Urbanomics

Weekend reading links

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

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

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

Cost of pharmaceuticals too are much higher.

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

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

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

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

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

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

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

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

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

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

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

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

7. Iran has been adapting to US sanctions.

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

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

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

9. The remarkable resilience of the European Union.

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

10. India reached peak college education premium in 2011?

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

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

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

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

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

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

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

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

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

Gulf War and India's external account

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So what does this portend for the external account?

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

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

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

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

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

Some takeaways from the Gulf War

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

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

Here are some observations:

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

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

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

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

And more generally on the global energy markets.

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

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

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

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

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

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

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

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

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

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

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

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

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

India’s dependence is especially acute.

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

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

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

Badr Jafar has this description of the vulnerability.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Weekend reading links

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

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

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

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

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

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

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

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

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

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

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

6. India equity market facts

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

And this.

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

And rupee's crawling peg.

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

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

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

This is a sobering note on private equity.

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

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

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

Some thoughts on catalysing India's chip design market

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

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

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

I blogged here on industrial policy for semiconductor chips.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Weekend reading links

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

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

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

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

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

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

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

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

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

And this is an important market failure

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

5. Gulf war scenarios.

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

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

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

Observations on China's 15th Five Year Plan

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Weekend reading links

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

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

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

She says something which more people should be talking about.

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

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

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

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

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

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

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

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

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

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

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

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

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

Weekend reading links

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

1. Private equity has outperformed public markets.

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

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

3. Japan lifestyle facts of the week.

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

4. Global crude landscape (HT: Adam Tooze)

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

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

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

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

India's dependence on Strait of Hormuz is especially acute.

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

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

The strait’s closure creates both an immediate crisis and a long-term strategic quandary. The current problem is that the longer it is closed, the greater the threat of a global recession. The future dilemma is that Iran now knows that control of the Strait of Hormuz gives it a stranglehold over the world economy. Even if it relaxes its grip in the short term, it can tighten it again in future.

6. A measure of how much Israeli politics has become radicalised.

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

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

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

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

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

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

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

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

11. India's AIF market is surging.

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

12. Global LNG market.

13. Italian judicial reforms face a referendum.

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

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

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

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

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

Britain’s Liberal Democrats... now want the nation to build a nuclear deterrent that is less reliant on the US... France, whose force de frappe is truly sovereign, said this month that it would increase its stockpile of warheads. In Poland, a rare point of agreement between the prime minister and the president is their openness to going nuclear. In South Korea, public support for a deterrent has gone up to 70 per cent in recent years. Saudi Arabia, which has said that it would get one if Iran did, might not wait for such a cue now that it and other Gulf states are under conventional attack from that quarter anyway. Even the original nuclear powers are chafing at old taboos. As of last month, there is for the first time in over half a century no binding agreement to limit nuclear arms between America and Russia, which have the world’s two largest arsenals.

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

One is the ordeal of Ukraine. In 1994, it gave up the Soviet nuclear weapons that were then on its soil in exchange for certain assurances about its security. Two decades later, Moscow began its long and ongoing war against Ukraine with the annexation of Crimea. The lesson, for some, is obvious. A country with dangerous neighbours should retain or acquire the ultimate deterrent. Another salutary tale is that of Iran. It seems that an unfinished nuclear bomb is the worst of all worlds: a provocation to other states but not a deterrent. A rational government would either abandon all ambitions of that kind or realise them in full. On balance, given Ukraine’s experience, observers around the world will regard the second course as the more prudent. On top of all this is the endless unpredictability of the US. Until now, countries with the expertise and resources to build the bomb, such as Japan and several European countries, have chosen to duck under America’s nuclear umbrella instead. As Donald Trump casts doubt over whether he would ever honour those mutual defence treaties, some of which were signed a human lifetime ago, this “nuclear latency” doesn’t seem so clever.

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

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

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

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

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

18. The unit economics of AI tokens.

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

Economic impacts of tax reductions

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

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

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

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

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

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

And this on its outcomes in terms of revenue impact.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Their main findings are worth quoting:

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

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

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

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

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

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

Thoughts on international development IX

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

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

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

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

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

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

It makes these suggestions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A framework for public funding of innovation and startups

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

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

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

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

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

What does the empirical evidence on these efforts globally report?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Weekend reading links

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

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

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

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

3. The declining labour productivity growth rates.

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

Pension systems are grappling with increasing dependency ratios.

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

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

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

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

China update - March 2026

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

7. Finally, did China really eliminate poverty?

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

Labour market in times of technological changes

noreply@blogger.com (Urbanomics) — Mon, 09 Mar 2026 02:19:00 +0000

The impact of AI on the economy, especially on the labour market, is most likely to be the defining political economy issue of this generation.

In this context, it is useful to understand the trajectory of the evolution of jobs with technological changes over the last century or so. Daron Acemoglu and Pascual Restrepo have shown that roughly half of America’s employment growth between 1980 and 2010 came from the creation of entirely new occupations. They argue that the automation effect of the displacement of workers is offset by the reinstatement effect arising from the creation of new occupations.

David Autor, Caroline Chin, and Anna Salomons have a paper which examined the substantive content of emerging job categories (or new work) over the 1940-2018 period in the US, where it comes from, and its effect on labour demand. Augmentation innovations are those that increase capabilities, quality, variety, or utility of the outputs of occupations, thereby generating new demands for worker expertise and specialisation. They constructed a database of new job titles linked both to US Census microdata and to patent-based measures of occupations’ exposure to labour-augmenting and labour-automating innovations.

We find, first, that the majority of current employment is in new job specialties introduced after 1940, but the locus of new work creation has shifted—from middle-paid production and clerical occupations over 1940–1980, to high-paid professional and, secondarily, low-paid services since 1980. Second, new work emerges in response to technological innovations that complement the outputs of occupations and demand shocks that raise occupational demand; conversely, innovations that automate tasks or reduce occupational demand slow new work emergence.

Third, although flows of augmentation and automation innovations are positively correlated across occupations, the former boosts occupational labour demand while the latter depresses it… Employment and wagebills grow in occupations exposed to augmentation innovations and contract in occupations exposed to automation innovations… augmentation innovations increase occupational wagebills by boosting both employment and wages suggests that ‘new work’ may be more valuable than ‘more work’—plausibly because new work demands novel expertise and specialization that (initially) commands a scarcity premium… we establish that the effects of augmentation and automation innovations on new work emergence and occupational labour demand are causal. Finally, our results suggest that the demand-eroding effects of automation innovations have intensified in the last four decades while the demand-increasing effects of augmentation innovations have not.

Routine task-intensive occupations gained substantial new titles between 1940-80, and few between 1980-2018.

What most stands out from this figure is the shifting fortunes of routine task-intensive occupations—both blue-collar occupations such as operative and kindred workers, metal workers, and mechanics; as well as white-collar occupations such as shipping and receiving clerks; stenographers, typists, and secretaries; bank tellers and bill and account collectors; and library attendants and assistants.

So what does this all mean for the labour market in the times of AI? In a much discussed essay, Dario Amodei, CEO of Anthropic, sounds alarm that AI could displace half all white collar jobs in 1-5 years.

The pace of progress in AI is much faster than for previous technological revolutions. For example, in the last 2 years, AI models went from barely being able to complete a single line of code, to writing all or almost all of the code for some people—including engineers at Anthropic.Soon, they may do the entire task of a software engineer end to end… it just implies the short-term transition will be unusually painful compared to past technologies, since humans and labor markets are slow to react and to equilibrate... AI will be capable of a very wide range of human cognitive abilities—perhaps all of them. This is very different from previous technologies like mechanized farming, transportation, or even computers.This will make it harder for people to switch easily from jobs that are displaced to similar jobs that they would be a good fit for…
AI is increasingly matching the general cognitive profile of humans, which means it will also be good at the new jobs that would ordinarily be created in response to the old ones being automated… Across a wide range of tasks, AI appears to be advancing from the bottom of the ability ladder to the top. For example, in coding our models have proceeded from the level of “a mediocre coder” to “a strong coder” to “a very strong coder.”We are now starting to see the same progression in white-collar work in general… AI, in addition to being a rapidly advancing technology, is also a rapidly adapting technology… Early in generative AI, users noticed that AI systems had certain weaknesses… But pretty much every such weakness gets addressed quickly— often, within just a few months.

However, in a recent issue, The Economist disputed such alarming prognostications.

We analysed employment and wage trends across more than 100 large white-collar occupations in America since the second half of 2022. Employment across the sample has risen by 4% and real wages by 3%. To get a sense of AI’s impact on different roles, we used occupational descriptions to classify white-collar roles into four groups depending on the bundles of tasks involved: technical specialists, managers and co-ordinators, care workers, and back-office employees. We then tracked employment in each group starting in late 2022, using six-month moving averages.

Roles that combine technical expertise with oversight and co-ordination have enjoyed the biggest gains. Employment among project managers and information-security experts has risen by 30% or so. Other occupations which combine deep expertise in maths-related fields with problem-solving are also thriving. So are jobs which involve interpersonal care work and those which demand judgment and co-ordination. Only routine back-office work has shrunk. Over the past three years or so the ranks of American insurance-claims clerks have shrunk by 13% and those of secretaries and admin assistants by 20%.

It also finds AI generating all-new jobs - data annotators, forward-deployed engineers, chief AI officers, and mainly those without settled names (“other occupations”).

On the impact of AI on jobs, the Yale Budget Lab has a meta-study that compares evidence from across studies. It uses seven different measures of occupation-level AI exposure calculated by researchers and urges caution in reading too much into the findings. These measures are based on human and AI assessments of whether a job’s constituent tasks can theoretically be performed by an LLM, linking tasks with AI-related patents, and using real-world data on how LLMs are being used to carry out particular work-related tasks.

Its headline findings:

AI exposure metrics broadly agree with each other, but they disagree with each other more on highly exposed occupations. The key point of disagreement between different AI exposure metrics is in the magnitude of exposure, not whether an occupation is exposed. Occupational exposure to AI is not indicative of a jobs AI will automate out of existence. Rather, it indicates places in the labor market where AI could have an impact.

The study uses each occupation’s exposure and variance across the various scores, with low variance pointing to a consensus on exposure. They regressed the two and found greater disagreement for highly exposed occupations, “driven more by how much an occupation is exposed more than whether it is exposed.”

Clearly, occupations focused on computational, text-based, or administrative work tend to have both higher variance and higher average exposure, whereas manual fields like construction and maintenance have lower disagreement and variance.

The high degree of variance and disagreements point to the perils of forming opinions on the trajectory of AI’s evolution and its impact on the labour market. The meta-study urges caution in drawing conclusions “about where AI disruption to the labor market could be going”.

John Burn-Murdoch and Sarah O’Connor in the FT point to a few perspectives that are important while considering the impact of AI. Specifically, they point to the nature of the AI exposure and the regulation of AI adoption.

It is more than 20 years since David Autor and his co-authors argued convincingly that, like the waves of technological change that came before, computerisation threatens jobs where workers are mainly performing tasks to meet a specification, but is a complement to those who determine the specification. Viewed through this lens, the AI revolution may pose less risk to (or even benefit) a software developer who exercises considerable autonomy over what they work on and how they do it, than to a warehouse worker who loses out to a new generation of AI-enhanced robots, or a retail sales assistant whose store is closed as technology drives ever more commerce away from brick and mortar stores and onto the web…
Or consider the role of regulation. As we have written previously, AI models can now evaluate medical scans more accurately than experienced radiologists, but regulatory barriers and insurance policies have made it virtually impossible for fully autonomous systems to be used. Meanwhile, laws have sprung up across the US prohibiting AI tools that “provide services that constitute the practice of professional mental or behavioral healthcare (such as therapy)”. Whatever one’s views on the rights or wrongs of these particular cases, they are clear demonstrations that vulnerability to occupational displacement in the age of AI comes down to far more than “Is AI capable of performing the tasks that make up your job?”

