Article by Dr. Armin Rosencranz on "The black spots in India’s coal story" - The Statesman

November 11, 2016 | Dr. Armin Rosencranz

When Mohan Kumaramangalam, the then minister for coal, pressed Prime Minister Indira Gandhi to nationalize Indian coal mines, he had not imagined how the Coal Mines Nationalisation Act of 1973 (Act) would turn into a Frankenstein in the 1990s. Most coal mines were nationalized and the National Coal Development Corporation morphed into the Coal Mines Authority of India Limited, which is now the holding company Coal India Limited.

But just two decades after nationalisation, a succession of weak governments decided to circumvent the act by allotting ‘coal blocks’ rather than coal mines to private parties. Coal India was not able to meet India’s fast growing needs for more coal and it was felt that limited privatization would spur quick development by bringing in private investment and augmenting coal output required desperately by new power plants. These coal blocks were allotted free of cost.
 
A small royalty was chargeable on the quantity of coal mined. This low cost was justified due to the ‘pass through’ cost in generation of power. This means that any charge levied on allotting these coal blocks would have a direct effect on the cost of power produced. No cost led to unscrupulous allotments of short lived ‘coal blocks’, tying up India’s rich coal resources. Coal India was deprived of new mines, while the private sector enjoyed grabbing these blocks for free. Most never started production. With coal blocks not producing much coal, India was back to square one. Coal output stagnated at about 300 to 400 million tonnes, while new coal-fired power plants were sprouting up and required 200 million tonnes more than the domestically mined coal. The National Thermal Power Corporation (NTPC), the country’s largest state owned power producer, panicked in 2010- 11 with just two days worth of coal in hand.
 
On many occasions the Manmohan Singh government had to allow duty free imports of coal in order to meet the increasing demand. While imports took care of immediate needs at the cost of a huge dent in India’s already negative balance of trade, power supply grew. India now has more than overcome the hump of power scarcity. In this era of shortages, power plants insisted that Coal India meet its obligation to supply them coal. In a rush of administrative decision making, the Prime Minister --who also held the charge of the coal ministry - instructed Coal India to meet at least 80 per cent of its committed obligations. Many power producers weren’t getting enough coal and this was an effort to push for efficiency and make Coal India more responsible.
 
The situation seemed to heal when the NDA government welcomed the cancellation of all coal blocks by the Supreme Court in 2014. Moreover, quick amendments to the Act enabled fresh auctions and re-allotment of coal mines to public and private power producers. This time however, for a price. Coal India’s output has jumped from 450 million tonnes in 2014-15 to about 540 million tonnes in 2015- 16. The target for 2016-17 is 600 million tonnes, despite a slow market. Even with the current slowdown in the economy, the government is pushing forward with these targets, hoping that import of coal can be replaced by domestic production.
 
However, several power plants have been built to use imported coal. Due to the difference in ash and moisture content, these boilers are designed differently and will not be able to use Indian domestic high ash coal efficiently. Others with older boilers had made some adjustments to be able to use a mix of imported and domestic coal and continue to happily do so, resulting in imports continuing at about 180 million tonnes. The government has not imposed any import duty on coal and the attraction for import is greater as many power producers have invested in their own coal mines overseas and set up establishments to run them.
 
Transfer pricing benefits could also drive unrelenting imports. The coal ministry claims that Coal India will start exporting its surplus coal rather than curtailing its production or lowering its prices. Coal India decided recently to actually increase its prices of all power grades across the board. In a slack market, any producer would lower its prices, but interests other than efficiency seem to determine administrative decisions in the coal sector.
 
With NTPC strongly supporting this move, coal prices will go up and Coal India will continue to make huge profits. It helps when both ministries are under common management. It is not just the government that benefits; it is also the private shareholders. Another 10 per cent of Coal India’s shares were sold to private investors in early 2015 and with this the private holding now is 20 per cent. Interest groups lobby to influence administered decisions and NTPC’s loss will be Coal India’s gain, with 20 per cent leaking out to private investors. These anomalies seem to be evident to the experts at Niti Aayog, but no comprehensive energy policy has been finalized so far. In the interest of freeing Coal India from administered prices, with a decade of eAuction price mechanisms running successfully, Niti Aayog is rumoured to be in favour of market pricing for coal.
 
The Ministry of Power is vehemently opposing this. India needs to make some hard choices fast and these anomalies need to be cured. A coal regulator might help, if the budget allows for the added salary burden on the exchequer. Why does India want to increase its coal production so late in the day, when the whole world is closing its coal mines? Tripling coal output will no doubt lead to tripling India’s pollution as well. India’s climate goals hide the fact that we plan to keep spewing more greenhouse gases as long as we keep on growing at a fast pace, because our climate targets are geared to the total energy consumption of the total GDP.
 
These dichotomies lay hollow India’s claims at being a responsible global citizen. Prime Minister Modi, though not an economist, will no doubt have to take the final call. If the past two decades of liberalized policy making can be cited, the nation’s experience with Prime Ministerial decision-making has been pretty poor, even in the hands of experienced economists. The primary call needs to be taken on the fact that the nation is built on the backbone of public sector enterprises, which seem to have done their bit in contributing to building India. How far right do we want to go?