Arvind's Newsletter- Weekend edition

1.Has Maruti outgrown the middle class?
The brand long associated with this demographic is courting a new customer base. Maruti Suzuki launched the Invicto its most expensive car yet, priced at nearly ₹25 lakh (~$30,000). Managing director Hisashi Takeuchi said the company wants to double its turnover in the next eight years by launching more electric vehicles and grabbing the top spot in SUVs, a premium segment.

Maruti’s shift in priorities is the clearest, recent sign that rich Indian consumers are driving the economy. Even in rural India, the number of ‘super-rich’ households ballooned between 2018 and 2021, outpacing growth in urban India, Bloomberg reported. But, destitute homes grew rapidly in cities, while growth in middle class homes was slow.

2. Lecanemab, the first drug shown to slow cognitive decline — albeit modestly — in Alzheimer’s disease, will be made widely availablein the United States. The Food and Drug Administration granted it full approval, and Medicare said it would cover 80% of its $26,500 cost.

The FDA said, however, that the drug would carry a “black box” warning: Lecanemab, sold as Leqembi, can cause fatal brain bleeding. It does not reverse the impact of dementia, but delays its progress, by about five months over 18 months on average.

The FDA previously approved another drug, Aduhelm, but even the agency’s own statisticians have said there was “no compelling evidence” that it worked. Lecanemab clearly does, even if at some risk.

3.The Countries Buying Fossil Fuels from Russia in 2023

While Russia’s revenues from fossil fuel exports have declined significantly since their peak in March of 2022, many countries are still importing millions of dollars a day worth of fossil fuels from Russia.

Revenue from fossil fuels exported to the EU has declined more than 90% from their peak, but in 2023 the bloc has still imported more than $18 billion of crude oil and natural gas so far.

China continues to be Russia’s top buyer of fossil fuels, with imports reaching $30 billion in 2023 up until June 16, 2023. With nearly 80% of China’s fuel imports being crude oil, Russia’s average daily revenues from Chinese fossil fuel imports have declined from $210 million in 2022 to $178 million in 2023 largely due to the falling price of Russian crude oil.

After China and the EU bloc, India is the next-largest importer of Russian fossil fuels, having ramped up the amount of fossil fuels imported by more than 10x since before Russia’s invasion of Ukraine, largely due to discounted Russian oil. EU can not complain about India’s imports as long as it continues to import significant fossil fuels from Russia.

4.The Taliban’s poppy production ban is putting America’s “war on drugs” to shame.

America’s “war on drugs,” launched by President Richard Nixon in 1971, raged for more than half a century but hardly put a dent in the Afghan opium trade.

The country’s farms account for more than 80 per cent of the world’s opium production but even the American invasion in 2001 did little to disrupt the flow of drugs out of the nation.

But now, where the world’s drug enforcement community has failed, the Taliban themselves are succeeding. In April last year, the group’s religious leaders issued an edict banning poppy farming across Afghanistan. More than 12 months later, experts are calling the ban “the most successful counter-narcotic effort in human history.”

The impact on the ground has been dramatic. Afghan poppy production has plummeted by an estimated 80 per cent in the last year as Taliban enforcers move from farm to farm destroying crops and punishing offenders.

Cultivation in Helmand province, which once produced around four-fifths of Afghanistan’s poppies and was the centre of British operations in the country from 2006 to 2014, fell to around 2,500 acres this year, down from 320,000 the year before, according to estimates based on satellite imagery.

Opiate production in countries like Myanmar and Mexico could boom to fill the void created by Taliban, with all sorts of attendant impacts on trafficking routes, gangs and supply chains. Read on

5.Opinion: The HDFC twins’ merger will leave India’s banks gasping opines Andy Mukherjee in Bloomberg. Long Read

When the remaking of India’s socialist financial landscape began in 1993, very few people believed in the project — some of the 40 applications to set up new private-sector banks were so frivolous that they were written on postcards.

Three decades later, things are far more serious. Finance in the most-populous nation is moving into a higher gear. Of the two big changes expected this year, one has just occurred and created a juggernaut bigger than Morgan Stanley. The other splash may see the birth of India’s own Ant Group Co., a digital-lending powerhouse being set up by the country’s wealthiest tycoon.

These disruptions are taking place on the strength of a much larger consuming class that finance has helped create along the way. But is it big enough to sustain the industry’s latest makeover? The test will come in the deposits market.

