Tag: gulzar natarajan

Gulzar Natarajan on Industrial Policy for Large Investments

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…the idea of attracting large manufacturers in ecosystem creating industries might be a promising strategy to adopt. An example is the Indian government’s push for Apple.

https://gulzar05.blogspot.com/2023/08/industrial-policy-for-large-investments.html

Industrial policy – what it is, what its benefits are, and what its limitations are – has been the focus of many an op-ed in the recent past. That, to me, is a signal to avoid reading most of them. But not because the topic itself isn’t important! On the contrary, industrial policy is the topic to learn more about if you are a student of the manufacturing sector in the Indian economy.

Why do I say so? Many reasons, but Gulzar Natarajan offers as good a summary as any I’ve read in the lead-up to the excerpt I’ve pasted above.

But in this post, Gulzar Natarajan points to a specific aspect of industrial policy:

Conventional wisdom would have it governments should not pick winners. India’s courting of Apple and mobile phones success is a good example that questions this wisdom. Mobile phones and Apple/Foxconn (and Samsung) are winners. Just as electric vehicles and Tesla, or semiconductor chips and Samsung/TSMC could be. Solar and wind power generation equipment manufacturers and defense manufacturers are another two examples. The same can be said of contract manufacturers Pou Chen, Feng Tay, Hong Fu, Apache, etc in footwear, and Toray, etc in apparel. The facilities of these companies will be large enough to create a manufacturing ecosystem that has transformational impacts in its town or region. In fact, there’s a strong case that instead of spreading resources thin by targeting economy-wide measures like concessions and input subsidies, an outcomes-focused industrial policy for a government would be to identify a few winners (sectors and large brands or contract manufacturers) and court them. Success would be measured by the ability to get one of them to actually make a meaningful enough investment.

https://gulzar05.blogspot.com/2023/08/industrial-policy-for-large-investments.html

By the way, as regards footwear, here are my notes from an earlier Gulzar Natarajan post on the topic.

But to come back to the point being made in this post, he is making the point that one way to do industrial policy is not by targeting an entire sector, but rather by picking “winners”. By the way, for students looking to answer the question “but what should I be working on?”, he has an answer.

But what of the risks with such a strategy? He identifies four of them:

  1. You need to pick the “right” kind of winner, which is easier said than done.
  2. It could well lead to crony capitalism.
  3. This can be countered with effective state capacity, and we don’t have it.
  4. It could crowd out the focus on small and medium enterprises.

I would add a fifth, and it is my biggest worry with such a policy: what if the winner ends up being a dud? Do we have the capacity to be ruthless and play hardball? To me, it is this that was, and remains, the key differentiator between East Asia of the 60’s and India today.

Not Quite As Simple As One Would Like It To Be

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Simple economic analysis can take you a very long way.

Not only do I hold this statement to be true, but it is one of the cornerstones of this blog. The idea that at its heart, economics is about a few important principles, and that the judicious application of these principles can take you a very long way – this idea has motivated nearly all of my writing on this blog.

But as with everything else in life, so also with this alluring, tempting idea. Every now and then, simple economic analysis can only take you so far, and you must wheel out the heavy artillery to make further progress.

In yesterday’s video, we heard John Cochrane talk about how if there is a problem, look first for the regulation that caused it. And there is more than an inconvenient iota of truth in that assertion. But between too much regulation and too little regulation lies that slippery little point of the optimum amount of regulation. Nobody knows exactly where that point lies, and it moves once you get close to it, but it is very much there. Finding it is all but impossible. Keeping it in sight once you find it is impossible.

But it’s there all right.

Consider housing.

The conventional wisdom has been that if restrictive zoning regulations are removed, ease of getting building and other permissions simplified, and taxes on construction lowered, it will increase the stock of housing of all kinds including affordable housing. This, in turn, will lead to lowering of house prices – “richer renters trade up into new luxe units, starting a chain of move-ins and move-outs that lower prices for modest homes”. This can be called the “trickle-down” theory of housing affordability. Instead, I’m inclined to believe that a meaningful dent in the housing affordability issue in the medium-term has to involve an increased supply of large volumes of public (or heavily subsidised) housing.

https://gulzar05.blogspot.com/2023/05/some-thoughts-on-affordable-housing.html

You’ll meet economists who tell you that housing can only be solved by removing as much regulation as possible. You’ll meet other economists who tell you that public housing is the only solution to the problem. And you’ll get bloggers like me, who will tell you that the truth lies somewhere in the middle. But by referring to Gulzar Natarajan’s (GN) excellent blogpost, let me explain to you why I think so:

