K, the economic letter of the year, has a ripple effect

Edition #131. Tuesday, 29 September 2020

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Good morning,

One should read all policies with a giant wink emoji. 

India’s newly framed agricultural reforms wanted to eliminate intermediaries in agriculture, but states are finding a way to bring them back in.


Indonesia wanted to promote clean, renewable energy. But they just lumped that policy together with non-renewable sources. 

Shareholders have trained their guns on Lakshmi Vilas Bank, but should it be India’s central bank, the Reserve Bank of India, that deserves the scrutiny? After all, RBI did just pull a fast one on the country’s most awaited policy meeting. 

PS: If you are sick of television news and the media trials in India, there is some good news around. 

K, the economic letter of the year, has a ripple effect


It began with economists and forecasters using letters—V, U, W, and L being the most common—instead of mathematical models to describe the shape of an economic recovery. But now, the consensus has turned to K. 

It all sounds a little silly, but a K-shaped recovery is a harsh reminder of the truth of growing inequality. It’s a representation of people with high and low income, and those who have the luxury to work from home and those who don’t. The divergence means that those at the top are doing better than ever, and those in the middle or lower are getting worse.

India’s wealth divide that you see in this chart from a Credit Suisse report (2018) is going to get starker.

Especially when you consider that the stock markets, predominantly owned by the wealthier population, continue to do well, while the real economy languishes. And the real economy is where the jobs are being lost.

But a country-localised K-shaped recovery is just one part of the problem.

The wealth inequality between countries, too, is enormous. The Credit Suisse report pegged the median wealth in North America (US$61,667 per adult in the US) at more than three times the level in Europe and China, 50 times the level in India, and almost 200 times the level in Africa. 

A report last week by the International Labor Organization (ILO) said that developing countries would need nearly US$1 trillion in stimulus packages just to maintain the pre-pandemic gap with more affluent countries. And with low-income countries constrained by the amount of money they can borrow and spend, the pandemic is destroying any chance the world had to bridge the wealth gap. 

Now, higher unemployment and poverty seem to be a given in these circumstances. But it could also lead to a groundswell of political frustration and populism in the developing countries. 

And while it may not always lead to the local government being questioned, the relevance of global organisations in helping the less wealthy countries is certainly being challenged. On Saturday, Narendra Modi, the Prime Minister of India, had a message at the United Nations General Assembly:

“Over the last 8 to 9 months, the whole world has been battling the pandemic of the coronavirus. Where is the United Nations in this joint fight against the pandemic?


 The international community is faced with an important question. Is the UN of 1945 still relevant?”

The K-shaped recovery is leaving its mark everywhere.

Restricting trade by expanding “markets” 


Even as India’s Parliament approved a contentious bill to free commerce in produce beyond regulated wholesale agricultural markets, or mandis, a couple of states also want to expand the notion of a mandi. Except, what they are planning will nullify the central law. 

The new legislation allows any commercial buyer to procure directly from farmers without having to pay the stipulated market levies, which range from 1% in Maharashtra to 8.5% in Punjab. The fee will now only apply to transactions carried out within the physical confines of a mandi, while earlier its writ even extended outside. 

So, two opposition-ruled states, Rajasthan and Punjab, are getting inventive to wrest back control. 

First, Rajasthan passed an order late last month designating all warehouses of Food Corporation of India (FCI) and state warehousing corporation as mandis, thereby retaining its powers to charge mandi fees.


Now, reports suggest that Punjab, the largest contributor of wheat and rice to India’s central pool, might also be looking at amending its mandi Act to declare the entire state a Principal Market Yard.

The two states are taking a leaf out of the Centre’s book only to turn it to their advantage. 

Farmers have taken to the streets against this law and two others on the grounds that it will lead to “corporatisation” of agriculture and that the State will no longer look after their interests. They feel the freedom that the government says these laws will give them is unsolicited

Rajasthan and Punjab are not just making sure farmers, a key vote bank, don’t turn against the ruling parties. They are watching out for themselves, too. Punjab’s annual revenue from the levies is around Rs 5,000 crore (US$680 million). Agriculture is a state subject, and these states say the new laws run counter to that. 