In conclusion, on the overall likely impact, the central questions revolve around three trends - labour automation (associated displacement), labour augmentation (and associated redeployment), and the emergence of new work categories. What will be the relative impacts of the three? Will the first far exceed the second and third? Or will they offset the first? What will be the pace of the first? Will the second and third lag the first significantly?

It is impossible to answer any of these with a degree of confidence. We may only be able to wait and watch how the trends play out and respond accordingly.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 07 Mar 2026 04:31:00 +0000

1. China is rising up the ladder on higher education and research.

In 2010, only one mainland Chinese institution ranked in the top 50 of the QS World University Rankings, a closely watched global league table. By 2025, that number had risen to five, and they were positioned higher up the table... A report by the US-based Center for Security and Emerging Technology found that in 2019, a group of 10 elite Chinese universities each had a budget exceeding $5bn a year... Holden Thorp, editor-in-chief of the Science family of journals, says 14 per cent of papers accepted in Science in 2025 were from China, the second-largest share after the US, at 45 per cent... As China has climbed the rankings, many critics have pointed to the industrial scale of fraudulent or poor-quality research, driven in part by incentives that reward publication volume in tenure and promotion decisions... In 2025, Ivan Oransky, co-founder of Retraction Watch recorded nearly 3,000 retractions of Chinese-authored papers from journals, compared with 177 for US authors.

And this on R&D spending

China is close to surpassing the US in total expenditure on R&D, with China spending $781bn and the US $823bn in 2023, according to data from the OECD. By contrast in 2007, China spent $136bn compared with $462bn by the US. The OECD also calculates that China spends, on average, $305,000 on R&D costs per researcher, which is more than the European average of $268,000.

2. Ed Luce has a good description of the war in Middle East.

The war threatens to turn into a contest over which can hold up longer — Iran’s ability to produce drones versus America’s capacity to intercept them.

3. Emmanuel Macron has outlined a new more aggressive and collaborative nuclear strategy for France.

Laying out a new concept, “forward deterrence”, he offered to extend French protection “into the depth of our continent”. Successive French presidents since Charles de Gaulle have consistently alluded to the “European dimension” of France’s “vital interests” covered by its independent force de frappe. Macron has now suggested concrete steps to materialise this. These include the temporary deployment of French nuclear-armed aircraft, the Rafale, to allied countries, as well as participation in deterrence exercises. The conventional forces of allies may also take part in France’s nuclear activities. Macron mentioned seven — Germany, Poland, Sweden, Denmark, Greece, Belgium and the Netherlands — with whom this strategic dialogue has already started. This is all new and quite remarkable. Together with the Northwood Declaration, which committed France and the UK in July 2025 to an unprecedented level of co-ordination in nuclear policy, Macron’s speech signals a major development in the history of European defence.

4. Insurance premiums rocket 12-fold on ships sailing through the Strait of Hormuz.

Premiums jumped as high as 3 per cent of the cost of a ship on Wednesday, up from about 0.25 per cent before the war... Typical prices in the high-risk region now ranged from 1 to 1.5 per cent of the cost of a ship, while ships linked to the US, UK and Israel had been quoted prices as much as triple those rates, Marsh broker Dylan Mortimer told the FT.

5. On Nvidia's staggering 75% gross profit margin.

Nvidia makes its money selling physical chips that must be manufactured in fabrication plants the company does not own. Nvidia’s most advanced AI chips rely heavily on fabrication by Taiwan Semiconductor Manufacturing Company. Its most profitable products, including the H200, Blackwell and the next-generation Rubin architecture, are made on TSMC’s advanced 4 and 3 nanometre production processes. There is currently no alternative capable of manufacturing those designs at the same scale, performance and yield. In chipmaking, whoever controls advanced manufacturing has the greatest leverage. TSMC decides how much it charges for each wafer and how much advanced production capacity each customer receives... Nvidia designs the architecture and the software. TSMC builds the chips and spends more than $40bn each year expanding and upgrading fabrication capacity. Nvidia enjoys software-like margins without bearing the cost of constructing and upgrading factories. TSMC keeps its most advanced factories running at full capacity. For now, that balance has held. Nvidia’s valuation, however, assumes it will continue to hold... At current revenue levels, every one-point move in gross margin would represent about $2bn in annual gross profit, which would be enough to move earnings forecasts... Today, the chip industry revolves around two critical bottlenecks: ASML in advanced lithography equipment and TSMC in advanced chip manufacturing. Credible alternatives are rare and the barriers to entry are vast. Nvidia’s advantage sits above manufacturing, in chip design and in the software ecosystem built around its processors.

6. Brilliant essay by Dean Ball, a former White House policy adviser who wrote the Trump administration’s A.I. strategy, on the consequences of the US Government's decision to cancel the Department of War's contract with Anthropic to use its AI system Claude in classified contexts and designate the firm a "supply chain risk". Specifically, the US DoW objected to two restrictions in the contract with Anthropic (a contract that was renegotiated with these restrictions by the current Trump administration) that Claude could not be used for mass surveillance on Americans and it could not be used to control lethal autonomous weapons which are can identify, track and kill targets with no human in the loop at any point in the process.

The Department of War’s rational response here would have been to cancel Anthropic’s contract and make clear, in public, that such policy limitations are unacceptable... War Secretary Pete Hegseth has gone even further, saying he would prevent all military contractors from having “any commercial relations” with Anthropic... Essentially, the United States Secretary of War announced his intention to commit corporate murder... the message sent to every investor and corporation in America: do business on our terms, or we will end your business. This strikes at a core principle of the American republic, one that has traditionally been especially dear to conservatives: private property...

This threat will now hover over anyone who does business with the government, not just in the sense that you may be deemed a supply chain risk but also in the sense that any piece of technology you use could be as well... No entity with meaningful ties to government business would use DeepSeek, simply because the regulatory risk was too high. Now that the government has applied this regulation to an American company, the regulatory risk simply exists for all software... this could end up making AI less viable as a profitable industry... Simply for having different ideas, expressing those ideas in speech, and actualizing that speech in decisions about how to deploy and not deploy one’s property. Each of these things is fundamental to our republic, and each was assaulted.

7. The economics of Iran-Israel/US war.

The United States is dominating the skies above Iran. But math is not necessarily on America’s side. Iran is using low-cost drones for precision attacks in the Middle East. The United States and its allies have air defense systems capable of intercepting a vast majority of Iranian ballistic missiles and drones, which are sophisticated yet costly... The cost ratio per shot, per interception, is at best 10 to one. But it could be more like 60 or 70 to one in terms of cost, in favor of Iran... Iran’s Shahed drones are triangle-shaped loitering munitions, roughly 11 feet long... They are small enough to be launched from the back of a truck, making them relatively easy to hide and tough to hunt down. The long-range version of the Shahed drone, known as the 136, can travel roughly 1,200 miles... Built with off-the-shelf commercial electronics, each Shahed is said to cost $20,000 to $50,000 to manufacture, depending on the model... The gold standard in missile defense, the Patriot air defense system, uses interceptors that can cost more than $3 million per shot and are in limited supply. For instance, Lockheed Martin delivered just 620 PAC-3 interceptors in 2025, which broke a record for production.

8. One of the biggest casualties of the war is UAE, Dubai and Abu Dhabi. This about Dubai.

Since the US and Israel launched the war a week ago, the United Arab Emirates, which for years has enjoyed spectacular success as a global entrepot, has been the target of about two-thirds of all ordnance fired by Iran across the Gulf. For years, the UAE’s brand — and that of Dubai in particular — was underpinned by its claim to be an island of stability in a dangerous neighbourhood. Tech billionaires, influencers and holidaymakers alike were pulled in by factors ranging from favourable tax treatment to winter sunshine and a location where east meets west, convenient for Europe, Africa and Asia alike... Iranian attacks have also peppered military, infrastructure and energy targets in Saudi Arabia, Bahrain, Kuwait and Oman, confirming long-held fears that Tehran would lash out at its US-allied neighbours if the regime’s survival was at risk... The UAE’s multi-layered defence system’s interception of 93 per cent of more than 1,100 incoming missiles and drones has limited casualties and damage...

Transforming itself from fishing village to regional trade hub in the 1970s, the rise of Emirates airline — linking cities across the continents through its ever-expanding airport — kick-started a tourism industry that made Dubai the world’s sixth most visited city last year. In the aftermath of the 9/11 attacks in the US, funds from Muslim-majority nations flowed to the Gulf. Dubai opened its property market to foreigners, fuelling the city’s first real estate boom. The global financial crisis rattled the region in 2009, shrinking Dubai’s debt-strewn economy and prompting bailout loans underpinned by Abu Dhabi. But the influx of money and people precipitated by the Arab popular uprisings of 2011 boosted its economy further. When the coronavirus pandemic struck in 2020, the government locked down harder and reopened faster than others, fostering a relaxed, safe environment that attracted a new generation of newcomers: social media influencers, cryptocurrency investors and hedge fund managers. The war on Ukraine in 2022 brought Russians seeking sanctuary, while higher UK taxes lured a wave of wealthy residents and long-term residency programmes incentivised all foreigners to put down roots.

9. Formula 1's spectacular growth since its takeover by Liberty Media.

F1’s accounts for 2025 show a sport in rude health. Annual operating profit rose 28 per cent to $632mn as revenues — across media rights, sponsorship, fees from promoters and hospitality — increased by 14 per cent to $3.9bn. In 2017, when Liberty Media acquired the sport, F1 made a $37mn operating loss on revenues of $1.8bn. Big brands continue to flock to Formula 1... F1 now has 10 global partners, versus four only four years ago. Sponsors are also flooding to racing teams... The most lucrative partnerships can make more than nine figures for F1 teams. Global appetite for attending races is stronger than ever. Tickets for this weekend’s opening race in Melbourne sold out in minutes when they went on sale in September, setting the tone for the rest of the season. Last year, 6.75mn fans attended races, up 4 per cent from the year before... Bankers and financial analysts think there is still plenty of room for further growth. According to data from sports news group Sportico and investment bank Houlihan Lokey, F1 teams were valued at around 6.1 times revenues last year, compared to 10.3 times for franchises in the NFL and 11.9 for those playing in the NBA.

This comes at a time when Formula 1 has introduced sweeping changes to the cars from this year.

Owing to new rules introduced by the sport’s governing body, cars this year will all be shorter, narrower and lighter, wings will be simpler and aerodynamic redesigns will result in flatter vehicle floors, which F1 says will increase the scope for different driving styles. While engines have been hybrid for years, the balance of power between petrol and battery has been altered significantly, meaning that cars will now rely on electric power around 50 per cent of the time. The changes have been brought in for two main reasons. One is to shift F1’s approach to sustainability by leaning more into battery power and using so-called e-fuel made from carbon capture, municipal waste and non-food biomass or a combination. The other is to attract more car companies into the sport. The new engines will be “more road-relevant”, F1 says, pointing out that Ford, Audi and, from 2029, General Motors have all been enticed into producing engines as a result of the reforms.

