It changed the internal structure of cities. By decoupling production from residence, it allowed cities to expand spatially while maintaining high levels of economic concentration. This increased the scale at which agglomeration forces could operate, since firms could cluster in highly productive locations without being constrained by the need for workers to live nearby.

What triggered this trend was the expansion of the railway network after 1836. It facilitated the dispersion of population to the suburbs and a rapid increase in population for the metropolitan area as a whole.

Mass transit shrunk commute times between the City and other London boroughs. The graphic captures the reduction in travel time in terms of an index that is a population weighted sum of the bilateral travel time reductions (between the City and the boroughs).

Following the construction of the first railway in 1836, we observe a sharp reduction in the City of London’s population-weighted average travel times to other boroughs, which is followed shortly thereafter by the precipitous decline in its population discussed above. Although the decline in population-weighted average travel times slightly leads the decline in the City’s of London’s population, both follow a similar trajectory, with their rates of decline slowing towards the end of the 19th century and beginning of the 20th century.

This allowed City of London to specialise as a workplace, and attract commuters from the hinterland to work there.

Consistent with the City of London increasingly specializing as a workplace, we find that the steep decline in its night population from 1851 onwards coincides with a sharp rise in its day population. This evidence of an increasing specialization of locations as either workplaces or residences is also consistent with a sharp rise in public transport journeys per head of population from around 7 in 1834 to just under 400 in 1921.

This specialisation had its impact on the value of land and buildings, which manifests in the form of the City’s share of GL’s rateable value of developed land.

In the early-19th century, this share declines from around 14 to 9 percent, which is consistent with a geographical expansion in the built-up area of Greater London. As this expansion occurs, and undeveloped land becomes developed, the share of already-developed land in overall land values tends to fall, because the denominator of this share increases. In contrast to this pattern, in the years after 1851 when the City of London experiences the largest declines in its residential population, its rateable value share increases from 9 to 11 percent. Finally, in the decades at the end of the 19th century, the pattern of a decline in this rateable value share again reasserts itself, consistent with the continuing geographical expansion in the built-up area of Greater London. Therefore, the change in the City of London’s pattern of specialization in the decades immediately after 1851 increases the relative value of this location.

The online appendix to the paper by Heblich et al documents strikingly similar trend of urban development in Paris, Berlin, Boston, Chicago, New York, and Philadelphia over the same period (1800-1921).

I want to qualify this story given the evidence we have from developing country cities. There are perhaps three big differences in the metropolitan development trajectories of the Western and developing world cities. The first is that in the latter the mass transit systems generally followed the development of urban settlements. This is unlike the former where, as we have seen, mass transit shaped the form of urban development. The second is that the residents of the latter cities now have access to the option of car commutes, a choice unavailable for the suburban residents in the Western cities in the 19th and early 20th centuries.

The third is that the Western cities built their mass transit when their regulatory regimes (zoning, building codes, and land-use planning) were themselves being invented so that the two co-evolved. In contrast, developing world cities are encumbered with fossilised regulatory regimes whose change requires overcoming political-economic lock-in that Western cities did not face during their development phase.

The three factors together make the retrofitting problem harder - transit comes after the form, cars offer an alternative, and the regulatory apparatus is sticky.

It is probable that such cities could remain entrapped in a model of metropolitan growth characterised by suburban sprawl revolving around car-commutes, unaffordable housing, and traffic congestion. Further, the last two have a self-reinforcing nature - increasing unaffordability expands the sprawl, increases vehicle density on the road (both in numbers and time spent on the road). This equilibrium erodes the productivity and competitiveness of the urban agglomeration and sets the stage for its gradual decline. This is apparent in the lived realities of metropolitan cities across the developing world.

The best research evidence so far in this regard comes from the study by Liming Chen, Rana Hasan, Yi Jiang, and Andrii Parkhomenko (and here) on the impact of the opening of the Bangalore metro in 2011. They show that in a regime of low building heights, while the metro increases citywide output and welfare, those gains are several times larger with transit-oriented development (TOD). Using a quantitative spatial model calibrated to Bengaluru, they show the same metro can produce a 32 percentage point spread depending on the planning regime. The bigger takeaway is that mass transit with a bad planning regime produces a worser outcome than without mass transit.

In their comprehensive survey of mass transit, World Bank economists Hiroaki Suzuki, Robert Cervero, and Kanako Iuchishow that transit systems whose returns were disappointing almost always lacked integrated land-use regimes, while those that performed best (Hong Kong, Singapore, Curitiba, Tokyo) treated transit and land use as a single planning object.

The takeaway is stark and simple - regulatory norms are what converts transit accessibility into measurable urban-form outcomes, and without it, the accessibility exists but the form does not change.