Among the more serious aspirants for a banking license in 1993 — one that didn’t send in its application on a postcard — was Housing Development Finance Corp., then a 16-year-old specialist mortgage lender in a country where the culture of debt-financed homeownership was still in its infancy. After nearly three decades of spectacular growth,HDFC Bank Ltd. finally swallowed up its parent, HDFC, on July 1. The combined entity, as HDFC investors’ stakes are swapped for shares in the bank over the next few days, will have a market value of $173 billion.

What’s more, the juggernaut is showing no sign of slowing down. To sustain its 20% pace of annual asset expansion, the bank will need stable funding. Suresh Ganapathy, head of financial services research in India at Macquarie Group Ltd.’s brokerage unit, estimates that the newly bulked-up HDFC Bank will go after as much as 20% of the banking system’s incremental deposits over the next three to four years. This could be highly destabilising, at a time when the overall industry is gasping for liquidity.

India’s extreme income inequality has an impact on banking. Individual savings, which account for three-fifths of deposits, are heavily skewed toward top earners. At the bottom of the pyramid, there are practically no savings. But this rather narrow affluent class is currently grappling with a post-pandemic surge in inflation and trying to protect its living standards with debt. Higher interest rates, however, mean paying more to lenders for mortgages and other consumer credit.

What’s left of the surplus at the family level is going into mutual funds in search of better returns — and only then entering the banking system. As a result, the liquidity sources for banks have become more institutional and retail deposits are stagnant, a point that Mumbai-based analyst Harsh Vardhan, a former Bain & Co. partner, made recently.

The data show this shift: As much as 12.5% of the incremental deposit growth this fiscal year is coming from a money-market instrument. The share of the so-called certificates of deposit was just 6.4% two years ago, according to India Ratings & Research. With credit growth outpacing deposits by 3 percentage points, the unit of Fitch Group expects increased competition among banks to grow their resource-mobilisation franchise.

That contest is bound to become keener as HDFC Bank looks for low-cost, sticky deposits to fund the loan book it has inherited from HDFC. That's the whole point of this marriage. The shock waves that emanated from the sudden 2018 collapse of IL&FS Group, a prominent Mumbai-based infrastructure financier, toppled several institutions and made it clear that shadow banks with a concentrated exposure to one industry — real estate, in the case of HDFC — would be safer as banks. That way, they wouldn’t have to depend on fickle wholesale funding. Access to state-insured retail deposits and the central bank’s emergency liquidity lines made the HDFC-HDFC Bank merger a compelling proposition.

This year’s other big development in Indian finance is a demerger — a spinoff. In May, shareholders of Reliance Industries Ltd., the country’s most valuable conglomerate, approved splitting a new consumer-finance unit into a separate company with its own stock-market listing soon.

When it comes to acquiring new borrowers at a low cost, tycoon Mukesh Ambani’s Jio Financial Services Ltd. will have a ready cachet of more than 400 million subscribers of his dominant telecom business. Additionally, Reliance operates India’s largest retail chain, and has ambitious plans to compete against the likes of Unilever Plc in general merchandise trade, where the No. 1 ingredient for a successful mom-and-pop store is credit for working capital. Ambani’s low-income customers may also need financing for Jio Bharat, a sub-1,000-rupee ($12) phone he’s launching this week for beta trials with unlimited voice calls and 14 gigabytes of data for 123 rupees a month. The device can also stream videos from Reliance’s JioCinema and make payments. With good execution, Jio Financial will be a panopticon, with a near-complete view of Indian consumers’ (and merchants’) spending and ordering behaviour.

Thus, the overall banking system will face twin challenges. On the liability side of their balance sheet, lenders will have to fight for deposits against a bank growing so fast that the market believes it to be worth more than Morgan Stanley, HSBC Holdings Plc or Citigroup Inc. On the asset side, lending models that run on limited credit-bureau data will have to take on Jio Financial’s superior, Ant Group-style pricing engine.

Whether the industry can digest the two near-simultaneous disruptions will ultimately depend on the growth of India’s middle class. For clues, watch the deposits market. A deeper reservoir of household savings will show that incomes are percolating beyond a narrow elite, making more of the country’s 1.4 billion people creditworthy. A shallow pool will mean otherwise.