Two new teams, Cadillac and Audi, are entering the race this year.

Some thoughts on startup innovation scaling - hospital solutions

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

The Ken has an article on how the health systems in India are adopting AI applications, specifically ambient AI transcription apps (always-on AI systems that use contextual interpretation to transcribe speech without explicit prompts). The article highlights several important insights about not only AI-adoption but also generally startups in India.

The idea is simple: use AI transcription tools as scribes to document patient consultations and integrate them into the patient and hospital management workflows, thereby improving efficiencies and quality of care. Besides, “ambient AI could become the layer on which a full AI stack in diagnostics, predictive health, and ICU optimisation” can be built.

Apart from the inherent productivity-enhancing value of a digital scribe, the felt need in India is the sheer volume of patient load faced by doctors. An Indian doctor sees, on average, 30 patients compared to three for the US doctor.

This is also because India has a doctor for every 811 people, rising to nearly 11,000 in rural areas, compared to one for 300 people in the US.

This patient load has naturally led to the search for methods to optimise consultations, especially by adopting ambient AI scribes. The well-heeled hospital chains have preferred to use the mature foreign solutions instead of relying on Indian startups.

The article describes the challenges faced by ambient AI scribe startups in India.

Most hospitals in the country do not have electronic health records, known as EHR, that can integrate such tools… Where EHR systems do exist—mostly in private hospital chains—they aren’t standardised, making the integration of AI-scribe tools into easy-to-use digital infrastructure a custom engineering project for each hospital… An AI scribe can… allow a doctor to see two to three more patients an hour, a tangible capacity gain for high-burden Indian hospitals... After adopting Augnito, a voice-to-text tool from the British firm Scribetech, 35% of Apollo’s doctors saw more patients in 2024… Apollo has deployed Augnito across 37 of its facilities since 2022–23, giving nearly 4,000 doctors access to it…
The tools would need to be highly precise, though, and customised for the Indian context. Transcription errors can impact drug dosage, change patient outcomes, affect insurance claims, and even invite malpractice lawsuits… A medical journal estimated in 2024 that there had been a 400% increase in medical-negligence cases in the previous few years… At a price point of Rs 600–1,500 per doctor per month, AI scribes need wide adoption to break even. Building AI tools is expensive, as model training and GPU costs are high…
Beyond the big players, however, it will take much more to convince doctors to adopt these tools than just a promise of less clerical work... such tools are hardly affordable for a non-chain clinic… Selling to big chains is hard for a new company, however. “Apollo’s actual deal at a corporate level is with Microsoft,” a hospital industry expert says, requesting not to be named. “They have also bundled in another voice solution, Nuance Dragon, to improve documentation.”… So startups like Dawnbreak and Eka Care started with selling their tools to hospitals that didn’t have any EHR at all… Instead of integrating their tools into existing systems, ambient AI firms are looking to provide lightweight tools that hospitals can use piecemeal…
India’s hospital-information-system landscape is fragmented… there are some 2,000 EHR systems compliant with the Ayushman Bharat Digital Mission… Unlike in the US, where Epic and competitor Cerner command 70% of the market, each EHR system in India is different. For makers of AI scribes like Dawnbreak and Eka Scribe, this means building custom-integration solutions for each client rather than a mass product. Dawnbreak, in one year of its existence, has managed to build compatibility with four EHRs out of nearly 2,000… Indian EHR companies like Healthplix and Docpulse safeguard their databases. If they open their APIs up, they lose their competitive edge. Their clients are locked in long-term contracts, leaving them unable to change their systems or integrate any AI tools.

This is a good case study on the problems with scaling startup innovation in India.

1. AI has undoubted potential for significant productivity improvements, including in public systems. Like scribing, triaging of outpatient (OP) cases coming to a primary health centre (PHC), community health centre (CHC), district hospitals, and medical colleges is an area where AI can play a significant productivity enhancing role. In all these places, OP cases come to doctors with limited or no triaging. Further, as we have seen, the daily OP load in these hospitals (at least the better ones among them) is multiples of what a doctor can manage, leaving them overburdened and stressed. The result is inefficient use of the doctor’s time, inadequate diagnosis time, incorrect diagnosis, wrong OP referrals, and so on.

An AI-based triaging application where the symptoms are entered at the OP-registration, nurse and doctor-level, can dramatically improve work conditions, increase hospital productivity, and enhance the quality of treatment. Triaging is already one of the early emerging successes of AI, with examples like Bank of America’s digital assistant “Erica”, which handles billions of client interactions and has reduced call centre volumes by 40 per cent.

2. However, the promise of AI is most likely to be constrained in sectors like healthcare and others where health and public safety are critical factors. In these regulated areas, vertical use cases of AI adoption (agentic solutions that can be outsourced specific tasks) is likely to be slower. The regulatory struggles of autonomous driving systems is an illustration.

Even a clear and credible demonstration that AI is more accurate than the current human-intermediated approach will not be sufficient. Notwithstanding all its flaws, the human psychology and political economy is such that society will demand a very high, near 100%, accuracy from any electronic/digital system that seeks to replace a human-intermediated system.

3. There are some important market insights here. Econ 101 would have it that since health care has inelastic demand, and also given the sustained high economic growth rates, one would have imagined a large supply side of hospitals in India who deploy such solutions. Similarly, one would have imagined that Indian startups would have grabbed the opportunity presented by developing AI solutions on patient triaging, consultation scribing, diagnostics, EHR, etc.

I’m not sure about whether the Indian market can support the demand for such apps and services at the price points required to sustain domestic innovation. Sample this on the limited consumption potential of the Indian economy, and the challenge of making money in the country.

While India’s population of 1.4bn offers enviable scale, its market has proven difficult to monetise. According to Sensor Tower, Indian internet users downloaded 24.3bn apps in 2024 and spent 1.13tn hours on them, but total spending was just $1bn.

The advantage domestic startups have is their lower price point. But any scaling pathway for startup innovation that relies on price point may be no scaling pathway at all. A business model that relies on a low price point does not generate the cash surpluses required to finance the significant R&D investments required to refine such products. The net result is that genuinely innovative companies remain elusive.

I blogged here about the demand-side constraint arising from the deeply price-sensitive nature of consumers and the small size of the consumption class with disposable incomes. It also does not help that Indian firms, including startups, do not have a culture of investing in R&D beyond that required to grow their ongoing businesses.

4. The dominant narrative on startups, shaped by the Silicon Valley giants, is that of scaling by growing exponentially. But contrary to this, apart from killer apps and the few platforms, the main scaling pathway for ambient scribing startups like Eka Care or Dawnbreak may well be through large IT companies already serving the same or similar market segments. The vast majority of these solutions, and not just in health, are limited in their scope as stand alone applications. But this changes dramatically once they are integrated with a larger ecosystem platform to leverage network effects.

These startups will struggle to get the big users, large hospital chains like Apollo and Max, to replace their bespoke legacy solutions or those supplied by established foreign vendors. This is a daunting market access challenge that even the startups with great solutions will face in markets like India.

It raises the important point about a model of the digital economy where startups develop innovations which in turns scales through large firms. This not only makes the large firms even larger, but also maximises value capture by them.

It also raises the question of whether the startups should pursue getting the big hospital chains to become their investors. This will also align the incentives of the hospitals to integrate these solutions with their EHR and legacy systems.

5. It is here that the failure of India’s software behemoths to build on their first-mover and other competitive advantages assumes significance. Both TCS and Infosys have long experience in global hospital systems management, including multi-year, multi-billion-dollar contracts. Hospital tasks management applications should have been a natural area of business development for these IT majors. But Indian software firms have struggled to break out from their services-led business model and embrace products and solutions which require high R&D investments.

IT services still dominate with exports set to reach $210bn this financial year, India Ratings and Research forecasts. It has been a powerhouse industry for India but as IT services presented so much low lying fruit, the sector sucked up tech talent and capital from elsewhere. India’s SaaS sector in particular punched below its potential as a result. Software majors treated their services businesses as cash cows, deploying a small share to intellectual property assets. The 10 largest IT services companies had consolidated profits of $114bn in the past decade; 75 per cent of this was paid out via dividends and buybacks.

While the top five Indian IT firms had free cash flows of nearly $13bn in the 2023-24, their R&D investment was a pitiful 0.88 per cent of sales.

6. Finally, what can public policy do to solve some of the scaling challenges? An India Stack for digital payments is unlikely to work for the far more complex area of EHR. Public policy cannot solve market coordination problems (like sharing APIs to allow integration and inter-operability), except in some contexts by defining standards. Public sector driven demand-side channels like Ayushman Bharat can gently force some standards.

The approach of supporting scaling by procuring for use in public systems runs into the problems of punishing public systems with second quality or inferior products and creating perverse incentives among the startups. Providing a small sample of public hospitals does not address the market scaling challenge arising from network effects, besides also creating procurement problems even if the solution is found effective.

Courts as co-designers of public policy in India

noreply@blogger.com (Urbanomics) — Mon, 02 Mar 2026 01:43:00 +0000

The Supreme Court of India has delivered two highly consequential judgments in the first two months of the year.

This is in the long list of judgments in the last decade-and-half, some of which have clarified and stabilised the law, and others have introduced deep uncertainties. These judgments have made courts virtually co-designers of policies on critical aspects of the economy, like resource management and taxation, and co-regulators of important sectors.

In the first judgment, on January 15, 2026, the Supreme Court ruled that the US private equity firm Tiger Global must pay tax in India on its 2018 sale of its 17% stake in e-commerce giant Flipkart to Walmart for $1.6 billion. It overturns a 2024 Delhi High Court decision that allowed Tiger Global to claim tax relief under the old India-Mauritius double-taxation avoidance treaty. The High Court had agreed with Tiger Global’s claim that its gains were shielded from Indian tax because the investment was held through entities that had tax residency status in Mauritius. The government had changed the Indo-Mauritius double-taxation treaty in 2016 through the General Anti-Avoidance Rules (GAAR) which made gains from the sale of Indian shares taxable even under treaties if they were “impermissible avoidance arrangements”. However, it exempted investments made before April 1, 2017. Tiger Global’s investments predate the change.

Indian tax authorities rejected the claim and argued that the Mauritian firms served as conduits and were used only to avoid taxes, with no real business purpose. The Supreme Court… ruling that tax certificates alone do not guarantee treaty benefits and that the investment structure lacked real commercial substance. It held that foreign investors cannot rely on complex offshore set-ups when those entities don’t carry out genuine business activities of their own. JB Pardiwala, one of the two judges, wrote: “Taxing an income arising out of its own country is an inherent sovereign right. Any dilution of this is a threat to a nation’s long-term interest.”…
India and Mauritius signed a protocol in 2024 amending their tax treaty to benefit only companies with legetimate businesses and not shell companies set up to avoid tax… India had long tried to attract foreign capital by encouraging investments from companies with structures in countries such as Mauritius, Singapore and the Netherlands, signing treaties to help investors avoid paying taxes twice… Between 2000 and March 2025, Mauritius alone accounted for about $180bn (£133.9bn), nearly a quarter of all foreign direct investment into India, according to official figures.

This effectively means that GAAR’s look-through of treaty structures overrides any treaty claims in the cases of transactions lacking any commercial substance or made solely to avoid taxes. In this backdrop, how does India compare with other jurisdictions in the taxation of gains from share sales?

