Tag: gulzar natarajan

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

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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. 🙂

On Economists and Plumbers

AshishLeave a comment

Whenever an undergraduate student asks me for advice about what to do after graduation, I always recommend two things. A gap year, if possible. And some work experience, especially if the next degree they plan to acquire is an MBA.

The gap year because I think our society needs to learn how to learn outside of college. That is a whole other blogpost, and I’ll get to it this Friday.

The work experience before embarking on an MBA? Because you need to learn what folks in HR do (and don’t do) before you learn about HR in an MBA course. Because you need to experience the agony of a performance appraisal before learning about management in an MBA course. Because you need to fight for budgets for your team before learning about finance. Because you need to know what a deliverable is in the real world before earning the right to moan about assignments in college. Doing an MBA without having worked is a little like learning how to ride a bicycle without ever having seen one, and without actually riding one while learning how to ride it. If that makes no sense to you, great. That’s what that metaphor was supposed to do.

And Gulzar Natarajan says much the same thing, with two crucial differences. He admonishes, rather than advises. And the folks he admonishes happen to have won the Nobel Prize in Economics, so the audience is ever so slightly different:

I think India is a good example of [a country] where they literally had not thought through their own plumbing. If you think of what happened to the urban migrants, India’s welfare system is actually completely designed on the assumption that people live in their stable families which live in one place for year after year. In your village, you’re entitled to apply for the public distribution, which is essentially nearly free food . . . and in rural areas there is the rural employment guarantee system. Both of those are designed for rural citizens who live in their own village. You’re not entitled to go to any village and say: ‘I want my employment guarantee.’ There might be as many as 50m of these low-income migrants who temporarily live in cities. They can’t connect to the welfare system. That’s why there were pictures in the first lockdown of people walking 1,000 kilometres . . . there was no way for them to survive. They just had to go home. That is pure plumbing failure.

https://www.ft.com/content/f998d48a-dd8a-43de-81e5-d530dd9df004

That’s the Banerjee/Duflo quote, taken from Gulzar Natarajan’s blogpost, as is the link itself (I’m not rich enough to subscribe to the FT!).

This is his response:

This is pure rhetoric. It’s the classic hatchet job – form your hypothesis (a system where migrant workers can access food and other welfare benefits), set up a straw man (the public distribution system, PDS, or any welfare benefit), demonstrate how the straw man fails the hypothesis test (the example of covid induced migration), and blame the system (the government “did not think through their own plumbing” on its programs). Before passing such sweeping judgement on something like the PDS or NREGS, it’s useful to understand its original purpose and its trajectory of evolution. It’s also classic hindsight-based judgement.

http://gulzar05.blogspot.com/2021/06/more-on-why-economists-make-bad-plumbers.html

As always, read the rest of the blogpost. Anything written by Gulzar Natarajan is self-recommending. And while you’re at it, read this post (and all of the posts that he links to!)

But the larger lesson you should take away from his blogpost – if you ask me – is this: designing something is very different from implementing it. If you want to be a good designer, you must have worked in implementation for a bit.

Whether it is MBA after having gained work experience or economists working on policy design – or anything else, for that matter, it is worth keeping this in mind: first the trenches, and then the command centre.

And lastly, while on the theme, here’s a book recommendation for you: Skin in the Game, by Nicholas Nassim Taleb.

And this post too, please:

Hammurabi’s Code is among the oldest translatable writings. It consists of 282 laws, most concerning punishment. Each law takes into account the perpetrator’s status. The code also includes the earliest known construction laws, designed to align the incentives of builder and occupant to ensure that builders created safe homes:

  1. If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.
  2. If it causes the death of the son of the owner of the house, they shall put to death a son of that builder.
  3. If it causes the death of a slave of the owner of the house, he shall give to the owner of the house a slave of equal value.
  4. If it destroys property, he shall restore whatever it destroyed, and because he did not make the house which he builds firm and it collapsed, he shall rebuild the house which collapsed at his own expense.
  5. If a builder builds a house for a man and does not make its construction meet the requirements and a wall falls in, that builder shall strengthen the wall at his own expense.

All About Taxation

AshishLeave a comment

I write this blog for folks who are looking to learn more about economics. And if you are in this group, you can’t help but have noticed that there’s been a bit of a brouhaha over taxes, both in the United States of America and in India.

ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.
Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.

https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

What exactly is income tax? And what is its history?

Well, the first question is simple to answer (to begin with): it is a tax on your income. Ah, but that then begs the (pardon the puny pun) million dollar question: what is income?

