During his Budget presentation earlier this year, the Union Finance Minister P. Chidambaram expressed concern over the increasing import of coal and the impact this will have on the current account deficit.
At present, India meets nearly a fifth of its over 600 million tonne (mt) of coal requirement through imports. Leaving aside coking coal, which is not available in the country, the biggest worry is the rising import of thermal coal used in power generation.
The concern is genuine. With nearly 60 per cent of India’s power generation coal-based, any spike in global coal prices will have an impact on the economy than crude oil or natural gas prices.
domestic production
According to the World Coal Association, despite having a more or less similar share of geological reserves (10 per cent) as China (13 per cent), India produced a mere 509 mt thermal coal in 2011. This is less than one-fifth of China’s estimated production of 2,831 mt in the same year.
Indian policy makers attribute this poor run to the country’s coal nationalisation drive that began in 1973. It ended up converting the country’s near-unorganised and highly unsafe privately-run coal sector into a national monopoly — Coal India Ltd — in 1976.
The initiative, critics argue, was in contrast to China’s move to open up its mining sector in 1978.
Leaving aside issues related to unsafe mining practices in China (the fatality ratio is five times higher than India), there are a few major fallacies in this argument.
First, though it opened up the mining sector, China deregulated coal prices only in 2007. The initiative did not augur well for the Chinese economy. In a rare flip-flop, China went back on its promise to deregulate electricity tariff and re-imposed regulations on coal prices for power generation.
Second, beginning June 1993, India opened doors to private sector participation in coal production through captive allocation route. CIL’s monopoly was reduced only in terms of commercial production.
The initiative led to the redistribution of a little less than half of India’s over 100-billion tonne reserve, to hundreds of captive users free of cost.
Nearly half of the beneficiaries are from sectors (including iron and steel) enjoying free market pricing of the final product. It was expected that they would give a head start to coal production, at a lower cost than CIL, and make maximum profits. The planners projected that the captive segment would produce 104 mt of coal by March 2012 and 333 mt in March 2017.
What happened next is history. Blocks were distributed in a discretionary methodwithout much transparency, leading to the cornering of large number of assets by a select few.
Captive production is yet to touch 30 mt. It has moved up by a mere 10 mt in last 10 years. The entire allotment process is now under the scanner. Instead of coal, the country is presented with ‘Coalgate’ — probably the biggest financial scam in its history.
Notwithstanding its inefficiencies, the State miners (CIL and Singareni Collieries) contribute close to 95 per cent of the domestic production. Between 1992-93 and 2012-13, CIL’s production rose from 211 mt to 452 mt. This includes a small percentage of coking coal. Having failed to post a production growth in 2010-11 and 2011-12, CIL staged a recovery last fiscal.
However, there is hardly any reason to rejoice over the improved performance of the State-owned miner.
First, the redistribution of assets to captive users has seriously impacted CIL’s ability to ensure a production growth beyond 2022.
Most importantly, the entire mining sector is plagued with a series of problems ranging from land acquisition, environment, lack of transport infrastructure to evacuate coal and increasing interference from political circles — these limit the prospects of any dramatic increase in production growth, be it by a State or private player. “The whole business environment is fragile and may give way at the slightest provocation,” said a seasoned miner, who did not want to be quoted.
The country’s policy makers have hardly taken any lessons from the failures and are engaged in either blaming CIL for not producing enough coal or making fresh promises on captive production (now projected to grow three times to 100 million tonnes in less than four years).