So, in these developing country cities where the urban form is already laid out, and where the convenience of car commutes can often trump, what can be done?

The only option is to retrofit pre-existing neighbourhoods, and make mass transit commutes attractive both in terms of convenience and cost. In these contexts, it is essential for mass transit facilities to be complemented with urban planning norms that encourages the concentration of incremental development around the stations and also incentivises the redevelopment of the station surroundings. This is the case for TOD and is critical to discourage the use of cars and choose mass transit for work commutes.

So, what are the successful examples of retrofitting?

In 1979, Curitiba introduced Bus Rapid Transit (BRT) with zoning relaxation only along the BRT corridors (“structural axes”), with density tapering sharply away from it. The result is that after 50 years, Curitiba has the highest transit mode share of any Latin American city, and the structural axes are visibly the densest and most economically dynamic parts of the city.

Another example of retrofitting is that of Arlington County in the Washington metropolitan area which after the Orange Line was built in 1979 upzoned the five stations along the Rosslyn-Ballston corridor to high-density commercial and mixed-use, while preserving single-family character immediately beyond the station catchments. Today the corridor hosts over 50,000 jobs and over 40,000 residents within half a mile of the stations, generates roughly half of the County’s property tax revenue from 11% of its land, and ridership on the Orange Line is three times what was forecast.

Another example is that of Copenhagen which regulated and channelled post-war suburban growth along the S-train (commuter rail) corridors, keeping the spaces between the radiating lines (or fingers) as green wedges. The regulatory decision was made as the suburbs began forming and required active enforcement against sprawl. Today 70% of Copenhagen’s population lives within 1 km of an S-train or Metro station.

Other examples include Hong Kong’s “Rail + Property” model (where the MTR Corporation receives development rights at every new station and co-develops the station area with private partners), Seoul’s subway Line 2 which opened in 1980 (built through what was then farmland south of the Han river, and the Gangnam district was then zoned for high-density mixed-use development around every station), Shanghai’s Pudong area (the metro was built in parallel with the development of essentially a greenfield area east of the Huangpu, and the zoning placed Lujiazui’s financial district at a specific metro interchange), and London’s Docklands and the Jubilee Line extension from 1990s (which created dense developments at Canary Wharf, North Greenwich, and Stratford).

So, what for India?

I had blogged here pointing to three requirements - relaxing development control regulations around stations, right kind of value capture instruments and their sequencing, and an incentive compatible institutional architecture.

The third one is the most important, and can address the other two. It is about aligning the incentives between those constructing the transit system (and repaying the debt mobilised) and those responsible for the land use and other decisions that determine the commercial viability of the system. This is perhaps the hardest given India’s political economy and its less than satisfactory track record with such kind of coordination failure bridging reforms across sectors.

Incidentally, every one of the aforementioned examples of successful retrofitting of mass transit shares two institutional features. The first is a unified authority with jurisdiction over both transit and land use in the station catchment. The second is the presence of value capture mechanisms that let the transit entity benefit directly from land-value uplift. In the Indian metropolitan areas, the simplest solution would be make the urban development authorities own the metro or regional rail entities. Needless to say, it may also be the politically hardest.

In conclusion, the empirical evidence suggests that mass transit without the complementary planning regime and institutional structure that facilitates TOD actively produces worse outcomes than no transit at all, because it legitimises continued sprawl by appearing to offer a mobility solution while in fact raising car dependence.

A framework for deregulation in the Indian bureaucracy

noreply@blogger.com (Urbanomics) — Wed, 21 Oct 2026 02:52:15 +0000

I have blogged on the issue of deregulation as an organisational culture earlier. This post is an attempt to provide a framework for thinking about the bias within the Indian bureaucracy towards the prevention of inclusion errors and process abuse.

Two features of India’s bureaucracy are of relevance.

One, a welfare policy to support the needy and a promotional policy to incentivise something, comes filled with access barriers. Two, a regulatory policy to permit or regulate something comes tightly prescribed.

In the former, there is a reflex within the bureaucracy to prioritise waste/leak/abuse avoidance over inclusion, whereas in the latter, there is a tendency to over-prescribe so as to limit abuse even if it inconveniences genuine applicants. This is the rational choice arising from the institutional incentives.

In both cases, the precautionary effort detracts from the realisation of the primary objective. The pursuit of the ineligible (the false positive or the Type I error) comes at the exclusion or harassment of the eligible (the false negative or the Type II error).