But a question remained: What would count as income and what wouldn’t? In 1916, a woman named Myrtle Macomber received a dividend for her Standard Oil of California shares. She owed taxes, thanks to the new law. The dividend had not come in cash, however. It came in the form of an additional share for every two shares she already held. She paid the taxes and then brought a court challenge: Yes, she’d gotten a bit richer, but she hadn’t received any money. Therefore, she argued, she’d received no “income.”
Four years later, the Supreme Court agreed. In Eisner v. Macomber, the high court ruled that income derived only from proceeds. A person needed to sell an asset — stock, bond or building — and reap some money before it could be taxed.

https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

As the article I have excerpted this from goes on to say, folks were warning us even back then that this was not going to end well (it is nowhere close to ending, and it is not going well). But this talks to us about the difficulty of defining income, about which more in a bit. Here’s a brief snippet about how the idea of income taxes originated:

The universal taxes of ancient times, like the one that brought Mary and Joseph to Bethlehem just before the birth of Jesus, were invariably head taxes, with one fixed sum to be paid by everybody, rather than income taxes. Before about 1800, only two important attempts were made to establish income taxes—one in Florence during the fifteenth century, and the other in France during the eighteenth. Generally speaking, both represented efforts by grasping rulers to mulct their subjects. According to the foremost historian of the income tax, the late Edwin R. A. Seligman, the Florentine effort withered away as a result of corrupt and inefficient administration. The eighteenth-century French tax, in the words of the same authority, “soon became honeycombed with abuses” and degenerated into “a completely unequal and thoroughly arbitrary imposition upon the less well-to-do classes,” and, as such, it undoubtedly played its part in whipping up the murderous fervor that went into the French Revolution.

Brooks, John. Business Adventures: Twelve Classic Tales from the World of Wall Street (p. 93). Hodder & Stoughton. Kindle Edition.

That… is not reassuring.

The chapter on income tax from this excellent, excellent book makes for great reading. As it turns out, it was the (surprise, surprise) Civil War that finally provided the impetus for the imposition of an income tax across the length and breadth of the nation1 And the imposition was celebrated! Well, at least by some:

“I am taxed on my income! This is perfectly gorgeous! I never felt so important in my life before,” Mark Twain wrote in the Virginia City, Nevada, Territorial Enterprise after he had paid his first income-tax bill, for the year 1864—$36.82, including a penalty of $3.12 for being late. Although few other taxpayers were so enthusiastic, the law remained in force until 1872. It was, however, subjected to a succession of rate reductions and amendments, one of them being the elimination, in 1865, of its progressive rates, on the arresting ground that collecting 10 per cent on high incomes and lower rates on lower incomes constituted undue discrimination against wealth.

Brooks, John. Business Adventures: Twelve Classic Tales from the World of Wall Street (p. 96). Hodder & Stoughton. Kindle Edition.

Back, as it were, to the future. Anand Giridharadas wrote an article in the New York Times about the ProPublica report:

Mr. Buffett is almost the perfectly made billionaire for this moment in which, at last, many Americans are beginning to question not only corruptions of the system but the matter of whether billionaires should exist at all. He doesn’t do the things the worst of them do. He isn’t in it for what they’re in it for. He clearly must care about money, but he also kind of doesn’t care about money. Even in his generosity, he has avoided the imperial lording over that others cannot resist.
And this is what makes him so troubling, because through him we are tempted into believing that a system can be defended that allows a man to accumulate more than $100 billion while people are sleeping, in hock to him, in his mobile homes, shortening their lives with the beverages he’s invested in, scampering around the warehouses whose nonunion status has redounded to his money pile.
It can’t. And who keeps us from seeing that simple, stark truth more effectively, more perniciously, than the Good Billionaire?

https://www.nytimes.com/2021/06/13/opinion/warren-buffett-billionaire-taxes.html

The second card in my three card trick is a response to this essay, from V Ananta Nageswaran2:

So, notwithstanding Anand Giridhardas, we can still think about the manner in which incomes and capital gains & dividends are taxed. I see three issues, at my level.
There needs to be a discussion on unrealised capital gains and dividends. Dividends are avoided and companies buy stocks back to avoid dividend tax. What if the tax policies take away that choice?
Second, even if we accept that only realised capital gains are to be taxed, why are they taxed at much lower rates than tax on wages?
Third, even if we accept this logic (which, in addition to the above arguments, is also a reflection of who made those laws, their incomes and wealth status, etc., over time and across the world) of the primacy of capital, for the sake of argument and hence accept the conclusion that capital gains will be treated differently from regular labour income, then the question is one of defining short-term and long-term. Why should short-term be just one year? In economics, anyone’s definition of short-term is not one year but a business cycle, i.e., minimum three years. Extending the definition of ‘short-term’ to 36 months from 12 months will earn more revenues.

https://thegoldstandardsite.wordpress.com/2021/06/19/the-inequity-of-the-tax-system/

That is, the author is saying that that are indeed problems with capital being taxed the way it is, but (as he points out elsewhere in the blog) the way forward is evolution, not revolution.

Which brings me to the third card: TALISMAN.

The truth, as always, lies somewhere in the middle – and that, of course, is the point of the excerpt above too. On the spectrum of Current System Bad:::Current System Good, reasonable people can and should argue about the “sweet spot”.

And if you are a student of economics (and especially public finances), where do you go to learn more before trying to figure out where you should be on this spectrum?

  1. Please read the chapter on income taxes from the book Business Adventures
  2. Read this essay by Tim Taylor (and note that it was written before the ProPublica report came out!)
  3. Farhad Manjoo, a while ago, on abolishing billionaires (and the response to that essay)
  4. Gulzar Natarajan on this issue
  5. And for a theoretical understanding – always a good idea for an issue as complex and important as this one – Chapters 20 and 21 from Stiglitz’ Economics of the Public Sector.
  1. do read the entire chapter, though. The snippet about the experiment in Rhode Island is fascinating.[↩]
  2. note that I am excerpting the outline of the argument, please visit the blog to read it in full[↩]