The Return of Malthus

For those of you who are hearing of this gentleman for the first time, he was the 19th century scholar who postulated (the Malthusian Theory), that nature will keep producing population growth, until it creates a resource crunch, which will then create a series of natural calamities, decimating the population and setting off a new cycle.

Intuitively, he found a lot of adherents, because in the old, pre-industrial, deflationary economy, this was actually true; till man learnt ‘systematic innovation’ and started to create new professions and economics became a tool in his hands to achieve progress.

After 1850, the world learnt about inflation, monetary policy and the Industrial Revolution, which created the modern era. Thereafter, the ‘natural limits’ to any constraint started to shift outwards, until 150 years later, we have started to believe that even a desperately poor country like India has a hope of beating the Malthusian Theory.

After Japan, it became the done thing to argue that human ingenuity would be able to beat all known (resource) constraints. You could have a tiny island nation with almost no natural resources, and the dubious distinction of having a quarter of all known natural disasters, which could grow to be the most productive nation in the world, by all known measures of savings and wealth accumulation.

As always, we Indians learn the wrong lessons. We extrapolated this to tell ourselves that our huge population would never hit a resource crunch, and that our own ingenuity would always delay the onset of Armageddon.

We forgot that every time man beat the Malthusian clock, then it was because he had a lot of time to see the threat and react to it.

This time, global warming will set off a series of events that might not give us enough time to react. If the current El Nino effect turns out to be a regular affair, how many years of 60 per cent monsoon deficits can we survive?

The current monsoon deficit may well turn out to be the most comprehensive, countrywide drought that we have seen in the last 100 years. We have been following coal-based energy usage, refusing to give up our right to pollute, with the “dog in the manger” attitude that it was the West that had done the most damage till now. But the worst affected will be us; the frail, weak uptick that we have seen these last 10 years, will be over-shadowed by what follows.

If we have three monsoon failures in a row, do we have the desalination industry that will produce enough clean, potable water to quench an entire nation’s thirst? How quickly do we have communication systems to create a culture of rain harvesting, water conservation/recycling etc.? No doubt, Israel has beaten all limitations to agricultural productivity, but how quickly can we duplicate those achievements?

In the short run, we will need to quickly create a market for water. There is no way you can tell a population that something has suddenly become precious, without putting a price to it.

The reason this will not happen is this: Mamata Banerjee/The Left/The BJP will politicise the issue. Just as any concessions given to the Kyoto negotiations is seen as a sign of weakness. I am very sure that no national consensus on water will be built, until it is too late.

This time, the consequence will not be economic, but humanitarian. Geopolitical think-tanks have postulated that India will be one of the worst-affected victims of global warming, with an estimated 100 million people dying.

If 2009 is to water, what 1991 was to forex, then we have the same man-in-charge. The PM hopefully has the same understanding of this problem that he had of the forex crunch. Certainly, he has the mandate to move swiftly on this issue. He just needs to tick off the following policy prescriptions:

* Get off your high horse on the Kyoto negotiations. It makes no sense to defend our right to pollute just because the West had done so;
* The country that gets off the ground first, on ‘alternate energy’, will see technological leadership in one of the most important pillars of economic progress in the current century — clean energy. The solar mission, if it is serious, is a step in the right direction. It needs to be followed up with the development of a quasi-fiscal investment market that subsidises the excess capital cost of solar energy, leaving enough space for cost-led innovation;
* Then focus on the clean energy applications. The first would be a full commodity market in water: just make water enormously profitable to everyone;
* Create a panel of IDFC-like nodal investment institutions, whose bonds have 200 per cent weighted tax-free deduction, i.e. for every Rs 100 subscribed to the bonds, you get Rs 200 as deduction (far better than raising the taxable limit). That provides a 70 per cent subsidy to the capital cost of solar power, which the institution channelizes as debt to the sector. Set high debt norms with long paybacks for eligible projects.
* Now let a thousand flowers bloom. Include the desalination industry in this panel of clean energy users. Create a pseudo-market in “water paper”, where credits are given to those who recycle industrial (waste) water, converting it to agricultural-grade clean water. This should create millions of recycling units, mostly based on solar applications, a variant of the solar water heating systems that have been so successful in rural areas;
* Promote the same ‘water paper’ to create a micro-irrigation industry, through which farmers can buy entitlement to water through the adoption of micro-irrigation techniques. Target subsidies through a small set of producers, where the leakages would be less;
* The first step is to create a sense of crisis, before a real one is created (I hope I have not spoken too late). The current monsoon may be typical of many more to come, and we will need a typical Dhirubhai Ambani overkill: create a giant capacity, 100 times the water needs of Delhi, then get to work at making it dependent on clean energy, maybe solar.

The problem with a product market for water is that the (commodity) prices will be very volatile, with prices collapsing during a good monsoon. So it has to be an investment-led market, not a product-market, i.e. the capital cost would be contributed through a market instrument, similar to the timeshare industry, or the one-time premium insurance products. If all sides of the industry are left open to market pricing, then there would be enough space for innovation to create a spectacular winner. A company that either reduces the cost of the project, or which can reduce the cost of capital, or which can extract other operating efficiencies, will find itself at the top of the industry.

“The cost of communication will go to zero”, said Ambani to a new recruit in 1989, when asked about the next big thing for the ‘90s. For the new millennium, Reliance should have been working at taking the cost of energy to zero. Certainly, if it can take the cost of water to zero, it would have made every Indian its customer: another Dhirubhai dream.

There is more greatness for anyone interested. A company that sits at the heart of all Indian energy usage is bound to be the next Reliance (if it isn’t Reliance itself). 80 per cent of the energy used in India’s villages, goes into water management. Think of the economic potential that will get unlocked by someone who takes that out.