After the Vodafone case, the government had, in 2012, retrospectively legislated for taxation of offshore share transfers in a foreign company where the underlying shares derive “substantial value” from India. While this is the legal foundation underlying the Tiger Global ruling, it overrides the grandfathering provision in the legislation for prior deals. See below the indirect transfer taxation regimes across countries, which show that indirect transfer taxation is confined to real estate in most developed economies.

In conclusion, the ruling, which could reshape how foreign investors exit their Indian investments, sets out a tougher interpretation of tax treaties. It allows authorities to deny treaty benefits if offshore investment structures are deemed sham entities with little commercial substance, even when investors hold valid documentation. The judgement gives India wide powers to scrutinise any offshore corporate deal. It also operationalises the Vodafone legislation.

In the second judgment, on February 13, 2026, in the State Bank of India Vs Union of India, it ruled that telecom spectrum is a natural resource held in public trust and the right to use it does not form part of the insolvency estate of a telecom service provider (TSP). Given that the spectrum (and associated license) is the bedrock for TSP’s business, it forms the basis of TSP’s bankability. MS Sahoo and Raghav Pandey write,

This ruling effectively places the most valuable asset of a TSP beyond the reach of a resolution plan. The likely consequence is the liquidation of stressed TSPs and the fragmentation of the insolvency framework, contrary to legislative design… the ruling rests on a conceptual overextension. The Public Trust Doctrine (PTD) is applied without sufficient regard to the evolution of the modern regulatory state and market economy… The PTD emerged to protect communal access to resources such as air and water, as a check against the privatisation of the commons… In telecommunications, the state has translated the PTD into a detailed statutory and contractual framework of auctions, licences, and contracts. That framework explicitly permits the allocation, trading, and transfer of spectrum-usage rights.
When the state auctions spectrum, it does not abandon the public trust; it operationalises the use through market mechanisms. A sovereign resource is converted into a regulated, tradeable economic entitlement, juridically embodied in the licence. For the Insolvency and Bankruptcy Code (IBC), 2016, it is this statutory-contractual construct that matters, not the doctrine in abstraction. The judgment does not fully distinguish between sovereign ownership of spectrum and the contractual licence conferring the right to use it. These operate at distinct juridical levels. Spectrum remains vested in the state at all times, while the licence is a statutorily recognised intangible right, acquired for valuable consideration… In accounting and economic terms, the money paid to acquire the licence exits the balance sheet and is replaced by an intangible asset of corresponding value… Banks and financial institutions lend money to TSPs secured against these licences; that security ought not to be diluted by invoking the PTD.

This decision makes India an outlier in the treatment of spectrum in insolvency proceedings. The US, UK, EU, Japan, Brazil, and Mexico treat telecom like other sectors in bankruptcy proceedings.

Not only does this ruling make India an outlier in telecom spectrum treatment in insolvency proceedings, but it also makes telecom an outlier among other sectors, even in India.

While mining leases, airport, port, and road concessions, and electricity PPAs can be transferred with regulatory approval, the same is now prohibited for telecom spectrum. This is despite telecom having similar features - time-bound lease, competitive allocation, revenue sharing, and regulated transfer - as the others.

While all countries recognise public ownership of resources, with this ruling, India now diverges from others in the legal test to decide whether a government-granted license or concession is part of the insolvency estate and therefore transferable or usable in resolution.

The ruling effectively reduces regulated asset values, raises the cost of telecom finance, weakens restructuring scope, and makes telecom concessions riskier than other infrastructure concessions, all this due to an avoidable regulatory interpretation.

ChatGPT has this compilation of the Court decisions in India that have reshaped economic regimes in their respective sectors. The estimates are unverified and can be significantly off.

Of these, the cancellations of the coal blocks and 2G licenses, and the spectrum insolvency are major deviations from global norms. Also, on a global comparison, India has a relatively large number of Supreme Court decisions that rewrote regulatory frameworks, applied law retrospectively, and changed business models.

In countries like the US, UK and EU, courts rarely cancel licenses or concessions, retrospective orders are uncommon, and regulatory regimes are usually shaped by legislatures and agencies. Courts in these countries leave policy design and regulation largely to administrators, legislatures, and independent regulators, and prefer to only interpret statutory frameworks.

In contrast, Indian courts have taken an absolute view on public trust doctrine (without regard for its economic dimensions), favoured substance-over-form in taxation, and assumed the powers of broad and unconstrained scope in the judicial review of allocation processes. India remains distinctive in the scale and frequency of judicially driven economic restructuring, with courts almost acting as co-designers of policies on public resource management and taxation.

The concern here is not so much with the nature of the decisions per se. After all, some of these decisions are clearly progressive - substance-over-form in taxation, stricter ever-greening standards on patents, homebuyers as financial creditors - and should be adopted more widely globally.

Instead, there are two important concerns. One, at a fundamental level, should courts be making such definitive policy decisions? The argument that courts have stepped in where governments have abdicated cannot be taken as an answer. This is a slippery slope that risks destabilising the constitutional checks and balances.

The second concern is about the economic uncertainty induced by rulings that upend economic regimes (or rules of the game) based on which business decisions were taken. If investment decisions were taken based on a prevailing interpretation of the regime and the same was widely accepted (governments gave permissions, financial institutions gave loans, rating agencies did not consider them risks, auditors audited statements, tax authorities generally overlooked them, etc.), then a subsequent substantive (logical, ethical, etc.) interpretation should not form the basis for reversing it with retrospective effect. The only exception to this should be if it is established that there was a malafide intent in the decision made by the government entity.

The economic damages are exacerbated by the consequential decisions forced upon government entities. For example, the cancellation of one license immediately leads to the cancellation of all similarly placed ones. The rejection of a tax avoidance claim immediately triggers tax officials across the country to scout for similarly placed cases and issue notices to them.

I’m not sure whether the legislative or executive can do anything to address these concerns. Its answer lies in the judicial realm itself, in the form of restraint while courts take such decisions. The Supreme Court could use the opportunity presented by something like a Public Interest Litigation (PIL) or a case to lay down certain judicial principles that should guide judicial rulings on cases with sectoral policy impacts.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 28 Feb 2026 04:17:00 +0000

1. Europe too has its chokepoints over China and the US.

A group of experts called the Geostrategic Europe Taskforce last week published a report which “identifies 41 critical chokepoints where China depends on the EU for more than 80 per cent of its imports, and 67 such dependencies for the United States. These span essential inputs including insulin, pharmaceutical intermediates, medical technologies, and specialised machinery for agriculture, paper production, and industrial processing.” And the German economic think-tank Dezernat Zukunft has also just released a study highlighting that “Europe has more cards than it thinks. We control 80 per cent of US uranium imports. Siemens dominates the turbines US data centres desperately need.”

2. US and Western VCs are struggling to exit their China investments.

Ten of the biggest buyout firms with investments in China including KKR, Blackstone and CVC had zero publicly disclosed complete divestments from mainland Chinese portfolio companies in 2025, according to data from providers PitchBook and Dealogic.

3. Declining attention spans.

A 2022 survey by King’s College London found that 49 per cent of UK adults feel their attention span is shorter than it used to be. Forty-seven per cent feel “deep thinking” has become a thing of the past. Studies that monitor people’s attention in their real-world environment show that since 2004, the average time people stay focused on a single task has dropped from about 2.5 minutes to roughly 47 seconds, according to data tracked in Attention Span, a book by Gloria Mark, professor of informatics at the University of California, Irvine.

4. South Korean stock markets rose 76% last year to become the best-performing major market.

Retail investors have bought a net Won6.3tn ($4.3bn) of locally listed stocks since the start of 2026, according to Korea Exchange, the country’s securities market operator. In addition, they have pumped Won13tn into Korean ETFs, helping boost the benchmark Kospi by 35 per cent this year and making it one of the world’s best-performing stock market indices for the second year running... The number of individual active stock trading accounts in Korea topped 100mn for the first time last month — the equivalent of roughly two accounts for every member of the population. Deposits held at retail brokerages, reserved for stock purchases, hit a record Won103tn this month, up from Won87tn at the end of last year. Margin balances (the funds investors have borrowed from brokerages to buy stocks) have also surged to a record at Won31.5tn.

5. The MAGA right and progressive left converge in their opposition to emerging AI trends.

AI opposition spans the political spectrum. Democrat Senators Bernie Sanders and Elizabeth Warren warn against corporate power concentration and job displacement, while Maga strategist Steve Bannon and Republican Senator Josh Hawley spread warnings about the dangers of empowering tech billionaires... The list of grievances being raised against AI is varied. At the local level, communities are fighting the construction of data centres that they worry will disrupt resources such as water, land and electricity... Meanwhile, in Hollywood, celebrities have launched the “Stealing Isn’t Innovation” campaign against the use of creative work for AI training, and parents, along with 37 state attorneys-general, are pressing for accountability after Grok, xAI’s chatbot, facilitated the generation of non-consensual nude images of women and children.

6. China announces restrictions on exports of rare earth magnets and other critical minerals, in the guide of "dual-use materials", to dozens of Japanese companies, especially vehicle makers.

7. Contrary to Elon Musk's claims that space-based data centres are three years away, they may be decades away.

Google’s satellite-based data centre initiative, Project Suncatcher, estimates that launch costs would need to fall below $200 per kilogramme (a sevenfold reduction from current levels) before this becomes economically viable. That threshold isn’t expected until the mid-2030s. Even if costs do fall, the components required — including radiation-hardened servers, on-orbit communications infrastructure and in-space servicing capabilities — do not yet exist at commercial scale. Adding to the conundrum, orbital data centres turn routine IT management into a complex space systems problem. On Earth, a failed server can be replaced in minutes. In orbit, that task requires either sophisticated in-space servicing or acceptance of degrading performance and stranded capital that becomes orbital debris as components age and fail. Burning satellites up when they become obsolete is not environmentally neutral: the process injects metal particles into the upper atmosphere where they can affect winds, temperatures and ozone chemistry.

8. On the importance of manufacturing for national economic development.

Most successful development stories — from Britain’s Industrial Revolution to South Korea’s transformation to China’s ascent — have run through the factory floor. Manufacturing drives productivity through economies of scale that services struggle to replicate. It generates innovation spillovers that ripple through entire economies. It enables countries to access global markets at a scale services cannot match. And contrary to fears about automation eliminating manufacturing jobs, countries like China demonstrate that manufacturing can absorb hundreds of millions of workers even as robots proliferate... Digital platforms, financial services, and business process outsourcing... cannot replace manufacturing’s role as the engine of sustained productivity growth and structural transformation...

Between 1750 and 1950, the West’s establishment as the world’s economic hegemon was fundamentally a process of becoming the world’s manufacturing hegemon. Since 1950, this pattern has persisted with remarkable consistency. A World Bank study published in 2008 identified 13 countries that sustained annual growth rates of 7% or higher for a period of 25 years or longer. Among these growth miracles, only two — Botswana and Oman, both small countries with highly idiosyncratic economic structures — achieved this without manufacturing-led development... recent data by the UN Industrial Development Organisation (UNIDO) arrive at similar conclusions. In their Industrial Development Report 2026, they highlight that 64% of growth episodes over the last 50 years can be directly attributed to manufacturing... Manufacturing firms spend heavily on research and development (R&D), generating strong innovation spillovers throughout the economy. In fact, manufacturing is attributed to 53% of global R&D activity. Manufacturing provides the material foundation for innovation, creates demand for new technologies, and enables the accumulation of productive capabilities that underpin further innovation.