  1. People in India think like much of the rest of the world, and are inclined to view housing as both a place to stay, but also as an investment asset. These are GN’s words, not mine, taken more or less directly from his blogpost, but they are worth repeating here. Yes the demand for housing is more than the supply, in many cities the world over, but that demand itself rather complicated to think about.
  2. For example, some people buy a house to stay in it. Others buy a house in order to sell it at a high price later, without ever having stayed in it. A Knight-Frank report form 2019 tells us, for example, that 25% of all residential houses in Gurugram are vacant. That number is almost 22% for Pune, 15% for Mumbai and about 10% or so for Ahmedabad, Bengaluru and Delhi.
  3. Who is likely to be able to afford to buy a house as an investment?
  4. Which types of houses will have higher margins?
  5. So the supply of what type of houses will go up?
  6. The answers most likely to be correct for the three questions above are “More affluent folks | luxury housing as opposed to affordable housing | Luxury housing”.
  7. By the way, Noah Smith has an excellent post (referenced by GN in his blogpost) that goes against the case I’m building here. It is, hopefully, free to read, and the link is here. Here’s an excerpt: “…you could probably get them to admit that if we built 10 market-rate (“luxury”) apartments for every resident of Austin, most of them wouldn’t get filled, and landlords would be forced to slash prices, and regular folks would have cheap apartments to live in”
  8. That is, Noah is saying that an increase in supply will get prices down eventually. And with reference to the excerpt, it’s not just “them” – I will also agree that prices will come down eventually. How long will the “eventually” take is one good question to ask in response. That is, how long before the price of those unoccupied apartments will come down? Will the rate of reduction be the same for all cities in all countries? Will class distinctions matter, for example? What about religion, what about caste and what about availability and affordability of public transport?
  9. Or as GN puts it: “We need to step back here a little bit. The starting conditions of the cities under consideration matter. For example, how segmented is the housing market, how do the prices in the different segments compare, what’s the likely profit differential between higher-end and marginal housing, what’s the marginal demand for higher end housing, how does it compare with the supply, how do the starting prices for each housing segment compare with the annual incomes of different population groups etc. Differences in each can generate entirely different outcomes.”
  10. There are many points to make over here, related to pricing, regulations, urbanization, public transport, urban sociology, and much else besides. But for the purposes of this blog post, I’ll leave you with just this one thought: economic models need to be rooted in the lived reality of whichever specific region you are modeling for. Noah isn’t wrong in his post, and neither is GN. But the “correctness” of their argument is very much dependent on whether they’re talking about Bombay or Austin.
  11. Context matters, in other words, and a good first pass answer as an economist always is “Well, that depends.”

Steady As She Goes

Ashish3 Comments

Gulzar Natarajan has a typically excellent post (part of a two-part series) on India’s economic growth trajectory. And they key point in the post is a counter-intuitive one.

India cannot, and should not, grow too rapidly.

In Can India Grow, we had argued that India does not possess the capital foundations to sustain high rates of growth for long periods. It does not have the physical infrastructure, human resources, financial capital, and institutional capabilities to grow in the 7-9% ranges without engendering serious distortions and overheating. The last such episode of high growth in the 2003-11 period required nearly a decade for companies to deleverage and for banks to overcome their bad assets. While some commentators have since come forth with similar views citing aggregate demand etc, I think we were the earliest to put forth a clear case for lowering expectations and targeting a 5-6% economic growth rate.

https://gulzar05.blogspot.com/2022/11/indian-economy-thoughts-on-growth.html

Our household owns two cars, a Tata Zest and Tata Nano, and the best analogy I can come up with for 2003-2011 is that it was like racing the Nano along the expressway to Bombay at a 110 kilometers per hour. It might (perhaps) have made it to Bombay at those speeds, but the little blue car would then have needed a long time at the mechanic before being road-worthy again. India, similarly, did grow rapidly in that period, but as Gulzar Natarajan puts it, it did not have the “physical infrastructure, human resources, financial capital, and institutional capabilities to grow in the 7-9% ranges without engendering serious distortions and overheating.”

Or put another way, if we want India to grow rapidy in the next two decades or so (and who wouldn’t?), it is very much a question of whether we’re driving a Nano or a Zest over the course of the next two decades. Or, god willing, an even better car. But a Nano will simply not cut it, and in terms of our infrastructure, human resources, financial capital and institutional capablities, we’re more like Tata’s cheapest car than we are like the Tata’s most expensive car.