All bureaucracies are prone to this precautionary bias. The clearest exemplar of this bureaucratic bias is cited in the oft-cited paper on regulatory economics concerning the invisible graveyard in the US FDA’s drug approvals process. The works of Sam Peltzman, Henry Miller, and Alex Tabarrok have shown that a drug regulator treats approving a harmful drug (visible deaths, Congressional hearings) as catastrophic and not approving a beneficial drug (invisible deaths among those who never got it) as costless, so it errs massively toward over-caution. Studies have estimated the ratio of Type II (delay) cost to Type I (bad-approval) cost in the thousands to one.

However, there are compelling reasons to argue that this bias is excessive in the Indian bureaucracy.

Root cause reforms aimed at deregulation should target this bias and not be confined tojust one-off changes to existing regulations. I blogged here and here on this issue.

There is an important contrast on this with the judiciary. There, the norm of the Blackstone ratio deliberately and explicitly instills that it is better to let ten guilty escape than allow one to suffer. The bureaucracy needs its equivalent norm.

As a conceptual framework to understand it, there are perhaps three drivers within the Indian bureaucracy of this bias.

1. The false positive is salient when detected, whereas the false negative is always a silent counterfactual. Even the oversight mechanisms focus on detecting and pursuing the false positives, while invariably staying silent on the false negatives. In public debates, too, media stories play up the false positives while largely overlooking the false negatives.

2. The bureaucrat gets personally hauled up in the case of a false positive that comes to light. Even if honest mistakes are safeguarded now, and they are finally exonerated, the public scrutiny and process harassment is a worse punishment.

3. The bureaucratic approvals process, especially the finance department concurrence (and also legal and personnel department concurrences), focuses far more on the false negative and mitigating them than on the efficiency and effectiveness of the achievement of its objectives.

These three drivers must be seen against the backdrop of a system with a very high level of trust deficit between the government and the beneficiaries (in the case of welfare and promotional policies) and the regulated (in the case of regulatory policies). In the Douglass-North sense, there is a low-trust institutional equilibrium inherited from the colonial control-state, which has hardened into a shared prior (“the applicant is a cheat”) and a norm (“process compliance is safety”).

There is also the historical inheritance of the colonial guardian bureaucracy built to maintain order and extract revenue, standing above and apart from the governed, and which elevates procedural purity over substantive correctness. At a social and political level, there is a stigmatisation of private benefit and a valorisation of public gain, which often views the two in binary zero-sum game terms. There is a widespread chalta hai (it’s alright) attitude that condones such delays, hassles, and exclusions, and does not provide credible enough channels to provide feedback and redress them. Finally, I am not sure whether ease of doing business and ease of living are yet the kind of electoral goods that generally force real, actual changes.

In contrast, the development trajectories of today’s advanced countries and China involved deliberate trade-offs that erred on the side of inclusion and lowering transaction costs. The regulatory excess in the US (captured in the so-called “everything bagel liberalism”) and the precautionary principles in the EU are more modern trends that emerged well after these countries reached their developed country status.

In contrast, the development trajectories of today’s advanced countries and China involve deliberate trade-offs that straddle a fine line between enabling and abuse. The regulatory excess in the US (captured in the discourse of everything bagel liberalism) and the precautionary principles in the EU are more modern trends that emerged well after these countries reached their developed country status.

As an analytical framework, the public loss function is to minimise social welfare loss by minimising inclusion and exclusion errors and compliance costs. The social optimum is when the marginal reduction in leakages and abuse is equal to the marginal increase in inclusion or convenience. Since abuse is generally rare and genuine cases are the overwhelming majority, the social optimum requires tolerating some leakage.

However, this public loss function comes up against the official’s private loss function. The aforesaid reasons amplify an accountability multiplier that forces his/her private loss function to minimise inclusions and abuse, even at the cost of exclusions and compliance costs.

The asymmetricity or gap between the two loss functions is the distrust wedge, the gap between the procedural strictness that the society would choose and the strictness that the incentive structure would produce.

Any remedy to address the root cause of the problem should revolve around shrinking the wedge, either by lowering the accountability multiplier (stop over-punishing honest false positives), making exclusion and compliance costs visible and costly, or lowering the compliance costs.

It is about internalising the implied shadow price of avoiding abuse or leakage. How many units of genuine exclusion or compliance cost is the system willing to incur to prevent one unit of abuse or leakage? This is the marginal trade-off that serious deregulation policy must target. There must be an institutional ownership (and bearing of the associated costs) of the cost of exclusion and harassment.

So, in terms of possible solutions, here are a few suggestions.

Efforts to change deeply entrenched norms and behaviours are complex endeavours. They are collective social and political choices that get adopted by the bureaucracy as strong and salient organisational narratives. They are best and most effectively done when they are done directly to change beliefs, norms, and behaviours.

The Indian state has generally struggled when it comes to instilling values to change collective behaviours.

It does better with specific interventions. But there is a risk in reducing such efforts to technical measures. The Ease of Doing Business ranking is a salutary example of the form taking over the substance and subverting the objective.

