India Taking Steps to Transform its Coal Industry

26 November 2014 FDI Team

India plans to transform its coal industry with denationalisation and by confronting the corruption within the sector. The transformation is not complete, however, as the state continues to protect its virtual monopoly on this critically important, yet stagnant, sector.

Background

The Indian Supreme Court ruled on 24 September that 214 of the 218 coal blocks that had been allocated to private companies since 1993 were operating illegally. Targeting corruption, the Supreme Court decided that these blocks were “arbitrarily allocated”. The government has since taken control of 42 operational mines. A transparent re-allotment procedure for the blocks has been outlined by the government, which intends to use e-auctions. Proceeds are to go to the state in which the coal mines are located and the entire process is to be completed within three to four months. There will also be no first right of refusal for the original owners of the blocks. In a move with far-reaching implications for the industry, the government has taken the opportunity to reform the sector by allowing commercial mining by private companies.

Comment

The Supreme Court called the initial allotment of the blocks ‘fatally flawed’ in its ruling.It said the blocks were allotted though an ‘ad-hoc and casual’ approach, further stating that ‘Common good and public interest suffered heavily in the unfair distribution of the national wealth: coal.’ Coal mines were under-priced by the previous government; as much as US$33 billion in windfall gains was effectively given away to mine operators. Additionally, it has been alleged that these companies worked to illegally influence the allotment decision. The Indian media has dubbed the matter “coal-gate”.The Supreme Court has refused to allow former ministers involved in the original allocation process, among them former Prime Minister Manmohan Singh, to be brought under scrutiny by the relevant authorities prior to levelling possible criminal charges against them. Companies under investigation for illegally influencing the allotment procedure, however, have not been barred from bidding for allocations again on the grounds that investigations against them are still underway.

Most importantly for India, the ordinance expected to be announced soon by the President will contain an enabling provision for commercial mining. Finance Minister Arun Jaitley announced the decision after a Cabinet meeting, confirming the government’s intention to take the sector partially down the road of denationalisation. It is partial because the two state-owned coal giants will be allocated mines and their market shares protected, and only companies incorporated in India will be allowed to bid. The ordinance has not yet passed parliament, but must do so within six weeks of parliament resuming sitting. Unions, in the meanwhile, will aggressively lobby against the decision. General Secretary of the All India Coal Worker’s Federation, Jibon Roy, stated to the press, ‘We’ll resist every move to privatise the sector.’

Despite having vast coal deposits, India is dependent on energy imports and suffers regular power blackouts. The coal sector is one of the most important, yet most inefficient, sectors in India and has been highly centralised. Coal-fired plants comprise 58 per cent of India’s installed power generation capacity. Whereas an open-cast mine in Australia can produce 75 million tonnes per eight hours and an underground mine 40 million tonnes, Coal India, the government-owned coal producer, averages seven tonnes and 0.8 tonnes, respectively. Officials are hoping that the move towards denationalisation will be the catalyst for an efficiency initiative in Indian coal production.

What this means for the global coal industry remains to be seen. The Finance Minister has stressed that the interests of Coal India are to be protected, which means that the state’s effective monopoly on the sector is not about to be reduced immediately. In the past, that protectionism has been a factor in the sector’s poor productivity.

About 300 million Indians currently lack access to electricity in their homes, and millions more still rely on biomass for fuel and lighting. Primary energy consumption in India doubled between 1990 and 2012, and consumption of coal is expected to rise from 720 million short tonnes to 981 million short tonnes by 2017. For countries that export coal to India, their future in coal seems assured.

Bronwyn Fraser
Research Assistant
Indian Ocean Research Programme

 

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