9. Britain has a peculiar worsening trend in graduate fortunes.

10. Good illustration of how regulations may be stifling European business environment. From Pieter Garciano

The whole point of the AI Act, is to create an extremely consistent and level playing field across all of Europe to allow like companies to face a much larger market straight away. The problem is that because of directives, the actual enforcement of a given law is left to the member state and the member states are ordered to create their own regulatory bodies. So for example, in the case of the AI Act, every single member state is ordered to have a notifying authority and an enforcement authority... these different regulators, they talk to each other, but they’re not necessarily forced to agree with each other... And so you have cases where the Irish regulations happened with GDPR, the Irish Data Protection Authority said to Meta, this is excellent. You can do X or Y. And then the Austrian and German data protection authorities disagreed and then fine Meta billions of euros. And so, this is a case where the law, even if you agree with the intent of the law, the way it’s currently being executed, which is through directives, makes it so that you’re going to always get an extremely high friction and fragmented regulatory system... They currently have, I think the count is between these four laws, they’ve created 270 different tech regulators... And that of course has really distortionary effects as well for what kind of basically very large fixed cost. And so if you’re a large company, if you’re a Google or a Meta, you have a thousand guys in your Brussels compliance office and they’re really good at this. But if you’re a smaller company, then you actually really struggle with figuring out what the 270 different bodies want you to do.

European regulators have been influenced by beliefs against big corporations and their market power, which explains both their anti-trust actions against Big Tech and refusal to approve European mergers like those between Siemens and Alstom.

11. China is leading the race for humanoid robots, including those which resemble human beings and mimic their facial expressions while talking. This is a real advance.

Galbot’s silvery humanoid folds T-shirts, retrieves a bottle of water from a shelf and rolls walnuts about in its hands. Developing multifunctional hands has been a major challenge for robot makers, requiring advanced sensitivity and a high density of mechanical components. The Beijing-based company says its robots can be used for household tasks or in retail contexts such as shops and pharmacies... Galbot, backed by Chinese battery giant CATL, also showed its humanoid picking up irregular shards of broken glass, suggesting “integration of perception, grasp planning, and controlled force and precision, differentiating the performance from purely staged movement”, according to analysts at Morgan Stanley.

12. Is the National Green Tribunal (NGT), the primary appellate authority against orders of the Ministries of Environment of state and central governments, becoming a captive of ease of doing business?

Between 2020 and 2025, of the 329 appeals filed by citizens and activists against the grant of clearances by the Government, only in 20% (65 cases), did the NGT rule in favour of the appeal. Conversely, when the project’s proponents appealed against the denial of clearances by the government, in nearly 80% (126 of 160) of the cases, they secured relief. This is not a historical norm. Data from 2016-2019 shows a more balanced era where relief for both sides hovered between 18% and 31%. This pro-project trend has accelerated sharply in the last 24 months. Between 2024 and 2025, only 7% of appeals challenging clearances were successful. In contrast, 88% of industry-led appeals against clearance rejections got relief... of the 264 unsuccessful citizen appeals during 2020–2025, a significant portion was dismissed on technical grounds, labelled “time-barred” for more than 90 days delay in filing. The rest were dismissed as “not tenable,” or lacking “any merit.”

13. Excellent article by Richard Hurowitz on how gum arabic, a sap that comes from the acacia tree, is fuelling the civil war in Sudan, joining Sierra Leone's blood diamonds and DRC's cobalt in fuelling their respective civil wars.

Found in everything from soft drinks and candy to cosmetics and pharmaceuticals, gum arabic is a critical ingredient for Coke and Pepsi and gives an M&M its distinctive shell. Commonly listed as E414 on labels, it’s an ingredient in pet food, chewing gum, lipstick, pill capsules and throat lozenges... the groves of Sudan’s subsistence farmers produce 70-80 per cent of the global supply. And no one has yet found an effective synthetic substitute. Sudan exported some 60,000 tonnes of its “white gold” in the year prior to the conflict. It is no surprise, then, that multinationals have been stockpiling gum arabic since the civil war started...

It is also, tragically, being used to finance what the UN has declared the world’s worst humanitarian disaster. Since April 2023, Sudan has been engulfed in a civil war between the government in Khartoum’s Sudanese Armed Forces and the rebel Rapid Support Forces. The war has drawn in foreign powers including Saudi Arabia, the UAE, Turkey, Russia and Egypt... The crisis in Sudan dwarfs any other current conflict on every measure... According to a former US envoy, over 400,000 people have died. More than 15mn have been displaced. Tens of thousands of Sudanese have been massacred, there is widespread sexual violence and a man-made famine has sent millions into starvation... Both sides have used the commodity to finance their efforts... and the SAF continues to export what it can while the RSF smuggles its supplies abroad... The RSF controls large portions of the main gum-producing regions in Darfur and Kordofan where they have looted warehouses, seized shipments and imposed fees on harvesters and traders. Tens of millions of dollars’ worth of gum arabic has been stolen, smuggled and sold to finance their military operations. At the same time, the SAF controls Port Sudan, where taxes on gum arabic exports fill its coffers with revenue.

14. The killing of Nemesio Oseguera, the leader of Mexico's Jalisco New Generation Cartel (CJNG) has once again drawn attention to Mexico’s pervasive drug gang problem.

Derisking the public funding of innovation

noreply@blogger.com (Urbanomics) — Tue, 24 Feb 2026 03:45:00 +0000

The Government of India have recently concluded the first round of applications for accessing innovation funding through the $10.5 bn Research Development and Innovation Fund (RDIF) scheme. It has chosen the wholesale funding approach of financing alternative investment funds, development finance institutions, non-banking finance companies, and focused research organisations (FROs), which in turn give loans to or take equity in private firms and startups engaged in innovation.

What model of innovation funding generates the greatest bang for the buck in terms of achieving the primary objective of catalysing innovation?

The additionality from public funding of innovation is that it is risk-tolerant, concessional, and patient compared to commercial capital. It can be blended with commercial capital to derisk and thereby expand the envelope of investible startups. This can be done through two approaches.

One approach would be to fund startups by investing in a fund of funds (i.e., to be an LP in a startup fund). This approach would require only diligencing the fund and leaving it to diligence the individual investments. It would leave the portfolio building responsibility to the fund, albeit within the broad sectoral scope defined by the public fund. A flip side is that the fund could play it safe and avoid the riskier bets, and use the public funding to merely juice up its returns.

The other approach would be to co-invest with commercial investors. This would require significant in-house expertise in the due diligence of startups. In theory, it would ensure tight alignment with the specific policy objectives of the government and target investments to the riskier startups. But in practice, public decision-making processes are likely to detract from the objectives.

There are two possible objectives associated with public funding of innovation startups. One, to de-risk and expand the envelope of investible startups. Two, fund specific products or solutions that are considered strategically important.

In terms of these two objectives, the policy question is which one of the two approaches generates the greatest bang for the buck. An analysis of the experience of deployment of public funds through the two approaches reveals that the fund of funds approach is generally superior, except where it is required to target strategically important technologies or firms.

Here’s the list of a few such public funds from Europe and elsewhere, assessed in terms of their mobilisation ratios (or private capital raised per unit of public fund).

Here is a comparison of the two approaches in terms of various considerations.

Clearly, if the priority is to maximise the volume of private capital mobilisation and to catalyse the VC market, the fund-of-funds approach is superior. However, if the priority is to catalyse a few strategically important firms or technologies where private capital is reluctant, then co-investment is useful.

In emerging markets like India, where the domestic VC funding for genuine technology innovation (as opposed to imitating technologies already mainstreamed elsewhere) is negligible, there’s a risk that a fund-of-funds approach, at least for some years, could end up catalysing and unlocking the supply of venture capital finance, rather than the supply of innovative technologies. This risk will persist even with tightly prescribing the segments where the funds can invest, given the practical difficulties in monitoring, let alone policing, them. And commercial funds will have the incentive to prioritise the use of public funding to maximise the derisking of their capital instead of expanding the envelope of investible startups. This would be the long-route to catalysing innovation (or catalysing innovation primarily by catalysing risk capital funds).

In the circumstances, it is important to consider the option of government co-investing directly in startups with private investors to provide sufficient de-risking of their investments. Such derisking can be done by public funds taking the first-loss equity buffer, offering higher liquidation preferences for private capital, capping public returns, anti-dilution warrants, offering buyout options at modest returns, equity conversion as subordinate capital or at a discount, etc. The graphic below captures the comparative de-risking effect of public capital.

The challenge with co-investment, of course, is the administration of such funds by a public entity and getting its governance right. While there are good examples of co-investment like the Israeli Yozma fund, European Innovation Council, and the British Enterprise Capital Fund, they have been exceptions to the generally adopted fund-of-funds approach.

In the circumstances, DFIs are a good platform. While DFIs have traditionally focused on infrastructure financing and industrial growth, they are well placed to directly support co-investments by governments by deploying the full suite of instruments mentioned above, based on the specific nature of the investment proposal.

I am not sure how many of the above really invest in risky startup-driven innovations as opposed to investing in promising established SMEs in emerging industries.

As a note of caution, and this applies to the RDIF’s DFI window too, the experience of India’s infrastructure DFIs in actually derisking and catalysing infrastructure market segments has not been encouraging. Instead, they have most often been found chasing the market. See this and this.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 21 Feb 2026 02:32:00 +0000

1. On the origins of infrastructure financing in the UK.

In the summer of 1858, Britain’s parliamentarians soaked the curtains in the Palace of Westminster with lime chloride in an attempt to counter the “Great Stink” emanating from the river Thames. It failed. The prime minister demanded the Metropolitan Board of Works construct a sewerage system, legislating to allow the board to raise £3mn. This was to be repaid by a three-penny levy on all London households for 40 years. By 1900, the municipal bond market in England was about 50 per cent of the market for UK government debt. Today it is just 4.7 per cent. Back then, most infrastructure projects were not only financed by the private sector but also backed by hypothecated cash flows from money raised locally. For example, the debt for the 1892 Elan Valley Aqueduct to pipe water into Birmingham was funded by an increase in water rates on businesses and households there. So the residents of, say, Manchester were not funding infrastructure elsewhere.

2. India is marching ahead on adoption of electrotech.

3. Germany is the poster child for central bank independence.

4. Spurred by surging data centre loads, electricity demand is rising sharply in the US.

Data centre power demand will surge from 34.7 gigawatts in 2024 to 106GW by 2035, according to BloombergNEF, a research group, equivalent to more than 80mn homes. Overall US electricity demand is forecast to jump by a quarter by 2030 and by 78 per cent by 2050, compared with 2023, according to consulting firm ICF... Between January and November, the latest month for which data is available, the cost of electricity for residential customers in the US increased by 11.5 per cent.

5. Most Indian state boards focus on memory and conceptual understanding, as opposed to analysis and application.

6. At 16%, US after tax corporate profit margins are at historic highs.

7. Nick Bloom, Paul Mizen, Gregory Thwaites et al have an estimate of the costs of Brexit (HT: Adam Tooze)

These estimates suggest that by 2025, Brexit had reduced UK GDP by 6% to 8%, with the impact accumulating gradually over time. We estimate that investment was reduced by between 12% and 18%, employment by 3% to 4% and productivity by 3% to 4%. These large negative impacts reflect a combination of elevated uncertainty, reduced demand, diverted management time, and increased misallocation of resources from a protracted Brexit process.