But our country needs those upgradations if we want to achieve (and sustain) those aspirational growth rates. And here’s another counter-intuitive bit: even a 6% growth rate would be a challenge when we are talking about sustaining it over the course of twenty long years. That’s not the pessimist in me talking, that’s empirics:

A 6% baseline growth for the next three decades would be extraordinary. Underlining this point, as Ruchir Sharma has written, there are only six countries which have grown at 5% for four decades – Taiwan, Japan, South Korea, Singapore, Malaysia, and China. As the data shows, India has become the seventh. But just two have done it for five decades in a row – South Korea and Taiwan. Given that China looks certain to fall short, India could become just the third. It could go one better and strive to become the only country to grow at 5% for seven decades in a row. This would be exceptional at a time when developed countries will struggle to grow at even 2%.

https://gulzar05.blogspot.com/2022/11/indian-economy-thoughts-on-growth.html

But for that to happen – for us to embark on this journey, we would do well to first take the Nano to the garage, and bring out the Zest instead. We could do with a bigger engine, better suspension, better safety features – why, better everything:

We should simultaneously use the growth to build the capital foundations – increase domestic savings, deepen financial inclusion, develop robust financial intermediation systems, expand physical infrastructure, prioritise human capacity development, and develop and strengthen state capabilities.

https://gulzar05.blogspot.com/2022/11/indian-economy-thoughts-on-growth.html

All of which is easier said than done, as many a “growth star” state of the 20th century will tell you. This stuff is hard, unglamorous, politically risky, and with payoffs that manifest themselves only in the long run. But also, this stuff is unavoidable. Here’s one way to think about it as a student of economics: studying macroeconomics without a deep study of development economics is dangerous.

For as a nation to our north and east is hell bent on showing us in recent times, attemptig rapid growth without getting the basics right isn’t a good idea:

A too rapid growth will invariably drive up signatures of overheating – high inflation, property bubbles and land valuations, spike in wages, environmental damage, clogged infrastructure like traffic congestions and water scarcity etc.

https://gulzar05.blogspot.com/2022/11/indian-economy-thoughts-on-growth.html

Institutions matter. Education matters. Physical infrastructure matters. State capacity matters.

And attempting to engineer rapid growth without getting all (not some, all) of these right is a bad idea.

P.S. If you are a student of the Indian economy, the first chart in this blogpost is worth deep contemplation and reflection. What is your best guess for what comes next, and why is your guess whatever it is? That’s be an excellent essay to assign at the end of a macro semester that focuses on the Indian economy.

Incentives Matter, and so do Externalities

Ashish1 Comment

In my Principles of Economics classes, I spend a lot of time explaining what I think are the six core principles of economics:

  1. Incentives Matter
  2. There Is No Such Thing As A Free Lunch
  3. Trade Matters
  4. Costs Matter
  5. Information Matters
  6. Externalities Matter

Note that the fifth point is really about prices, which are really about information.

And a recent blogpost by Gulzar Natarajan, one of my favorite bloggers from India, showcases two of these principles really well: incentives, and externalities.

When compared to the task at hand, relocating supply-chains especially from China and attracting global contract manufacturers in various sectors to establish facilities in India, the PLI scheme outlay at Rs 1.97 trillion (~$25 bn) over five years is modest. The scheme extends 4-6% subsidy on incremental sales. However, this is only a small share of the at least 18-20% cost advantage, not to speak of several other locational and supply-chain advantages, enjoyed by manufacturers in China and Vietnam. This coupled with stiff production expansion targets the inevitable bureaucratic difficulties with accessing these benefits mean that the substantive benefits from PLI Scheme are limited. In fact, a recent Bloomberg Intelligence report estimates that it would taken about 8 years to move just 10% of Apple’s production capacity out of China. 

https://gulzar05.blogspot.com/2022/10/some-thoughts-on-pli-as-industrial.html

The PLI scheme incentivizes the domestic manufacture of products across fourteen sectors, by providing subsidies linked to “incremental sales from products that are manufactured in domestic units”. That quote is from the Wikipedia article about the scheme, which is a good place to begin reading more about PLI.

On the face of it, you might think that Gulzar Natarajan’s take on the PLI scheme is a negative one. Because even if the scheme is fully utilized, it still falls short of China’s 18-20% cost advantage, plus the locational and supply chain advantages enjoyed by China (and Vietnam). In fact, as he goes on to say in the blogpost, “the PLI is unlikely to be substantive enough to be a game changer for India’s manufacturing sector”.