Nevertheless, the three-point conceptual framework articulated earlier can be the baseline for reforms.

The single highest-value and genuine root-cause fix to the problem is to make exclusion visible and costly. It is useful to have an institution, ideally within the Department (even with all the flaws or conflicts of interest), or one like the NITI Aayog, entrusted with the task of capturing/quantifying and updating the exclusion and compliance costs (the false negatives). This would include the publication of exclusion/rejection/non-uptake rates and median clearance times for every benefit and licence, by geography and office, as standard MIS. To also provide perspective, these metrics can be posted against some desirable benchmarks. This may be done for a prioritised set of activities for certain departments.

This may be an essential requirement to foster a culture that evaluates public services also in terms of their false negatives and compliance costs.

The first step is to quantify and make the costs salient and institutionally aware. An apprenticeship, a scholarship, or a credit-linked subsidy scheme should be evaluated primarily on its uptake. A welfare benefit should also be evaluated on the cost of access and the extent of its exclusions. The compliance cost of sectoral regulatory regimes (environment, development control regulations, building byelaws, land, labour, cyber security, etc.) should be quantified, as also those for various kinds of registrations and licensing (shops, schools, restaurants, clinics, visas, land, etc.).

This could be supplemented with an explicit articulation, for internal circulation, of an exclusion or compliance impact statement with every policy or regulation. This would provide policymakers and regulators the institutional freedom to account for convenience, access, and implementation flexibility, and avoid being exclusively hooked on loss prevention.

Auditors and oversight entities must explicitly incorporate this dimension in their audits, assessments, and investigations that tend to focus only on the false positives. This would offer the combination of deliberative process protection, the vigilance-intake filter that separates the honest error from corruption, and the avoidance of the ex-ante (not hindsight) audit standard.

Finally, the approval process should incorporate these principles across the gates. The financial, legal, and personnel concurrence/vetting should be circumscribed to ensure that the precautions and safeguards that are proposed don’t detract from the objectives.

There is a high risk of these efforts spawning more bureaucracy. So it must be done thoughtfully and not in a checklist-filling manner, as was done in the case of EoDB rankings.

Further, given that most policies and regulations are administered digitally, a low-hanging fruit would be extensive adoption of data analytics. The digital trails of administrative and transactional data could be analysed to detect abuses and address them. The emergence of AI-enabled applications equips us with the tools to do this easily and effectively. The challenge in each activity should be to define the likely problems and analyse to identify signatures of abuse.

To conclude, the stock of policies and rules with a precautionary bias is an output whose generator is the distrust wedge, or the asymmetric loss functions. The revision of rules one at a time merely empties the reservoir that the generator keeps replenishing. Therefore, the durable reform is to do a root cause analysis and recalibrate the generator with some of the aforesaid measures. This can shift the precautionary bias that is the current individual rational choice within the Indian bureaucracy.

Examining the structures and incentives of the Chinese administrative state

noreply@blogger.com (Urbanomics) — Sun, 18 Oct 2026 23:30:00 +0000

Zhuoran Li has a neat description of China’s frontline bureaucracy at the township level that resonates with many other accounts. It is worth extracting in detail and discussing its lessons for countries like India.

The township, which includes both the rural and urban areas, is responsible for the implementation of most functions of the government such as education, healthcare, public welfare, and municipal services. This is a description of the administrative hierarchy at the township level.

At the top of the township government hierarchy are local leaders, who are township cadres with administrative rankings. A township typically has three section-level (科级) leaders: the township Chinese Communist Party (CCP) secretary, the township mayor, and the chief of the Township People’s Congress, who is often the former township party secretary transitioning to retirement. In addition, there are approximately 10 vice section level (副科级) leaders, including vice party secretaries, vice mayors, the discipline inspection secretary (纪检书记), and the heads of several key offices. Officials heading less critical offices or serving as vice chiefs of any office do not hold administrative rankings and, therefore, are not considered leaders.
The next level below government leaders are civil servants with no rank who hold bianzhi (编制), which refers to established posts within government offices. Bianzhi status grants significant benefits, including superior welfare compared to regular citizens and lifelong employment (unless the employee commits a crime). Within the bianzhi workforce, “cadres” and “officials” hold civil servant bianzhi, while other bianzhi workers have public institution bianzhi – the same designation given to teachers and doctors in public hospitals. Only those with civil servant bianzhi can reasonably expect opportunities for promotion. In contrast, those with public institution bianzhi have no career advancement prospects.

Li points to several career progression challenges at the township level.

