There used to be much talk about ‘green shoots’ in 2009, although nobody uses that phrase anymore. At a time when sovereigns accounting for about 3% of world GDP look all set to default, it is difficult to imagine just how things will ever come back to normal. Yet, to misuse Nouriel Ruobini’s book title, ‘this time too, is NOT different’.
Declaimer: This article written was originally in December 2011, and some of the data points may be outdated.
The Cost Of Solar Power
The darkest hour (we might be approaching it now), will still be followed by a dawn. To get past these times, you need to have some pictures 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 cost of Solar (power) has just come level with the grid cost of thermal power, at least in California. Solar capacity used to cost Rs.42 cr per MW a decade back, and in a variant of Moore’s Law, is dropping 60% every 5 years. From Rs.16 cr per MW in 2008, it is now Rs.11 cr per MW in India. The latest American panels should now be launching at Rs.7 cr per MW, not very far from the ‘parity bar’ at Rs.5.4 cr 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 & 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 activities, 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 favorite gift: free power for farmers.
At a different level, power reforms should see a fitful start, now that bankruptcy is staring both producers and distributors in the face. Amazingly, Tamil Nadu is looking at tariff hikes of 20-30%; reducing 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
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. Govts will interfere, preventing the kind of profits that, say, Apple makes out of its leadership.
Not so in Biotech. There are already more than 500 products awaiting FDA approvals, and they will impact big diseases like cancers, renal and liver disease, heart, diabetes, and lifestyle disease. Over the next 3 years, they will be coming onto the market, impacting the pharmaceuticals industry in a way that cannot be imagined. The $40 bn of patents expiring, will not be noticed in the excitement that follows. For the equity markets, this (more than Solar) will create the next bubble.
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 will be driven by attitudinal/behavioral change. Govts 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 the memory of their own 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 Govt discipline in the whole of Europe and its neighbors. Whether such learning will impact behavior 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.
The Think About Of Europe’s Misfortunes
Think of the impact of this. Govt 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’ Govt 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. Govts 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, and 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 WILL NOT happen is also clear. There will be no structural reforms in agriculture, no corporatization 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.
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 tectonic change in, say, drone technology. The new drones being developed are microscopic, with nanotech-sized gnats sidling up to you and shooting you down, wherever you are. 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 a power shift to China, Afghanistan, or Iran, which seemed to be the alternative this last decade.
Lastly, private Americans have been paying down debt, even if their Govt hasn’t. Another 4-7 years more of this and they will be down to 1950 levels of indebtedness, 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…