Worse, as a Business Standard article that the author links to points out:

Global players have raised concerns on the slow and complex disbursement process, causing some of them to question whether they want to go ahead with their investment commitments under the scheme. Others are questioning the qualifying criteria. And still others are struggling with the “China factor”.

https://www.business-standard.com/article/economy-policy/govt-takes-plis-back-to-the-drawing-board-amid-critical-challenges-122092101038_1.html

But neither the Business Standard article, nor Gulzar Natarajan’s blogpost should be construed to mean that the PLI scheme is a failure (not yet, at least). The Business Standard article points out that the silver lining to the rocky start to the PLI scheme is the willingness of the government to listen (about which more later). And Gulzar Natarajan points out that a good way to think about the PLI scheme is to think of it as a complement to marketing campaign of Make in India. If (my emphasis, not GN’s) the PLI scheme is able to “attract the critical mass of a few big contract manufacturers to establish massive manufacturing facilities in the country”, that in and of itself will be a Very, Very Good Thing.

Which brings me to the second principle of economics at play in this blogpost: externalities matter.

This is perhaps an example to avoid evaluating policies based solely on their substantive merits. The circumstances and their externalities matter, and are often more important than the policies themselves. To put this in perspective, if India’s manufacturing sector moves to the next level in scale and productivity towards the later part of the decade, I’m inclined to argue that while the PLI’s contribution by itself would be small (say, less than a tenth), it could not also have happened without the PLI Scheme.
When examining policies, researchers and commentators fail to see the larger context in which they are being implemented. They are blind to the complex theory of change associated with major policies. More often than not, transformational changes in health, education, nutrition etc are not brought about through technocratically designed and targeted policies. Instead they are brought about by community and stakeholder mobilisation, which engenders a virtuous cycle of ownership and engagement, and which can in turn be triggered by standard policies and programs which are effectively implemented. The entire process has space for improvisation and innovation to improve design and implementation quality.

https://gulzar05.blogspot.com/2022/10/some-thoughts-on-pli-as-industrial.html (emphases added)

Sure, it is entirely possible that the PLI scheme doesn’t meet its stated aims and targets. But if it acts as a catalyst in terms of better scale and productivity, thereby giving a boost to India’s manufacturing sector in the medium to long term, that would be a great start. That is, the positive externalities wrought by the scheme might end up mattering more – and that is just fine.

But.

If you are a student of economics intending to eventually work in the realm of policy-making, you would well to focus on the phrase “community and stakeholder mobilization”. You can come up with the most well-thought-out policy in the world, but it means nothing if you don’t have a) community buy-in and b) the ability to listen to feedback and rework your policies iteratively.

In The Service of the Republic, Ajay Shah and Vijay Kelkar describe Satya Poddar’s four-step policy process:

  1. Defining the future state, or the preferred policy outcome,
  2. Preparing a blueprint for the design and specification of the future state,
  3. Defining the transition path from the current to the future state, and…
  4. Building political consensus or garnering public support for the change.

Of which, the fourth step is often ignored or downplayed, to the detriment of the whole scheme. Remember, announcing a scheme isn’t policymaking. That’s the easy bit. Making it happen is the real challenge, and that requires having a very sensitive ear to the ground at all times.

And that’s why the willingness of the government to listen matters so much, for the success of the PLI scheme depends (very much so) on our ability to tweak it as we go along.

…the success of the Scheme will depend on how nimble, flexible, and courageous are the relevant Ministries of Government of India in responding to emergent problems and trends and adapting the scheme guidelines(say, in calibrating import duties up the value chain). Policy making will have to become entrepreneurial in being able to reap gains from the PLI Scheme.

https://gulzar05.blogspot.com/2022/10/some-thoughts-on-pli-as-industrial.html

Re: the break on the blog (the last post was on the 19th of September): I just felt like taking a break, so I did. 🙂

Read Blogs Written by Gulzar Natarajan

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Regular readers must be sick and tired of hearing me say this, I suppose, but please: read blog posts written by Gulzar Natarajan!

Especially so if you happen to be a student of economics. The art of taking a complex topic, asking simple questions about it, marrying them to the appropriate economic concepts that will help in the analysis, and reaching a cogent, well argued conclusion is a rare, rare skill. And Gulzar Natarajan possesses it in spades!

Consider the post titled The Demand Supply Gap in Medical Education.