The path to promotion begins only when an official is elevated to the vice section level, becoming a township leader. Making it to vice section level is not difficult. Officials attest that almost all cadres can expect this promotion as long as they don’t make any serious mistakes. However, further promotion from here becomes extremely difficult. Therefore, most township leaders do not view promotion as a strong incentive and often describe themselves as “not caring much about promotion.”
Promotion opportunities at the township level are rare, as leaders face intense competition and strict age cutoffs. As Chien-wen Kou and Wen-Hsuan Tsai noted, the age cutoff for promotion to vice section and section levels is 40, while the cutoff for vice division (副处) level is 45. In reality, interviews indicate that in many places, the cutoff age for the vice section level can be as early as 35. Promotion opportunities are further constrained by the competition among vice section leaders, 10 of whom may vie for just two section-level positions. Moreover, township party secretaries and mayors are often not promoted from the pool of vice section leaders within the township. Instead, county-level governments may appoint section-level leaders through temporary transfers (挂职), effectively fast-tracking their promotion… As a result, township governments are often referred to as a “black hole for young cadres,” trapping many in perpetual vice section level assignments. They frequently surpass the promotion cutoff age and remain indefinitely in vice section positions.
Promotion prospects do not improve for section-level leaders, as they face even fiercer competition. A county typically has only around 10 vice division (副处) level positions. Township and street (街道) party secretaries and mayors compete for these roles alongside section chiefs from the county government. As several cadres have concluded, promotion opportunities are largely reserved for those with the right connections…
The lack of promotion incentives is a widespread phenomenon. According to research by Jianxing Yu and Xiang Gao, more than 70 percent of surveyed officials in Zhejiang stated that they know their terminal position early in their careers. Therefore, since early in their career, many local officials decide not to participate in the promotion tournament.

This is a good nice description of how officials manage to work the system to get assigments of their choice.

Since promotion opportunities are rare, township leaders have developed different career calculations. Some are primarily motivated by the goal of “escaping the township.” Many township leaders keep their families in the county center to access better housing and educational opportunities for their children, while residing in township government dormitories during the workweek. Consequently, they aspire to secure an administrative reassignment (平调) to the county government as a section chief, which would allow them to work closer to their families. Obtaining such a reassignment depends largely on strong personal connections with county leadership and the Organization Bureau. Others, however, prefer to remain in the township because they value the benefits of “holding real power” (大权在握). Many leaders enjoy the authority that comes with being “number one” (一把手) – and the ability to leverage this nearly unchecked power to enrich themselves. For such figures, an administrative reassignment to the county government is seen as a career downgrade.

The similarity with India’s district and below level bureaucracy is remarkable.

This about contract workers.

Many township governments often employ more contract workers than official bianzhi workers. They perform similar tasks and often work closely with officials. In fact, township contract workers are often more competent than their counterparts. Unlike officials, who are required to rotate posts and localities under the Civil Servant Law, contract workers often remain in the same position for their entire career. This continuity allows them to develop a deeper understanding of local conditions and acquire specialized skills… In theory, a township government can terminate a contract worker’s position at any time. However, the specialized skills that contract workers possess make them irreplaceable, granting them de facto job security… township governments are highly reluctant to fire contract workers unless they commit a crime or a serious mistake.
The primary distinction between contract workers and regular officials is that contract workers do not receive the welfare benefits that officials are entitled to. They only receive basic wage, which is lower than bianzhi workers’, and do not enjoy any bonuses or subsidies… contract workers enjoy more freedom compared to officials. They are not subject to investigations by the commissions for discipline inspection at various levels, since many of them are neither civil servants nor CCP members. Additionally, they are exempt from sitting through the grueling meetings or participating in political activities that are typically reserved for officials and Communist Party members.

Li has this summary of the local government performance.

China’s township governments are best described with one word: stagnation. One cadre captured the reality of township government succinctly: “Everyone is stuck.” Such stagnation will inevitably lead to organizational decay. The resiliency of the CCP comes from its grassroots, and a stable Chinese state depends on local governments delivering services. Decaying local governments will lead to long-term social consequences.

So what are the lessons for countries like India from the Chinese administrative structure?

1. In India’s administrative hierarchy, the township appears akin to the block, the county to the sub-division, and the prefecture to the district. However, unlike in India, the Chinese administrative units appear to have been created keeping in mind their size and functional importance. Accordingly, the largest cities like Beijing and Shanghai have province-level status, some larger cities have prefecture-level status, and some others have county-level status. This is in contrast with India where all municipalities and districts are alike in their administrative powers. In the Chinese administrative structure, Mumbai and Bangalore would have the powers associated with state governments.

2. The bianzhi are similar to the field staff in local governments in India, and the Vice-Section level and above forms its leadership. In terms of career progression, in most states, their progression is limited to their local government. In this respect, their prospects are similar to their Chinese counterparts. Further, local governments in India are generally are headed by officials appointed from the state governments.