8. Some data on students and migrants from Asia in the US. Even as enrolment of Chinese students has declined, that of Indian students has taken off since 2014. While Chinese students were mainly for the UG programs, Indian students have been mostly for PG studies. (HT: Adam Tooze)

Indian students dominate the workforce of computer science workers.

Similarly, Indians dominate physicians and Filipinos dominate nursing.

9. India has one of the lowest free floats in its equity markets.

10. Japan's public debt at 237% of GDP is way off the charts, and considerably constrains Sanae Takaichi's room to manoeuvre.

11. Tej Parikh writes that UK's biggest economic challenge is its political instability.

The UK doesn’t have a productivity puzzle. The causes of Britain’s weak underlying growth are well known and discussed ad nauseam. Why policymakers aren’t delivering is the bigger conundrum. Instability undermines business investment, hiring and planning decisions, and absorbs the political bandwidth that could be used to address lacklustre growth... Uncertainty and slow growth weaken the appeal of UK assets too. Pound sterling and British stocks have underperformed relative to peers over the past decade. Long-term UK government borrowing costs have remained elevated compared with other G7 nations, having come under frequent selling pressure thanks to fiscal mishaps... For all the turbulence, Britain remains attractive. London remains the leading European destination for foreign direct investment. The country’s strengths in finance, university research, tech and life sciences are draws. Cheap assets add to the allure.

12. Fascinating account of China's largest hotel chain, H World, with 12,700 hotels, adding 1700 hotels in 2025, aiming for 20,000 hotels by 2030, and took in 8.3 m guests during last year's Lunar New Year holiday. As a reference, Marriot has 10,000 hotels worldwide.

H World was launched in 2005 by Ji Qi, co-founder of online travel booking site Ctrip, after he took inspiration from the multi-brand French group Accor... Its Hanting Inn brand, a fixture of the streets of major Chinese cities, often charges well below Rmb300 ($43) a night, while mid-range Ji Hotels typically cost slightly more. H World has several other brands, while internationally it also operates German brand Steigenberger. Its franchise model mirrors an approach that other Chinese businesses have used to expand in consumer sectors from bubble tea to fast food. For the “vast majority” of its franchised hotels, H World retains a degree of control, sending in hotel managers on its own payroll under what it calls a “manachise” approach. In the US, “typically the franchisees decide almost everything . . . we think in China this would not work,” said He. “A lot of people would not abide by your rules.”

13. VC funding for India's tech startups has fallen 73% since 2021, which also coincided with the rise of Byjus.

14. Fascinating account of the Jeffrey Epstein world.

15. Shruti Rajagopalan has a good essay on India's AI ambitions, and more. This on regulation.

The EU went first and went heavy, a binding cross-sector AI Act with tiered risk categories, compliance obligations, and a governance apparatus that could employ a small city. China took the authoritarian-efficiency route. Regulate fast, regulate specifically, and make sure the state retains control over what models can say and do. The US, characteristically, has been light touch at the federal level, leaving governance to a patchwork of executive orders, state laws, and vibes. India, with these guidelines, has landed somewhere interesting, closer to the US in its instinct to avoid a standalone AI law, but far more deliberate in articulating why it is choosing not to regulate horizontally yet. The framework’s core bet is that India’s existing legal infrastructure (the IT Act, the Digital Personal Data Protection Act, sectoral regulators like the RBI and SEBI) can handle most AI risks if enforced properly and updated where needed...

Do not regulate the technology itself, govern its applications through the regulators who already understand those domains. Build incident databases so you learn from failures instead of pretending to prevent them through preemptive compliance theater. Use “techno-legal” mechanisms (standards, system-architecture-level controls, provenance tools) so that compliance scales without armies of auditors. Create sandboxes so regulators can see what actually goes wrong before writing rules. The explicit preference for “innovation over restraint,” listed as a core principle, rejecting the EU’s precautionary posture. Both committees looked at Brussels and decided that regulating AI the way you regulate pharmaceuticals, before you know what the side effects actually are, is a bad trade for a country where AI adoption is still nascent and unevenly distributed... The liability framework it recommended is graded. The regulated entity remains liable to consumers for any losses, but first-time failures where the entity followed prescribed safeguards and reported promptly would not automatically trigger full supervisory penalties. A rigid liability regime that punishes every probabilistic error will cause institutions to constrain AI capabilities to the point of uselessness.

16. Shyam Saran writes about Marco Rubio's speech at the Munich Security Conference, describing it as an "unabashed white, racist manifesto".

His remarks celebrated the history of conquest, exploitation, barbarity, and even ethnic cleansing, which has marked the history of Western imperialism and colonial empire-building across Asia, Africa, and Latin America. He wants this to be a source of pride and inspiration, not something to “atone for purported sins of past generations”. What is perplexing is that the history of the world after the Second World War, which is often described as an American era, is instead seen as a period of Western decline:
“But in 1945, for the first time since the age of Columbus, it [i.e. the West] was contracting. The great western empires had entered into terminal decline accelerated by godless communist revolutions and by anti-colonial uprisings that would transform the world and drape the hammer and sickle across vast swaths of the map in the years to come.” Anti-colonial uprisings, which would include our own against British colonialism, are not celebrated as struggles for freedom and human dignity but as evidence of the abdication of the Western will to rule. Strange that this should come from a representative of a country that is celebrating 250 years of its own successful war of independence against British colonialism.

17. AI is leading to changes in software industry business models, resulting in less predictability and more uncertainty.

Software companies have, for decades, sold their wares on a “per seat” basis, where an employee gets unlimited use of a package of tools. Think of the traditional Microsoft 365 licence... In a world of AI “agents” carrying out duties autonomously, that model makes less sense. The unit of account will no longer be users but tasks completed, queries undertaken, and data “tokens” used. Sticky, predictable, year-round software-as-a-service revenue — the kind of thing that private equity firms love because it makes companies easier to load up with debt — may become an endangered species. Some are already embracing the post-seat era. Snowflake, a data management software maker, charges based on consumption, as does Databricks, an unlisted hotshot valued at $134bn, according to Crunchbase. ServiceNow is one of many working on hybrid models, where monthly fees meet pay-as-you-use add-ons... consumption-based pricing... Software companies’ predictability was an asset that contributed to high valuations.

18. Europe telecom industry facts of the day

Europe has more than 44 mobile operators that each have more than 500,000 subscribers compared with eight in the US and just four in China, according to industry group Connect Europe’s State of Digital Communications 2026 report.

19. China high-speed railway facts.

China’s railways have in recent days been ferrying about 20mn passengers a day, with half a billion train trips expected over the 40-day lunar new year period... Nearly three-quarters of passengers will travel at speeds of greater than 200kph, streaking across the country in the white and silver high-speed trains that have become a defining symbol of China’s industrial might. In December, China reached 50,000km of high-speed rail, enough track to circle the globe, compared with 8,500km in the whole of the EU as of 2023. Just over two decades after it was launched, the network now links 97 per cent of cities with populations of more than half a million... China opened its first high-speed passenger line in 2003 between Qinhuangdao and Shenyang in the north-east, with speeds of 200kph. The World Bank estimated in 2019 that China spent about $17mn to $21mn per kilometre on high-speed rail... Another 20,000km of track is planned by 2035...

China has benefited from a combination of relatively cheap land, enormous scale, standardised designs and a permissive regulatory environment, experts say. The country’s rail project is now overseen by China State Railway Group, a huge state-owned enterprise that operates the network and helps fund new line development. The group plans to invest Rmb520bn ($75bn) this year... The group’s total liabilities have mounted to Rmb6.4tn. China State Railway reported a modest profit of Rmb11.7bn in the first three quarters of 2025, following several years of losses during the Covid-19 pandemic. Analysts said profits from the freight network helped offset losses from passenger high-speed rail. Local governments typically share the burden of building and operating the tracks. But many are struggling with their own shaky finances following the pandemic and the collapse of the property market.

20. Finally, the US Supreme Court has struck down the tariffs imposed by Donald Trump under the International Economic Emergency Powers Act. Also this.

Demand and supply side constraints to rapid growth - the case of medical education

noreply@blogger.com (Urbanomics) — Fri, 20 Feb 2026 03:36:00 +0000

Business Standard points to a paradox in India’s medical education - post-graduate seats lying vacant amidst a shortage of specialist doctors.

It points to data from the Health Dynamics of India report by the Ministry of Health and Family Welfare.

Community health centres (CHCs) in rural India face an almost 80 per cent shortfall in specialists. As of March 2023, just 4,413 specialist doctors were available against a requirement of 21,964 across 5,491 CHCs in 757 districts, each centre serving an average population of nearly 160,000 per centre… The number of PG medical seats for MD and Diplomate of National Board (DNB) courses rose 157 per cent to 80,291 in 2025 from 31,185 in 2014, with the government planning to add another 2,000-3,000 seats by 2029… India generates over 123,000 MBBS graduates per year…

As a result, filling the seats on offer remains a challenge. After two full rounds of NEET-PG 2025, over 18,000 seats remained vacant, forcing the National Board of Examinations in Medical Sciences (NBEMS) to keep slashing qualifying cut-offs… candidates with zero percentile scores became eligible for counselling in further rounds… Zero percentile means candidates who scored the lowest in a test, or that none of the other candidates scored less. Such relaxations have become routine. Cut-offs were reduced to zero percentile in 2023, 2024 and, earlier, throughout the Covid years… Vacancies are most pronounced in private and deemed universities, which account for nearly 10,000 unfilled seats annually…

Specialities such as cardiology, radiology, gynaecology, orthopaedics, and general surgery traditionally being the most sought after. On the other hand, seats in non-clinical subjects such as pathology, anatomy and biochemistry have vacancy rates of 50-70 per cent, as many candidates prefer to drop a year rather than opt for these disciplines. However, doctors say even traditionally sought-after clinical specialities are now seeing gaps.

The article posits several explanations for the paradox, including high fees, poor quality in private colleges, mandatory service bonds, regional imbalances in seat distribution (half the seats being in the South), declining attractiveness due to safety and other concerns, lack of commensurate increase in MBBS seats, and so on.

Instead, I am inclined to argue that these are all symptoms of more basic problems. While there is no specific evidence, I feel that this highlights two first-order problems on both the demand and supply sides.

On the demand side, the vacancies reflect the poor quality of education in general and basic medical education in particular. What does it say about the quality of the MBBS education when nearly 2.5 lakh students could fill only 62,000 out of the 80,000 PG seats after two rounds of counselling, even at cutoff scores of 235-276 out of 800?

On the supply side, the sharp 2.6-fold increase in PG seats over a decade appears to have compromised quality. Does India’s medical education ecosystem have sufficient supply of good-quality teaching personnel (human capital) and well-equipped hospitals to adequately train the 2.6X increase in PG seats? I’m not sure.

This is the point made on multiple occasions in this blog about India’s problems of poor quality of human resources and the low capital base of supply across sectors that constrain sustained high economic growth. Fundamentally, high economic growth can be sustained only if there’s a broad enough capital base (physical, human, industrial, financial, and institutional) to support that growth.

This is also central to the larger point about high economic growth rates requiring the foundations of a broad base of human development and economic growth.

India's non-financial corporate bond market trends

noreply@blogger.com (Urbanomics) — Wed, 18 Feb 2026 02:15:00 +0000

Deepening of the non-financial corporate bond market has been the big endeavour of financial market reforms in India. I have blogged here and here, pointing to the limits to bond market financing of infrastructure sectors.