The demand supply gap is stark. About 1.6 million students appeared for the National Eligibility cum Entrance Test (NEET) in 2021, of which only 88,120 make it to the 562 public and private medical colleges. That’s 19 applicants for every seat. Those numbers are now 89,875 and 596.
How do you analyse this market? What will be the impact on seat prices due to supply changes of medical seats? How will the supply side react to this situation of large numbers of Ukraine returned students? What will be the profile of supply side?

https://gulzar05.blogspot.com/2022/03/the-demand-supply-gap-in-medical.html

These are not hard questions to frame. In fact, I would argue that most of us will be able to frame these questions even without having studied economics formally. But that being said, framing them this simply and concisely takes years of practice.

He identifies four main problems that we need to deal with:

  1. The major constraint is the source of quality faculty
  2. Private supply of medical colleges is unlikely to make up the shortfall (he explains why in the post, and I tend to agree)
  3. As he puts it, “In an acutely supply deficient market, the limited marginal supply is likely to bid up the medical seat prices even more”. I would only add one word to this sentence, between the words marginal and supply: quality. It’s not so much about the supply going up as it is the degree to which high quality supply goes up.
  4. Ah, but alas, that brings us to an even more difficult question: quality as it truly exists, or quality as perceived by prospective students and by society? I studied in Fergusson College in Pune, so I have a moral right to ask this question. And that’s what he means by the phrase “lemon problem“. If you’re wondering why this is known as a lemon problem, take a look at this.

His preferred solution is having the government step in to augment the supply, using government district hospitals and some area hospitals. This, he says, is preferable to the public-private-partnership (PPP) model. I don’t dispute the assessment of the PPP model, and its shortcomings. But I’m curious about why he would say that government institutions are always going to assure a certain basic minimum assured quality. Is this necessarily true, even in a relative sense? And if so, why?

And the concluding paragraph is at once depressing and optimistic:

Finally, this is a teachable example on the reality that though many problems have no immediate solutions, we try to solve them. Part of it is about wanting to do something and also be seen doing something. This is a human reflex and a political economy compulsion. Bridging the demand-supply gap in medical education is one such problem. Given our context and constraints, it’s very unlikely that we can bridge this gap in the foreseeable future. Like with other similar problems like affordable housing, agricultural productivity, or traffic congestion, we can only create the conditions required for its mitigation and gradual easing.

https://gulzar05.blogspot.com/2022/03/the-demand-supply-gap-in-medical.html

Depressing because, as he says, it is unlikely to be solved any time soon. Optimistic because creating the conditions is easier said than done, but it is achievable.

What might these conditions be? How does one go about creating them? If you’re interested in the answers to these questions, you are, like it or not, now a student of economics and public policy.

P.S. And the answers themselves require many more blogposts, but please, feel free to search around on this blog for some of ’em! 🙂

Aamdani rupaiya, kharcha atthanni

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If you’re not familiar with the Hindi language, the title of this post is a play on a fairly popular phrase: aamdani atthanni, kharcha rupaiya

In effect, your income is less than your expenses. Which, of course, isn’t a desirable state of affairs:

For all of the last decade, the primary metric for evaluating budgets was the fiscal deficit. How much would the government target to bring it down by, and how credible were the numbers? The source of that stress was the massive stimulus set in motion by the government well before the global recession showed up, as it was inundated by taxes in the 2006 to 2008 period. The challenge with that stimulus was that it was hard to roll back, much of it being a large increase in state and central government salaries and pensions.

https://tessellatum.in/?p=409

But we find ourselves in unchartered territory, says Neelkanth Mishra:

Tax collection is surprising positively, and should be more than 1 per cent of GDP higher than before the Covid-19 lockdowns (though assumptions are lower). Further, financial markets appear to be expecting both central and state governments to incur large fiscal deficits for several years, with the anchor shifting higher by 3 per cent of GDP. Let us assume that GDP being below where it was supposed to be if the pandemic had not happened means an extra per cent-and-a-half of costs for the government. Interest costs have risen as governments borrowed to bear a large part of the economic loss during the lockdowns. Further, some government expenses, like salaries and pensions, keep rising irrespective of the level of GDP. This still leaves 2.5 per cent of GDP of space for governments to increase spending.

https://tessellatum.in/?p=409

And as it turns out, it is unchartered territory for everybody, the government itself included. Neelkanth Mishra points out that we’re bringing off-budget items on to the budget, we’re paying off export incentives that were due, and the debt write-off for India has also been accounted for. Even so, he says, cash balances maintained by the government with the RBI are at an all time high.