The portrait of the bianzhi painted by Li is not flattering. They appear no more or less motivated or institutionally primed (to perform) than their Indian counterparts. As Yuen Yuen Ang and others have pointed out, these levels of government are also rife with petty corruption and speed money. This requires more understanding.

It is possible that most of the government actions in terms of economic growth happens by way of policy decisions on economic growth and investment happens at the level of prefecture and provinces. The frontline bureaucracy, represented by the township level, may be merely delivering public services, for which China’s higher baseline of state capability may be sufficient.

3. The role of contract workers appear similar to that in India. It is not uncommon across government levels in India for contract employees, or consultants, to have become more indispensable than the regular employees. The Chinese frontline state appears as much dependent on the non-regular employees as India’s.

All these raises questions concerning the frontline functionaries and the state they represent. Is the median office clerk or teacher or nurse or tax inspector or policeman or land official in China more capable and/or more motivated than their Indian counterpart? Or is it that there are more of them than in India, thereby reducing the administrative burden? Or is the system less politicised at the frontline, given the single, unified Commuist Party in China? Or is it about greater administrative discipline and bureaucratic efficiency in monitoring and execution?

4. The Chinese officials at the larger county and at the prefecture levels appear similar to the IAS officers, who though enter laterally. The Xuandiaosheng, a Party-run track for top university graduates, but starting in village or township posts and then fast-tracked, appears the nearest to a selected elite stream.

In fact, one study by Genia Kostka and Yu Xiaofan of career backgrounds of 898 municipal (or prefecture-level) Party secretaries between 1990-2011, found that only 5.4% had mainly county-level careers, and under 1% came directly from a county post. About 56% were mainly municipal, 32% provincial and 3% central. The study points to a “glass ceiling” for county cadres.

Our analysis finds that obstacles hindering leading county cadres from rising to the upper ranks of the municipal apparatus include age and education restrictions; limited positions at the municipal level; the lack of networks linking to provincial leaders; and provincial leaders’ appointment preferences. Limited career advancement opportunities for county cadres have important implications for understanding the incentive foundations of China’s bureaucracy. With only slim prospects for leading county cadres to rise to top municipal positions, the political incentives outlined in the cadre evaluation system might not be as effective in steering cadre behavior as currently claimed in the literature.

This trend is also reflected in the career profiles of top government and Party leaders like Xi Jinping and Li Qiang.

5. The appointments and promotions into the government and Party at each level are managed by one level above, by the Organisation Department of that level. Interestingly, unlike other Departments, this Department functions as a Party body and not a government ministry. The centre appoints ministers, governors and provincial Party secretaries, and each Party committee manages cadres one level below it. So the province, not Beijing, picks prefecture heads. This points to a significant level of delegation of responsibilities in personnel management and a highly capable, objective, and professional Organisation Departments across levels.

Since most officials are also Party members, they move routinely between the Party and the government. As you go up, careers alternate between the two tracks.

6. The mainstream accounts of China’s bureaucracy paints a picture of managed competition among local governments as the driver of its success. This calls for a highly capable set of leadership level officials, institutional capabilities, and strong alignment of institutional and personnel incentives. These accounts describe a highly competitive and empowered system that also aligns the career progression of officials to jurisdictional performance in expanding the economy and creating jobs. This requires a highly meritocratic set of incentives and their disciplined compliance and enforcement from the top.

The deeper institutional innovation in China may be that of local governments (prefectures and provinces) being able to capture some of the returns to local economic development while their officials were simultaneously evaluated on that development and their career progression was dependent on the evaluation. This innovation has been underpinned by managed competition among local governments.

7. Even with this administrative structure, the fuel that fired competition was financial resources - revenues from land sales (and the raising of debt through Local Government Financing Vehicles, LGFVs), share of tax revenues from local economic activity, the profits from ownership of stakes in State owned enterprises. This resource stream is also important since the local governments receive very little provincial or central support and are responsible for over 85% of the government spending. Further, China does not have property tax, and after 1994, the central government dispensed with the retention of marginal revenues beyond the contracted base and recentralised a substantial share of tax revenues.

There are very few countries which can even remotely closely mimic this institutional structure and the scale of financial resource availability at the local government level.

Imagine an Indian parallel, where larger cities and districts, headed by IAS officers, are empowered to sell lands, set up off-balance sheet entities to raise debt and finance infrastructure, establish companies and subsidise them, court private companies to build factories and provide them bespoke incentives, mobilise funds and invest in innovative sectors, etc. This would be far beyond their capabilities. Even if the capabilities were miraculously mobilised, creating the institutional and personnel incentives to do these activities with reasonable fidelity would be difficult, if not impossible. It must be borne in mind that even state governments in India struggle to do these activities with any degree of effectiveness. In fact, even the central government has struggled to effectively manage the disbursal of its flagship innovation fund.