In the absence of readily available longitudinal data, I ran some queries on ChatGPT to estimate the landscape of India’s non-financial bond markets, issued by public sector units and private corporates, across different bond tenors, the respective shares of infrastructure and private placements in each tenor category, and comparison across countries. The data used are from RBI/SEBI, SIFMA (the US), AFME/ECB (Europe), and BIS/Brazilian Central Bank.

India’s bond market is dominated by private placement, skewed towards the short tenor, and issuance by the PSUs. A positive feature is the high share of infrastructure issuances.

The same result for the US showed up as below. The US corporate bond market is mostly through public placement, dominated by private corporates, and with the majority in longer tenors. The volume below is in Rs lakh crores.

The table below compares across India, the US, Europe (including the UK), and Brazil. India stands out for its dominance in private placements, a high share of public-sector issuance, and a very low share of long-tenor bonds. The private placement market is dominated by AAA and AA bond issuances, thereby squeezing out the vast majority of potential issuers. All three trends must reverse to deepen and broaden the bond markets.

How does the table look for tenor greater than 10 years?

Putting all of them together, we get the following charts. Brazil does a very good job of mobilising long-term infrastructure funds, in absolute value (see latter tables).

As a percentage of GDP, India does well in non-financial corporate bond issuance. Its challenge, as aforementioned, is with maturity depth and structural composition.

The total infrastructure sector bond raising is estimated in the range of Rs 2.2-2.4 lakh Cr, of which about Rs 1.3-1.4 lakh Cr is with tenor less than 5 years (55% raised by PSUs), and Rs 80,000-90,000 Cr with tenor more than 7 years (65% by PSUs). The table below has the approximate values in Rs crore.

Below is the graphical representation of the estimates.

As can be seen, the usual suspects - roads, power generation (thermal and renewables), power transmission, railways, ports, and airports - make up most of the bond issuance.

A comparison with Brazil is instructive. Brazil has managed to develop a deeper and broader market for private corporate bond raising, including in infrastructure. In 2011, it introduced the “Debêntures Incentivadas” (Infrastructure Debentures) to finance infrastructure projects. It offers tax exemption on interest income, is mostly issued for 7-15 years, and is used in transport, energy, sanitation, and renewables.

This is a summary of the comparison of the infrastructure bond markets in India and Brazil.

What have been the trends over the past ten years? Disturbingly, the share of private corporates in bond issuance has been falling, declining from over half to about a third. This may have been due to the focus on public capital expenditures through NHAI, Railways, PFC/REC. The share of long tenor bonds (>7 years) has risen only slightly from 8% to about 13-14%. Private placement route has remained stubbornly in the 90-92% range.

Given all the above, what are the policy takeaways?

Policy actions are required on at least three fronts. One, prioritised efforts to expand public placement, thereby ushering in greater liquidity and deeper markets. A practical intermediate pathway would be to promote the listing of existing privately placed bonds.

Second, diversify the issuer base away from PSUs by encouraging private infrastructure developers to issue long-term bonds by offering policy support through credit enhancement schemes, partial guarantee mechanisms, takeout financing, etc. The DFIs (NIIF, IIFCL, and NaBFID) should have a specific mandate to derisk infrastructure finance instruments.

Third, increase the tenor of bonds by expanding the use of partial credit guarantees, first-loss facilities, and blended finance models. This should also be complemented by demand-side measures to expand the pool of long-term buyers like pension funds, retirement savings accounts, and insurance funds.

On all these, the policy actions will be in the form of numerous small steps to simplify disclosures, documentation, listing requirements, listing processes, standardisation of bond structures, improvements on rating transparency, and so on. It must be complemented with initiatives like credit enhancements and guarantees, increasing the proportion allocated to long-term bonds for pension funds and insurers, revisiting risk-weights on long-term bonds, etc.

For references, I blogged here that India could take the lead in demonstrating how DFIs can work on both the demand and supply sides to de-risk infrastructure projects and crowd in long-term capital, respectively. I blogged here on how to reduce the cost of capital for foreign investments in the infrastructure sector, here on how to revise the credit rating framework in general, and here on de-risking and lowering the cost of capital of bank loans and de-risking the use of guarantees to crowd-in bank financing. All of these ideas are consolidated in this long paper.

Preventing small recessions risks big recessions

noreply@blogger.com (Urbanomics) — Mon, 16 Feb 2026 02:45:00 +0000

It is said that periodic episodes of small forest fires prevent the big ones, and smaller avalanches prevent the big ones. On the same lines, it can be argued that periodic episodes of equity market corrections and small recessions prevent the bigger crashes and recessions. In each case, the small episodes clear out the excesses and fault lines that continuously develop in any system and prevent their accumulation.

However, for a variety of reasons, over at least the last two decades, central banks and governments in the developed economies, especially the US, have pursued policies that have sought to prevent even such small episodes. This has led to an accumulation of excesses in the dark corners of the financial markets and the economy, whose implosion may be only a matter of time. The likes of an AI-led investment boom can only postpone the inevitable.

Tej Parikh has an excellent column which explains how an extended period of monetary and fiscal accommodation has contributed to plentiful cheap financing, eroded financial market discipline, kept zombie companies going, lowered business entry and exit, delayed recessions, and led to the accumulation of ever-increasing risks across the economy.

Sample these statistics about the trends with US recessions.

The US has only seen four recessions since 1982. But over the previous 40 years there were nine, and over the 40 years before that there were 10… The US economy was in recession for 58 months over the past five decades compared to 143 in the equivalent period prior, based on data beginning in the 1850s from the National Bureau of Economic Research… The past five cycles of US economic expansion — including the current one that began in the aftermath of the Covid-19 lockdowns — have averaged more than eight years, which is close to triple the average length of cycles before.

Thanks to quantitative easing, the US monetary base has expanded dramatically since the GFC, and equity market valuations have continuously soared.

The extended period of cheap money has distorted incentives by misallocating resources, keeping capital and people locked up in less productive parts of the economy, keeping alive zombie firms and funds, and weakening economic dynamism.

See also this graphical feature from Parikh on how economic dynamism is impeded by “statism, easy money, and risk aversion”.

It is useful here to step back and reflect on the role played by economic thinking. Economics has doubtless contributed to a better understanding of macroeconomic issues and the formulation of policies to address problems. In fact, it has played an important role in shaping the extraordinary period of human development and economic prosperity since the War.

However, economic thinking has also resulted in many undesirable trends and distortions. Arguably, the most important trend of relevance to our times is the regime shift in monetary policy from one that sought to control inflation to one that balances inflation control with backstopping the financial markets and economic growth.

While this regime shift in monetary policy is associated with the global financial crisis (GFC), it may have had its origins in the Greenspan put that emerged in the aftermath of the 1987 stockmarket crash. Since then, through a series of instruments, the scope and breadth of monetary policy actions have expanded continuously. It has been the big triumph of technocracy in economic policymaking.

Interest rate changes have come to be supplemented with central bank balance sheet expansion through liquidity injection windows, quantitative easing, macroprudential measures, yield control actions aimed at long-term sovereign bond rates, direct purchases of corporate bonds, and forward guidance actions.

What started as measures to ensure financial stability has now morphed into an institutionalised set of tools to backstop financial market declines, and thereby economic growth itself. There has been a wholesale reshaping of expectations among a generation of investors and market participants. This has resulted in a sharp erosion of the disciplining powers of the financial markets in capital allocation.

Economic thinking has emboldened governments on fiscal policy, too. The result has been the dramatic fiscal expansion, especially but not only since the GFC, as governments have run persistent large fiscal deficits to sustain economic growth. The US public debt to GDP ratio has nearly doubled since 2008.

Worryingly, these actions have engendered perverse incentives among politicians and policymakers. A generation has come to believe that fiscal and monetary policy offers an unlimited arsenal of options to stabilise equity markets and prevent recessions. The ideological cover provided by economists, coupled with the rising applications of these tools with little apparent costs, has emboldened them.

This is most evocatively captured in the unqualified “whatever it takes” assurance given by Mario Draghi, the President of the European Central Bank, at the height of the Eurozone crisis in 2012. It was followed up by the ECB in the 2012-15 period with its ‘Big Bazooka’ measures involving aggressive QE, liquidity windows, and reduction of rates to negative territory. He was merely following in the footsteps of Ben Bernanke during the GFC, and was followed subsequently by Jerome Powell during the pandemic meltdown.

Donald Trump’s arguments for lower rates must be seen against this backdrop. As a democratically elected leader, he is making a legitimate political choice of wanting to sustain high economic growth rates and continue the equity market boom. Further, never mind its consequences, he’s probably right in arguing that lower rates can help both political objectives, even if only for some time. Alan Greenspan, Ben Bernanke, Janet Yellen, Jerome Powell, and Mario Draghi made similar choices, especially in continuing monetary expansion far beyond what was required, to much acclaim and little pushback. Their decisions were accepted as technically correct choices. Donald Trump cannot be faulted for being upset at the apparent hypocrisy.

The political pressures to keep rates low are supplemented by the emerging high stakes of the big technology firms leading the AI charge. The two have become intertwined, also because of the outsized role of the surging AI investments in economic growth in the US. Nobody wants monetary policy to rock the boat in these euphoric times of impending transformative change.

It is therefore unsurprising that Kevin Warsh, the incoming Chairman of the US Federal Reserve, has already indicated his bias towards monetary accommodation, arguing that the productivity boom likely from AI adoption will create the space for interest rate cuts. Warsh has claimed that AI will trigger “the most productivity-enhancing wave of our lifetimes — past, present and future”. Never mind that his fellow economists think otherwise, and argue that it could raise demand and price pressures, at least in the short-term.

Interestingly, Warsh also argues in favour of easing bank regulation, another policy favoured by President Trump, whereas his colleague economists feel that it would increase the risk of a financial crisis.

John Maynard Keynes famously said, “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” It is equally likely that “defunct economists” are the slaves of “practical men” of the political variety. Kevin Warsh appears to be a likely candidate.

A problem with economic arguments is that the discipline allows one to make conflicting arguments grounded in theory. It is not surprising that a frustrated Harry Truman famously demanded a one-handed economist. Sample this on the likely impact of the AI-boom highlighted by Robert Barbera of Johns Hopkins University.

“The AI boom may generate a booming economy, shrinking budget deficits, higher neutral interest rates and comfortable shrinkage of the Fed’s balance sheet. Or we may experience a financial market crack-up, a deep recession, a dramatic rise for deficits, eliciting a return to zero short rates, a swoon for the dollar, and demands for another big dose of [balance sheet expansion].”

Jason Furman writes about the complicated nature of the relationship between productivity and inflation.

Over the long run, productivity growth does not determine inflation. Productivity reflects the economy’s real productive capacity; inflation reflects monetary policy choices. But sustained faster productivity growth does raise the economy’s neutral real interest rate. To prevent inflation, central banks must therefore maintain higher nominal rates. The mechanism is straightforward. Faster productivity growth allows households to save less because they anticipate higher future income, while prompting businesses to invest more because expected returns rise. Both of these boost demand and push up real interest rates. In the short run, an unexpected acceleration in productivity can influence inflation, but the direction is ambiguous.
Greenspan’s hypothesis was that higher productivity allowed nominal demand to grow faster without igniting inflation. Because wages adjust less frequently than prices, this initially showed up as slower price growth rather than faster wage growth. That dynamic may well have characterised the early years after productivity began accelerating in the mid-1990s. But there is a competing short-run effect that runs in the opposite direction. Anticipation of a sustained productivity boom can itself be inflationary, by lifting equity prices and household spending and by spurring business investment. At bottom, this is a timing race: does demand surge ahead of supply, or does supply expand fast enough to accommodate demand without inflation? In the late 1990s — just as today — there was no clear way to know in advance which would dominate.

