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The Dawn After

The darkest hour will be followed by dawn. The author tells you what the dawn will look like to help you get past these times…

There used to be much talk about ‘green shoots of recovery’ in 2009, although nobody uses that phrase anymore. At a time when sovereigns accounting for about 3 per cent of world GDP look all set to default, it is difficult to imagine just how things could ever come back to normal. Yet, to paraphrase the title of the book by Carmen M. Reinhart and Kenneth Rogoff, ‘This time too is not different’.
The darkest hour (we might be approaching it now) will still be followed by dawn. To get past these times, you need to have some picture of what the dawn will look like, which is why, contrarian as usual, I have decided to time this column just now. Remember: you read it here first.

The solar revolution
The cost of solar (power) has just come at par with the grid cost of thermal power, at least in California. Solar capacity used to cost Rs 42 crore per MW a decade ago. In a variant of Moore’s Law, it is dropping 60 per cent every five years. From Rs 16 crore per MW in 2008, it is now Rs 11 crore per MW in India. The latest American panels should now be launching at Rs 7 crore per MW, not very far from the ‘parity bar’ at Rs 5.4 crore per MW.
For India, if you factor in the rising costs and availability issues for coking coal, together with the possibilities for solar panels over the Thar Desert, ‘grid parity’ will be life-changing. The potential impact will rank along the lines of the IT revolution, followed by the Communications (mobile voice and data) revolution. First the cost of computing went to zero, then the cost of communications followed suit, and now (maybe) the cost of energy will follow.
While this will be a worldwide revolution, and I am sure India will lag behind in converting to solar, I can see spinoff benefits for a variety of economic activity, which will boost poverty reduction. Principally, it will make water management cheap and easily accessible to the rural poor, allowing politicians to dole out their favourite gift: free power to farmers.
At a different level, power reforms should see a fitful start, now that bankruptcy is staring producers and distributors in the face. Amazingly, Tamil Nadu is looking at tariff hikes of 20-30 per cent. Reducing the supply of free power will create a further impetus for production. But if the real cost of power drops for technological reasons, there will be no dearth of demand anywhere in the world. We have seen the same thing happen in the Communications Revolution. The development of solar and other renewable technologies will still be incremental, and will not impact markets, except indirectly. There might be no big bang in solar, and we might not see a Microsoft of Computing (or Apple of Mobile technology). (Solar) Power is an enabler, not a consumer good in itself, hence a producer will remain a Utility. Governments will interfere, preventing the kind of profits that, say, an Apple makes out of its leadership.

Big leap in biotech
Not so in biotech. There are already more than 500 products awaiting FDA approval, and they will impact big diseases like cancers, renal and liver disease, heart, diabetes and other lifestyle diseases. Over the next three years, they will be coming onto the market, impacting the pharmaceuticals industry in a way that cannot be imagined. The expiry of $40 billion worth of patents will not be noticed in the excitement that follows. For the equity markets, this (more than solar) will lead to the creation of the next bubble.

Towards fiscal rectitude

In currency and bond markets (the source of all the trouble just now), change will be equally dramatic, although it will be less noticeable, since it be driven by attitudinal or behavioural change. Governments will find it more difficult to be fiscally irresponsible, and the consequences of the current spate of bond market defaults will be remembered for a long time to come, at least in the developed world. Remember, Germany’s phobias about inflating away the debts of Greece come from their own memory of the hyperinflation of the 1920s. Whichever way this current European imbroglio ends, you can rest assured: it will leave lasting memories of the consequences of fiscal imprudence, high current account deficits and hot money flows. Anybody in Europe who is allowed to live life again will keep these lessons in mind. That ensures a sharp jump in government discipline in the whole of Europe and its neighbours. Whether such learning will impact behaviour as far away as India (and I don’t mean geographically, but attitudinally) is something I cannot yet say, but Jayalalitha’s power sector reforms and Mamatadi’s “Ms. Populist” reaction to oil pricing would suggest that the impact of Europe’s misfortunes will be far-reaching.

Think of the impact of this. Government deficits will be (relatively) under control, bringing back credibility to fiat currencies. This will take some of the shine off gold and other precious metals. Commodities in general will get cheaper, not just through technological advances, but because of the absence of front-running flows that anticipate government profligacy. The dash-from-cash will slow down, and people will start trusting bond markets to preserve their wealth. Who knows, they might even start stuffing cash into their mattresses; it certainly feels softer than gold! Countries (especially in Asia) that were following Europe down the welfare state route will tarry for a while. Not India, though, which continues to promise various rights (to food, education and all the other things that it has no hope of ever providing). But overall, most countries will have better finances. This will be achieved indirectly by vacating the towering heights of the economy (infrastructure, utilities and core manufacturing), all of which will be very good for jobs and income growth.

So try and imagine a world where the cost of energy is zero, following up on zero-cost computing and communications. Incremental life expectancy comes very cheaply now, with major advances in disease control and rejuvenation. Governments don’t take their (fiscal) credibility for granted, and prefer to stay out of running businesses. Parts of the Indian economy in particular, where supply side inflation is both endemic and structural, will see an improvement in productivity. Even assuming that Indian agriculture stays the way it is, technology will still impact food production through biotech, energy management, followed by superior water and logistics management. A doubling of food productivity is all that is needed now, not a very tall order on a very small base.

What won’t happen
What will not happen is also clear. There will be no structural reforms in agriculture, no corporatisation of agriculture at one end of the spectrum, nor any land reforms at the other end of the spectrum. Politicians need to keep agriculture free of any taxation to hide their ill-gotten gains from the business of politics. This will push up the cost of real estate, but at the same time ensure that leverage levels in India stay low.

A better world
The world is going to get better. Event risks will remain, like nuclear terror and biological weapons. But they will be mitigated by a change in geopolitics through a change in, say, drone technology. The new drones being developed are microscopic, with nanotech-sized gnats sidling up to you and shooting you down. The power balance will shift back to America, which is where I would like the world’s geopolitical power to lie. I would have been much more worried if I saw power shift to China, Afghanistan or Iran, which seemed to be the alternatives this last decade.
Lastly, private Americans have been paying down debt, even if their government hasn’t. Another four to seven years and they will be down to 1950s levels, which is where the last Baby Boomer generation started. And remember, this new generation of teenagers would have seen enough bad times to hold onto their character during good times, come 2020.