There are so many questions that come to mind.

How does the Chinese adminstrative system maintain its discipline given, say, the discretion available to mayors and governors in picking winners and allocating them large amounts, or controlling state-backed venture funds (as outlined here)? How does this discipline co-exist with several accounts of widespread corruption and aggrandisement among senior officials at these levels? Or is it that the centre condones these excesses to some extent as long as the headline outcomes on economic output and jobs are delivered? Or is it that the extent of administrative powers and financial resources available endow local governments with the levers to generate economic outcomes even with the indiscipline? Or is it that the magnitude and scorching pace of economic growth has offset all the inefficiencies?

How much of the success of the Chinese bureaucracy in delivering outcomes is due to the presence of a parallel Party structure, especially given that the Party Secretary outranks the mayor or governor? How much of the discipline within the government bureaucracy is due to the Party oversight? How much is it due to the personnel management of the government itself being done by the Party-controlled Organisation Department? How much of the discipline arises from the incentives on rising up the hierachy? How much of the motivation and drive to realise national goals among leaders is due to their Party membership and indoctrination?

It is difficult to not come away with a strong belief that the Chinese administrative system is sui-generis and may offer limited lessons for others to emulate in both reforming their own less effective administrative systems and also in creating institutional structures to enable and sustain high growth rates.

I had blogged here on China’s management of their public sector units, another sui-generis arrangement which might be difficult to replicate in countries like India.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 17 Oct 2026 07:00:53 +0000

1. The labour market effects of AI is not clear.

Even at the entry level, graduate unemployment has been rising since 2015, pointing to factors beyond AI.

2. China will grow old before it gets rich?

China’s total population peaked at 1.4 billion in 2021 and is now falling by three to four million people per year—roughly equivalent to losing one Los Angeles each year. By the 2040s, if China continues to follow East Asia’s descent to ultralow fertility rates, it will shed around one percent of its population annually—roughly ten million people, more than the population of New York City. At the same time, the proportion of China’s population aged 65 and older will surge, doubling from 15 percent today to around 30 percent in the 2040s, and then rising to well over 40 percent by the late twenty-first century. The size of that cohort in the United States, by contrast, is projected to rise far more gradually, from around 19 percent of the population today to just over 23 percent in 2060.

The essay by Carl Minzner talks of how the centralisation, a paranoid state, and suppression of dissent is creating the conditions for discontent and social instability. Sample this.

In 2023, Beijing created the Central Social Work Department and charged it with monitoring those suffering from any of the “four lacks” (no spouse or children, no job or stable income, no normal social interactions, or no financial assets, such as a house or car) or any of the “five losses” (failed investments, career or life setbacks, emotional imbalances, mental illness, or failed personal relationships). Beijing views such individuals as potential security threats capable of mass attacks, such as the November 2024 rampage in which a 62-year-old man, dissatisfied with the property settlement after his divorce, drove his car into a crowd and killed dozens.

3. Only 6.6% of Indians earn a middle class monthly salary of Rs 25,000. Even this is likely on the higher side, and I am not even talking about the low baseline.

4. China and EU agree tacitly on an arrangement whereby EU will impose a quota ceiling on Chinese hybrid car imports without any retaliatory action by China.

The agreement would more than halve projected exports over the next four years, reducing the number of hybrids shipped by China by “several millions”. On the current trajectory, Chinese exports to the EU would hit 800,000 this year. In 2027 alone, the deal would reduce imports by between 500,000 and 700,000 vehicles, cutting the EU’s expected trade deficit by between €10bn and €14bn, according to an EU official. The 2027 annual quota was expected to be initially about 350,000 vehicles, increasing by 6 per cent a year for the following three years, the official said. The EU’s trade deficit in goods with China hit €360bn in 2025 and has increased since. In the second quarter of 2026, it was €103bn, up from €93bn in the same period last year. Vehicles and machinery were the biggest contributors... The share of the EU market for plug-in hybrid electric vehicles controlled by Chinese imports rose to 25 per cent in the first half of this year and for other hybrid electric vehicles to 14 per cent, both up from 2 per cent in 2024.