Another Warsh preference is likely to be to steepen the yield curve by lowering short-term rates through lowering repo rates and raising long-term rates by winding back the Fed’s balance sheet. Martin Sandbu describes how the same set of policies can have contrasting effects.

It is not at all clear whether a steeper yield curve will by itself amount to a looser or tighter overall monetary policy stance. That depends on the relative moves at the different maturities, and how strongly they affect the economy — through exchange rate movements, market valuations and government borrowing costs at the short end, and through “real economy” financing costs such as mortgage rates at the long end. Warsh himself has intimated that the long benchmark Treasury rates are more consequential than short-term policy rates. I share this view. But it is clear that short-term rates matter a lot too. So the macroeconomic effects of a yield curve steepening go in both directions and it’s hard to be confident of the overall impact.

The larger point here is that in the US (and maybe elsewhere), the political acceptability of even small shocks has diminished significantly; economists have come to embrace hitherto unorthodox fiscal and monetary policy measures; and equity markets have become very high-stakes bets. The consequence of these trends is the postponement of smaller recessions and the accumulation of vulnerabilities that increase the risk of bigger recessions.

Weekend reading links

noreply@blogger.com (Urbanomics) — Sat, 14 Feb 2026 03:32:00 +0000

1. Gig economy may create over a million jobs in FY26, taking the total workforce to 14 million.

According to data from TeamLease Services, ecom and qcom are likely to add nearly 1 million jobs this year, followed by the logistics and warehousing sector. Balasubramanian A, senior vice president, TeamLease, said: “Qcom and ecom are estimated to generate 900,000 to 1 million jobs as they expand into Tier-II, -III cities; logistics and warehousing are expected to create nearly 500,000 roles driven by new multi-modal parks and electric vehicle fleets.” A similar trend was evident last year (CY25) when ecom and qcom firms created 600,000 jobs, logistics players generated 400,000, and the banking, financial services, and insurance (BFSI) sector added nearly 200,000 new gig roles for field sales and digital verification. Similarly, data from jobs and career platform Apna, for financial year 2026-27, said that hiring is expected to be driven largely by qcom expansion into Tier-II and Tier-III cities with around a million jobs. Kartik Narayan, chief executive officer of jobs marketplace at Apna, said: “The top three sectors— qcom, retail, and logistics — will continue to dominate the space. Qcom would add nearly 1 million jobs and logistics may generate approximately 500,000-700,000 jobs.”

On wages

On whether an increase in demand will lead to a rise in salaries or incentives of gig workers, Apna said, “Salaries are variable payout given the job but are approximately between ₹12,000-₹25,000 with the mean being ₹15,000 for nearly 40 per cent of these employees. Gig worker payouts might remain flattish due to intense competition and any increase would be attributed to incentivising festival period delivery and other holidays than the actual pay-out per delivery.”

2. Sanae Takaichi wins the largest majority for the LDP in the 465-seat Japanese lower house since its formation in 1955, securing 310 seats in the snap polls. The result saw the Nikkei rise sharply and bond yield climb in expectation of increased borrowings to fund Takaichi's committed spending program.

3. Contrary to all the talk of a declining US economy, investors are flocking to US assets.

Last year foreigners poured around $1.6tn into US financial assets, including nearly $700bn into stocks, both new records and significantly higher than the levels of recent years. The story is much the same for US corporate bonds, with foreign purchases up sharply... From Singapore to Seoul, they are staying up all night to trade on increasingly popular after-hours US trading platforms. Among the few foreigners sitting out this buying spree were central banks, which have been moving money from the dollar into gold... Foreign institutions alone now own nearly 15 per cent of US stocks, a record share and up by half from the level a decade ago... Notwithstanding all the America bashing, foreigners now own nearly $70tn in US assets, double the level a decade ago. And in the last year, most of those flows arrived as “hot money”. Foreign direct investment in factories and businesses, which cannot withdraw quickly, was much weaker than portfolio flows into assets such as stocks and bonds, which can reverse in an instant.

4. US plans tariff carve-outs to chip makers, especially the likes of TSMC, who make investments in the US.

The size of the potential rebate programme would be linked to the recent US-Taiwan trade agreement. The White House has agreed to slash tariffs on imports from the island to 15 per cent in exchange for a $250bn investment in the chip industry in the US. Under the deal, Taiwanese companies including TSMC that invest in the US will be exempt from the forthcoming tariffs in proportion to their planned US capacity. The White House said it would allow Taiwanese companies building semiconductor plants in the US to import 2.5 times the new facilities’ planned capacity tariff-free during the construction period, according to an outline of the trade deal released by the commerce department. Taiwanese companies that have already built plants in the US will be allowed to import 1.5 times their capacity. TSMC would be able to allocate the exemptions it earns under the trade deal to its Big Tech clients in the US, allowing them to import chips from the company tariff-free. The size and scope of the rebates for US hyperscalers depend on the production capacity that TSMC forecasts it can reach in the US in coming years.

5. China is treating data as an asset.

In 2024, China became the first country to allow enterprises to classify data as intangible assets on their balance sheets. Beijing had already declared data a “factor of production” alongside land, labour, capital and technology. The National Data Administration now oversees dozens of data exchanges. China Unicom, one of the world’s largest mobile operators, reported Rmb204mn ($29mn) in assets in its first filing under the new rules. The motivation isn’t purely philosophical. Local government financing vehicles — the off-balance-sheet entities Chinese municipalities use to fund infrastructure — are drowning in debt. Some use data as collateral for fresh loans.

6. The rising Apple margins

7. Mirroring the changing trends, as EV sales slump across the US, EV battery plants are being converted into energy storage systems (ESS) for the surging demand to power data centres. Sample this

Tesla, which incorporates batteries from a range of suppliers including CATL and LG into its Megapack and Powerwall energy storage systems, reported that energy and generation storage revenues grew 27 per cent year-on-year to $12.8bn — up from $2.8bn in 2021, while its revenues from EV sales fell 9 per cent to $64bn. The shift to ESS has been accelerated by weakening government support for EVs, after the Trump administration slashed tax credits established in the Biden-era Inflation Reduction Act and moved to cut tailpipe emission rules and state clean-air standards intended to encourage drivers to switch to EVs... These policy rollbacks led analysts at BloombergNEF to revise down their forecast for EVs’ total share of 2030 car sales from 48 per cent to 27 per cent. EVs currently account for about 8 per cent of US new car sales. Stellantis is selling its 49 per cent stake in a battery plant just over the Detroit River in Windsor, Ontario, to Korean battery giant LG for just $100, after the European car group announced a €22bn writedown last week tied to its aggressive expansion into EVs. It had invested $980mn in the Windsor facility...

While the administration has cut consumer tax credits for EVs, President Donald Trump’s flagship One Big Beautiful Bill Act passed last year retained generous production credits for battery manufacturers. They include a $35 per kilowatt-hour manufacturing credit for battery production, and a 30 per cent investment tax credit for energy storage that will be phased out starting in the 2030s. The credits, along with US tariffs on Chinese energy storage batteries of close to 60 per cent, mean ESS cells can be produced in the US at prices close to parity with the Chinese imports that dominate the market.

8. Migrants make a disproportionately large share of successful US startup founders.

Some 44 per cent of the 1,078 founders who created a US tech start-up valued at more than $1bn between 1997 and 2019 were born outside the country, according to a Stanford Graduate School of Business study. The top five grey matter exporters to the US were India, Israel, Canada, the UK and China.

9. AK Bhattacharya points to some facts about the Government of India's capital expenditure trends.

Between 2005 and 2020, a period of 15 years, capital expenditure crossed 2 per cent of GDP only twice — in 2007-08 and in 2010-11... Between 2020-21 and 2024-25, she grew capex by 26 per cent on average every year... As a percentage of GDP, capital expenditure rose from 1.67 per cent in 2019-20 to 3.2 per cent in 2024-25... Interest-free 50-year loans to states... in 2020-21... accounted for only 2.8 per cent of the total capex outlay of the Centre. Over the years, this share has gone up and, in 2025-26, it was 13 per cent and is set to go up to 15 per cent in 2026-27... Almost 41 to 52 per cent of the government’s capital outlay is allocated to PSUs. In other words, the Union government depends not just on the states for executing its capex plan, but also on PSUs... almost half of the government’s capex is dependent on providing equity and loans to PSUs.

10. Martin Sandbu points to Michael Sandel's prophetic warning in 1996 in his book, Democracy's Discontent.

“To the extent that contemporary politics puts sovereign states and sovereign selves in question, it is likely to provoke reactions from those who would banish ambiguity, shore up borders, harden the distinction between insiders and outsiders and promise a politics to ‘take back our culture and take back our country’, to ‘restore our sovereignty’ with a vengeance.”

11. London has the lowest new housebuilding among all major cities in the world!

London has been set a target of building 88,000 new homes per year over the next decade. Last year construction started on just 5,891 — 94 per cent below target, a 75 per cent year-on-year decline, the steepest drop in the country, the lowest tally since records began almost 40 years ago and the lowest figure for any major city in the developed world this century... New starts by private developers were down 79 per cent over the past two years, compared with collapses of 85 and 94 per cent for affordable and council housing respectively, with work started on just 100 council-funded homes in 2024-25 by one estimate.

And rising costs due to regulatory changes are behind this.

This is a good example of how well-intentioned policies to discourage foreign investors from buying up properties in London (and thereby squeeze out the local residents) may have had a perverse impact.

Such investors are frequently blamed for worsening affordability, but a 2017 report led by the LSE’s Kath Scanlon found that these investors “had a positive net effect on the availability to Londoners of new housing, both private and affordable”, warning that “there would be real costs to the London housing market if overseas investment . . . began to feel unwelcome”. That is precisely what has happened over a decade of increased charges on owners of second homes and foreign investors.

This about the regulatory layers added in response to the 2017 Grenfell Tower fire.

This has taken two forms: significant costs of upgrading existing homes to new standards, and the introduction of a new body — the Building Safety Regulator (BSR) — which has added a lengthy and exacting step between planning approval and starting construction, with inadequate resources quickly creating a logjam. This has placed a particular squeeze on the finances of affordable housing providers, who cite “additional costs and delays as a result of new building safety regulations” as a key reason for low build rates, leaving £120mn worth of council-funded homes on hold. Tens of thousands of provisionally approved homes in the capital are waiting on supplementary review by the BSR, which green-lights only a third of cases and takes an average of eight months to do so. These delays — at a point when developers have typically already poured large sums into a project — add huge financing overheads, in some cases expanding projects’ overall cost by more than 15 per cent. Adding to these are enhanced environmental regulations that are far more stringent than those in other European countries and levies requiring developers to invest in local infrastructure.

12. Tej Parikh has an excellent graphical summary that explains how the combination of an extended period of monetary and fiscal accommodation has led to plentiful cheap financing, eroded financial market discipline, kept zombie companies going, lowered business entry and exit, delayed recessions, and led to the accumulation of ever-increasing risks across the economy.