So what can be done? Well, part of the answer this time around lies in asking the states to step up and spend on building out physical infrastructure:

The sharp increase in capital expenditure from Rs 5.45 trillion to Rs 7.5 trillion shows the intent of the government is to stay away from distributing freebies (commendable, given the upcoming state elections), and focus instead on productive spending, which may be rolled back if necessary. However, half of this increase is an allocation for interest-free loans to state governments for capital expenditure, and some of the rest is the inclusion of off-budget provisions in last year’s budget in the budget numbers this year. There are increases in the allocation for defence (particularly once adjusted for the lower spend on aircraft purchases this year), the Nal se Jal scheme, and for roads and railways, but these are incremental rather than substantial.
Allowing state governments more fiscal space (deficits up to 3.5 per cent of GDP are allowed, with another half a per cent if the state undertakes power sector reforms), and dangling the carrot of more funding if they undertake capital expenditure is the right approach in theory. Much of the necessary investments need to occur at the state level: Like in health, education, urban infrastructure, water supply, sanitation and power distribution. However, the gap between states’ intent to spend and their execution has widened substantially during the pandemic, and their total spending is far lower than budgeted, despite increases in non-discretionary expenses like interest costs, salaries and pensions.

https://tessellatum.in/?p=409

And the limiting factor there, ironically, is limited state capacity.

…many developing countries and organizations within them are mired in a “big stuck,” or what we will call a “capability trap”: they cannot perform the tasks asked of them, and doing the same thing day after day is not improving the situation; indeed, it is usually only making things worse. Even if everyone can agree in broad terms about the truck’s desired destination and the route needed to get there, an inability to actually implement the strategy for doing so means that there is often little to show for it—despite all the time, money, and effort expended, the truck never arrives.

Andrews, M., Pritchett, L., & Woolcock, M. (2017). Building state capability: Evidence, analysis, action (p. 10). Oxford University Press.

In other words, we have more money to spend this year, but our constraint is quite literally our inability to spend it usefully and efficiently.

It would be worth our collective while, then, to learn a little bit more about state capacity!

How Are You Optimizing?

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One of the more popular blog posts on this blog this year was an essay I wrote in March, the title of which was Maximizing Soul. The essay was a lament of sorts about how obsessed we as a society have become about measuring every last thing that we do, and how we have become all about efficiency.

We have become a society of optimization through minimization. We’ve become very good at extracting the very last bit of juice out of a lemon.

https://econforeverybody.com/2021/03/08/maximizing_soul/

That essay was more about society and culture than it was about the economy directly. But more recently, Gulzar Natarajan wrote a blog post making what I take to be more or less the same point, but in the case of the global economy:

The Covid 19 pandemic has underscored the perils with efficiency maximisation at all costs and the importance of resilience. The excessive concentration of manufacturing, especially of critical Pharma products, in China and the supply chain disruptions have provided the most salient reminders. This post discusses the problems of pursuing efficiency at all costs and to the exclusion of all else in case of global manufacturing supply chains.

http://gulzar05.blogspot.com/2021/12/the-shift-from-efficiency-maximisation.html

The title I wanted for today’s blogpost was a bit of a mouthful: “How are you optimizing for whatever it is that you are optimizing for?” I went, instead, with what you see above. But the question I wanted to ask was the one you see in this paragraph.

Say you want to maximize profits (and who wouldn’t, eh?). Three ways you can do this: maximize revenue, minimize cost, or attempt to do both. And Gulzar Natarajan’s point in his blogpost is that the global economy has focused perhaps a wee bit too much on the cost minimization bit – and that we have, in the process, gone a bit too far.

Thanks to business schools and management gurus, it had become articles of faith that businesses should outsource, focus on comparative advantage, specialise functionally, concentrate suppliers and production facilities, minimise inventories, tighten supply chains, contract labour services, minimise tax payout through tax avoidance, and so on. For sure, when done in proportion, all of them have merits and are desirable. But when taken beyond reasonable proportions, they generate distortions.
A common underlying factor behind all these concepts is efficiency. Conventional wisdom has it that their pursuit leads to greater efficiency in some form or other (mainly cost reduction), all of which generally lead to greater profitability, the primary objective of businesses. Therefore efficiency maximisation by pursuing these concepts to their extremes becomes an innate and inexorable dynamic of the market. It does not help that globalisation and advances in information and communications technology and transportation end up furthering these trends.

http://gulzar05.blogspot.com/2021/12/the-shift-from-efficiency-maximisation.html (Emphasis added)

In effect, is blog post is making the point that cost minimization was done at the cost of ignoring the building up of risk:

Businesses and consumers doubtless benefited from these trends. It led to cost reductions which got distributed between higher profits (for businesses) and lower prices (for consumers). A virtuous cycle of consumption, production, and trade led to expansion of aggregate output.
Then the pandemic struck. Lockdowns and quarantines ensued. Supply chains were disrupted. Outsourced suppliers and producers were cut-off or failed to keep their commitments. The lack of diversification at country and company levels among suppliers and producers became painfully evident. Businesses realised that their pursuit of efficiency maximisation and cost reduction had gone too far.

http://gulzar05.blogspot.com/2021/12/the-shift-from-efficiency-maximisation.html (Emphasis added.)