5. China's debt service burden surges.

Debt servicing payments alone are expected to account for 19.2 per cent of the central government’s general public budget this year, up from 12 per cent in 2014, according to a new study from the Conference Board. The problem is especially acute at the local government level, where debt interest payments have risen 16 per cent annually over the same period. Together, central and local government debt interest payments are projected to amount to Rmb1.4tn ($209bn) in 2026, up from about Rmb348bn in 2014... Public debt-to-GDP is set to hit 122 per cent by the end of 2026, up 48 percentage points from its pre-pandemic level, according to Morgan Stanley analysts... Economic growth slipped to 4.3 per cent in the second quarter, below the official full-year target range of 4.5 to 5 per cent, on the back of weakening retail sales and sharp falls in fixed-asset investment... While the central government runs a fiscal deficit of about 4 per cent, the augmented deficit, a wider measure of state spending, is running at about 10 per cent of GDP, according to Goldman Sachs... “Spending on debt interest payments rose 341 per cent” between 2013 and 2025, according to the Washington-based Center for Strategic and International Studies, “faster than any other major budget category”. The think-tank noted that about 14 per cent of US government spending went towards interest payments this year while Japan, one of the world’s most indebted governments, spent almost 26 per cent.

6. The remarkable stability of occupations.

Long-established ones are far more durable — more than 70 per cent of workers today are employed in occupations that existed in the late 19th century. Rather than eliminating these occupations, technology has transformed them.

7. Forward guidance (among other things) wins Nobel Prize precisely in the year the new Fed Chairman is taking steps to reverse it.

8. China clocks a 36.3% growth in dollar terms in its exports in September over the same month last year, the biggest increase since January-February 2021. Trade surplus for the first nine months was $938.1 bn, compared to $875 bn last year.

This comes even as economic growth slows, reporting 4.3% in the second quarter, one of the lowest quarterly growth rates in decades and below the full year target band of 4.5-5%.

9. While subsidies were a major contributor to Chinese companies becoming dominant in manufacturing, they have been far sighted enough to sharply increase their R&D spending and move up the value chain and become global manufacturing leaders across the value chain.

10. Richard Waters puts the AI investment in perspective.

To take one recent estimate, from the Brookings Institution: Spending on the AI services produced by all those data centres would need to account for an astounding 9.2 per cent of US GDP by 2032 for their operators to make a decent economic return... The five biggest hyperscalers — Alphabet, Amazon, Meta, Microsoft and Oracle — have raised their capex budgets throughout the year and currently expect to spend $800bn, nearly twice as much as last year. That is set to eclipse their combined forecast cash flow of around $700bn... according to the Brookings report, it will take an extraordinary jump in AI demand to justify the construction boom. By 2032, customers would need to spend $3.7tn a year (the 9 per cent of US GDP). Tech research firm Gartner came up with a similar calculation this week, estimating that $8.5tn of AI revenue will be needed between now and 2030 to produce decent investment returns on all the new data centres. The actual AI revenue Gartner forecasts over that period: $3.6tn.

GCCs and the reshaping of India’s IT services industry

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

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

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

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

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

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

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

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

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

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

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

To summarise, Claude offered this assessment

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

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

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

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

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

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

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

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

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

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

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

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

Mass transit and land use planning drives economic clusters

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So what drives rupee depreciation?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Weekend reading links

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

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

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

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

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

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

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

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

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

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

5. India equity market facts of the week.

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

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

7. African credit ratings fact of the week.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Emerging industrial policy opportunity in batteries

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

India’s affordable housing policy problem

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Weekend reading links

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Such large migrants invariably invites discontent in these times.

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

8. Very good article about the Gurugram story.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And this is how the natural gas supplies were substituted.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TOD is critical for the commercial viability of Indian metros

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thoughts on private equity in consumer service businesses

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Its findings and recommendations are striking:

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

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

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

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

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

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

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

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

Weekend reading links

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

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

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

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

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

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

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

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

3. What are the fiscal costs of immigrants?

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

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

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

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

5. Oil prices over the last fifty years.

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

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

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

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

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

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

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

8. Some facts about the SpaceX business model assumptions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Public policy for domestic semiconductor design and components in general

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How do we reconcile the dilemma?

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

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

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

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

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

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

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

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

Weekend reading links

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

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

2. AI solves the Navier Stokes equation breakdown.

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

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

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

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

Prices have risen sharply across the board.

5. US inflation clearly owes to the Iran misadventure.

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

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

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

7. VC wealth multiplication.

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

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

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

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

9. Tiruppur facts of the week.

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

10. India's affordable housing market facts.

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

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

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

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

12. This is a staggering statistic on IPOs

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

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

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

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

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

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

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

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

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

16. Finally, some FDI facts about Indian states.

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

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

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

Disaggregating India’s savings and its risk capital challenge

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So how have been the trends over time?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The global crisis of falling student learning outcomes

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

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

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

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

The Economist writes

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

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

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

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

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

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

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

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

Schleicher makes important suggestions about better use of AI.

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

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

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

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

John Burn-Murdoch points to possible reasons.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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