The transformative potential of these laws notwithstanding, we are going to see more such clever subversions by states. 

A shareholder coup, but the spotlight should be on the central bank


What do you do if you’re a shareholder of a bank whose executives are being probed for fraud, has seen bad loans soar from 2.67% in 2017 to 25.39% in 2020, and lacks sufficient capital?

You vote out seven directors, including both its promoters, the newly-appointed CEO, and the auditors. 

You don’t see this often. Usually, shareholders vote against high executive compensation, but this is a coup or a revolution against bad corporate practices. 

It leaves Lakshmi Vilas Bank (LVB) without a leader. Not that it may be a bad thing given its history. At least the share price indicates that.


But leaving aside the bank’s troubles, questions have to be raised to India’s central bank (RBI) which initiated its prompt corrective action (PCA) framework on LVB in September 2019. The PCA prevented LVB from fresh lending to protect its capital. But what good is a bank that can’t lend money? Besides, it pushes good borrowers towards competitors and makes the road to recovery even harder. 


Earlier, a Mint column had evaluated two banks, the United Bank of India (now merged with a larger lender) and the Indian Overseas Bank that was placed under the PCA for two years. It found that both banks didn’t show any improvement in their financials. So under the PCA, income generation stalled, but expenses remained. 


RBI’s PCA, in fact, functions as a pill for a slow death.


With multiple bank failures over the past year—Punjab and Maharashtra Co-operative Bank (PMC), Yes Bank and now LVB—maybe the spotlight has to shine on the banking regulator, the RBI. 


As C.H. Venkatachalam, the General Secretary of All India Bank Employees Association (AIBEA) said in March, maybe it is time the RBI is brought under PCA for its failure in preventing bank debacles. 



Re(new)able energy and Indonesia’s semantic sleight of hand


Indonesia is heavily reliant on coal for its energy use. It is abundant and cheap, but dirty—a big greenhouse gas emitter.

The country has pledged to reduce emissions and signed climate accords. But not much is being done on the policy level to nurture the renewable energy sector with technologies such as wind, solar, hydro, and geothermal.

The controversial draft for a “New and Renewable Energy Bill”, which is currently being discussed in Parliament, just delivered further evidence that renewable energy development is getting sidelined.

The bill regulates things such as feed-in tariffs, typically a policy tool that’s intended to make the pricing for renewable energy more competitive. But the bill doesn’t actually apply specifically to renewable energy sources. It lumps them together with what the document defines as “new” energy sources: technologies like nuclear, liquified, and gasified coal.

Renewable energy companies and environmental groups oppose this framing of the bill, because:

  • It gives legitimacy to the idea of introducing nuclear energy in Indonesia. This has been a taboo for security reasons, and previous plans have all been abandoned

  • It pits truly renewable energy technologies like solar, wind, and geothermal against the others (nuclear, liquified and gasified coal), having to compete with them for price and efficiency

Opponents want the bill to set policies specific to renewables. But their protest is likely too little, too late. There’s just never been a commitment to favour wind, solar, and geothermal tech specifically.

In Indonesia’s National Energy Plan, “new and renewable” energies have always been treated in one breath–a semantic sleight of hand that gave a lot of elasticity to the interpretation. 

It led to many misleading reports. For example, the self-imposed “23% by 2025 target” mentioned in the energy plan always referred to the broadened “new and renewables” category. Headlines then often shortened this to just “renewables” which gave the impression of a strong government commitment.

Even PricewaterhouseCoopers (PwC), the global consultancy, misrepresented the government’s target in a report.

With the new draft bill in discussion now perpetuating the same elastic stance, the signals are getting stronger that Indonesia will, one way or the other, turn towards nuclear energy to drive its future energy demand. And that coal incumbents, with the shift to liquified coal and other coal derivatives, will continue to have a seat at the table. Even contributing to Indonesia’s 23% 2025 “renewables” target.