My essay, written in March, tried to argue for maximizing profit by increasing revenue (so to speak), rather than by only minimizing costs. Gulzar Natarajan’s essay, I think, makes a complementary point. If one focuses on minimizing cost by ignoring everything else, there is another problem, that of increasing risks by increasing dependencies on a very small set of ultra-efficient supply chains.

The story in 2022 (and beyond) is going to be one of building more resilient systems. The opportunity cost of this strategy is that these new systems may not be as hyper efficient as the ones that existed pre-covid.

And that Gulzar Natarajan seems to say, is just fine by him.

And I completely agree.

Three Charts Related to China

Ashish1 Comment

Read this post, and spend a good amount of time asking yourself some questions about the three charts. Here are my questions (note that I don’t have the answers):

  • Is China’s decoupling a good thing or a bad thing? For whom?
  • What time horizon should we use to think about the answer to the first question? Why?
  • To what extent is China’s reduction in exports as a percentage of GDP deliberate? Was it deliberate all along, or did they observe a trend, think through the consequences, and then make it a deliberate policy?
  • Is China’s decline the share of global GDP growth a good thing for the world? Why?
  • What about India, is it a good thing for India? If yes, along which dimensions? If no, along which dimensions?
  • Does China count the last chart in this blog post as a victory or a defeat, or is it “too soon to tell”? Whatever the answer, why so?
  • What are other data related stories from China that we have not been paying attention to?

I don’t have, as I said, the answers. And maybe I have missed asking some obvious questions. If you have material that will help me think through these issues, please do share.

Improving the Quality of Social Science Research in India

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Gulzar Natarajan points us towards an excellent paper written by Jacob Greenspon and Dani Rodrik, on who is writing papers in top tier journals today.

Developing country representation has risen fastest at journals rated 100th or lower, while it has barely increased in journals rated 25th or higher.

Click to access a_note_on_the_global_distribution_of_authorship_102521.pdf

Take a look at the table below, and note how developing country authorship has barely budged from 3.5% to 4.4% across the two time periods the authors have chosen to work with.

https://drodrik.scholar.harvard.edu/files/dani-rodrik/files/a_note_on_the_global_distribution_of_authorship_102521.pdf

What is the problem being addressed here? The fact that there isn’t enough representation in the very top tier journals of authors from developing nations.

How might this problem be resolved? In one of two ways: either the current top tier journals figure out a way to have more representation from developing countries, or developing countries start on the (rather long) journey of creating journals that will replace the ones currently at the top.

In his blogpost, Gulzar Natarajan points out nine ways in which both of these solutions might be implemented:

  1. Hire more local Principal Investigators, both for its own sake, but also because of the large positive externalities they will generate
  2. Develop academic consortium(s) such as NBER in developing countries. Gulzar Natarajan uses the example of India, but this could of course be done in many other countries as well
  3. Give more personalized, contextualized lectures in Indian universities
  4. More mentorships
  5. More referees from India in top tier publications, at least for “India” papers. (Note again that Gulzar Natarajan is writing this for an Indian audience, the same applies for other countries)
  6. Create and share data repositories.
  7. Build out better conferences.
  8. Build out more university level tie-ups on an international basis
  9. Build out better Institutional Review Board certifications for local Indian universities.

The author is kind enough to mention the place at which I currently work (the Gokhale Institute of Politics and Economics) as an Institute which may be able to play a role in furthering this initiative.

We’ve tried to do work on some of the initiatives he has outlined, including building out on mentorships, trying to build out better (and more) university level tie-ups, and one of the few silver linings to the last eighteen months has been the fact that it has never been easier to get professors from the world over to “come” and speak via video conference. But much more – much, much more! – remains to be done.

In an ideal world, each university in India would have a faculty member whose sole full time job it would be to figure out how each university is working on each of these nine points, with some sort of a coordinating agency working with (and across) each participating university. This is, of course, easier said than done.

Its necessity, if you ask me, is indisputable.