There’s actually one obvious thing Indonesia could do to improve its emissions balance. And it doesn’t have to do with building new power plants—just curb deforestation and the associated peatland fires.

A significant share of the country’s emissions come from forest and peatland fires. To illustrate, the red segment of the pie chart below are emissions from land-use change (deforestation, or clearing land for shifts in agricultural use) and fires.

Just-in-time for nothing


The whole country waits with bated breath for the deliberations of the Monetary Policy Committee (MPC), a six-member committee that sets the policy rates. Will the central bank cut interest rates or won’t it? Will the committee announce measures to guide the economy through the pandemic?

But before the policy meeting begins on 29 September, there’s the problem of the three missing MPC members to deal with. The replacement to the outgoing members still hadn’t been appointed, even on the eve of the meeting. *Cue shocked reaction*.

The country thinks, “That’s ok. At least they’ll announce the new appointees on 28 September and get on with it.”

Instead, the RBI postpones the meeting altogether. *Cue shocked reaction again*.


Record label IPO mints boy band multimillionaires 


The relationship between musicians and record labels can be tense. 

Artists make the product, but labels often are accused of raking in disproportionate revenue. Singer Prince, for example, who had a range of contractual battles with the industry, once called recording contracts “slavery.”

A very different tune played in Korea last week after record label Big Hit Entertainment went public. The IPO raised US$822 million, making it the country’s largest listing in three years. And in doing so, it also made multimillionaires out of the members of cult boy band BTS, Big Hit Entertainment’s largest act.

The [recording] company is run by CEO Bang Si-Hyuk, a longtime music producer who is credited with creating BTS and setting it on the road to stardom in 2013. Bang owns about 43% of Big Hit, according to a stock exchange filing. The IPO has made Bang a billionaire

Bang gave each of the BTS band members 68,385 shares in August. Those holdings are now worth nearly US$7.9 million each at the issue price. The shares start trading on October 15

Big Hit IPO makes BTS millionaires and their producer a billionaire, CNN

That’s a gesture you don’t often see.

Not that BTS’ seven members need the money. Forbes reported last year that the band is the world’s highest-valued music act with an estimated US$57 million in annual income before tax. Its six-stadium tour in the US alone grossed US$44 million. That’s around US$7 million per night. Or about the size of their income from the IPO.

Advertisers unite against toxic television news 

Team BFO

Two weeks ago, we proposed a possible solution to disincentivise media trials that has India’s TV news in a vice-like grip—a simple blocklist.  

A well-designed blocklist approach could allow brands to withdraw advertising from only certain topics they deem as unsafe or damaging to their brands. This effectively “demonetises” a topic that brands feel isn’t in keeping with their social responsibilities.

Now, advertisers have realised the damage the toxicity spewed on television channels TV news is causing their brand. So much so that brands like Parle and Amul, which spend close to 35-40% of their ad budget on television news, are considering pulling out ads. 

Consider what Krishnarao Buddha, Senior Category Head, Marketing, of Parle Products said to BestMediaInfo.com:

As a viewer and advertiser, I really feel the news channels have stooped to a pathetic state and if the advertisers have the opportunity to break this vicious cycle, they must do it collectively and be a real purpose-driven brand. While doing this, we should state the reason that we are all doing it because of the content. I agree that such an environment is dangerous for any brand because it comes back to hounding it.


I’m recommending all the leading advertisers to come together and ban the news genre until they are forced to bring sanity and ethics in news back. I’m saying the entire news genre because somewhere they will have to bring in honesty in reporting and not create stories only keeping TRPs in mind, which ultimately is poisoning the same mind.

Nope, will not say we-told-you-so.

That’s a wrap for today.

Don’t forget to write in with your thoughts and observations on how this pandemic is reshaping businesses, societies and economies. We will be back tomorrow.

Stay safe,


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Beyond The First Order is a paid daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia. This newsletter is published by The Ken—a digital, subscription-driven publication focussing on technology, business, science and healthcare
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