On Valuing Zomato, But Don’t Stop There

AshishLeave a comment

If you are a student of economics, you should be able to understand the basics of valuation. It is up to each one of us to determine our level of expertise, but at the very least, we should be able to understand valuations that others have arrived at.

And a great way to learn this is to devour, as greedily as possible, every single blog post written by Professor Aswath Damodaran.

Here’s an excerpt from his blogpost on valuing Zomato:

Eating out and prosperity don’t always go hand in hand, but you are more likely to eat out, as your discretionary income rises. Thus, it should come as no surprise that the number of restaurants increases with per capita GDP, and that one reason for the paucity of restaurants(and food delivery) in India is its low GDP, less than a fifth of per capital GDP in China and a fraction of per capital GDP in the US & EU.

http://aswathdamodaran.blogspot.com/2021/07/the-zomato-ipo-bet-on-big-markets-and.html

Read the whole thing, and if it is your first time reading about this topic, read it three times. I’m quite serious! Also download the spreadsheets, and play around with the assumptions in them. It is a great way to teach yourself Excel and valuations at the same time. Excel and valuations is also a great way to understand the concept of complementary goods, and I’m only half joking.

So, ok, you have now got a little bit of a grip on valuation. That’s great, but you shouldn’t stop there. Valuing a company is fine, but how does one think about the valuation of this company (Zomato) in the context of this sector (online food delivery)?

Here are some facts. Zomato raised $1.3 bn through an IPO which was oversubscribed 38 times and which valued it at $14.2 bn. At about the same time, its competitor Swiggy raised $1.25 bn in a Series J fund raise which gave it a post-money valuation of $5.5 bn.
The post-IPO public market price discovery of Zomato shows that Swiggy is 2.6 times under-valued.

https://gulzar05.blogspot.com/2021/07/some-observations-on-zomato-and-swiggy.html

Also from that post, a great way to understand how to start to think about the price one can get in the market. That is, you can learn all the theory you want about valuation, and pricing and what not. At the end of the day, the price you command in the market is about so much more than that:

4. But, if markets stay as frothy as it’s now, Swiggy’s promoters and investors need not worry. Unlike Zomato’s promoters who, judging from the first day pop left huge money on the table, Swiggy’s promoters could rake in much more by pricing its IPO closer to the comparator market price. Swiggy and other could benefit from the later mover advantage.
5. There appears to have been a first mover disadvantage for Zomato in leaving money at the table and not maximising its IPO takings. Conversely there may have been a first mover advantage for its investors in maximising their returns.

https://gulzar05.blogspot.com/2021/07/some-observations-on-zomato-and-swiggy.html

And you shouldn’t stop there either! Valuing a company is fine. Thinking about that company in the context of its competitors is great. Thinking about the IPO rush in the start-up world, and what it means in the context of the overall economy is fantastic.

The Indian startup scene has been set ablaze by the spectacular IPO of Zomato. In a largely conservative market this constitutes a huge collective leap of faith since the company has consistently made increasing losses and several questions hang on its profitability. With some more blockbuster IPOs lined up, the party is likely to go on for some time. Some high-profile boosters even think of it as a new dawn in risk capital raising. The problem is with those left standing when the party ends, as it must. And it’s most likely to be not pretty.

https://gulzar05.blogspot.com/2021/07/the-startup-ipo-bubble-reaches-india.html

The world’s unicorn herd is multiplying at a clip that is more rabbit-like. The number of such firms has grown from a dozen eight years ago to more than 750, worth a combined $2.4trn. In the first six months of 2021 technology startups raised nearly $300bn globally, almost as much as in the whole of 2020. That money helped add 136 new unicorns between April and June alone, a quarterly record, according to cb Insights, a data provider. Compared with the same period last year the number of funding rounds above $100m tripled, to 390. A lot of this helped fatten older members of the herd: all but four of the 34 that now boast valuations of $10bn or more have received new investments since the start of 2020.

https://www.economist.com/business/2021/07/19/technology-unicorns-are-growing-at-a-record-clip

Why is this happening now? Is it because of loose monetary policy the world over? Is it because of optimism about what the world will look like post-covid? Neither, and something else altogether? Or both and something else also? What might the ramifications be? How should that influence your thinking about the next three to five years in your life – when it comes to going abroad to study, or starting an MBA, or being in the job market?

Note the chain of thought in this blogpost: valuing a company, thinking about that specific sector, thinking about IPO’s in general, thinking about the overall economy… and getting all of that back to your life. Apply this to all of the news you read, everyday, and you’ll soon start to build your own little picture of the world. That is, you’ll start to see the world like an economist. And trust me, that is a superpower. 🙂