Coalgate: Cleaning up the coal sector

My earlier blog (, 31 October 2014) lamented the sorry state of affairs as far as India’s policy with regard to extraction of oil and gas resources was concerned. The coal sector in India presents an even more tragic picture — evidence, if any was needed, of the complete absence of a coherent energy policy in India. Over the past few years, there has been almost complete anarchy in this sector, commencing with the adverse reports of the Comptroller & Auditor General of India on the manner of allocation of coal blocks and culminating in the recent Supreme Court decision to cancel all allotments by the government, amounting to 214, since 1993. Retired bureaucrats have been dragged to court and fried in the media, all because of the lack of a transparent, impartial policy for allocating coal blocks. The recent decision of the Government of India to reallot a number of these blocks to public sector producers and carry out an e-auction of the remaining blocks to captive producers in the power and steel sectors is symptomatic of government’s proclivity to go in for half-hearted measures rather than a complete overhaul of a system that has been exposed as completely rotten over the past forty years.

The nationalisation of the coal industry in 1973 was part of the wave of state control over all major sectors of the economy, starting from the Second Five Year Plan in 1956. As with bank nationalisation, it not only enabled the government of the day to trumpet its socialist credentials but, more importantly, placed major sources of patronage and political control in the hands of the ruling dispensation, then almost exclusively from the ruling Congress party. We are all conversant with the way in which the control over the banking sector was used to waive loans to different sections of society, at the cost of bank profitability and the spread of an ethos that repayment was an avoidable nuisance. That this was, and still is, used by powerful business interests to evade their irresponsible management of enterprises should come as no surprise to us. The coal industry was no different. The public monopoly of production and sale of coal created entrenched, powerful vested interests, commonly known in public parlance as the “coal mafia”. This mafia was the source of money and muscle power for elections, even though democracy ensured that the spoils were distributed between political parties across the spectrum. The guarded decisions of the government in respect of resolving the present imbroglio in the coal sector are probably occasioned by the upcoming state assembly elections in Jharkhand. Since there is no predicting the outcome of these elections, one should not be too sanguine about the possibility of wide-ranging reforms in this sector, at least in the short to medium term, especially the opening up of the coal mining sector to private domestic and foreign companies..

This policy inertia in the coal sector (in fact, in the entire energy sector) has hurt the Indian economy and will continue to damage India’s energy and ecology. It puts pressure on the country’s energy requirements. With an annual coal production of 595 million tonnes in 2012, India was the third largest producer in the world. But it is also the third largest net importer of coal, with 158 million tonnes being imported annually. A major reason for this is the inefficient production techniques employed by the three monopoly public sector producers. Over 300 underground coal mines produce just over 50 million tonnes annually, while 177 open cast (or open pit) mines yielded over 425 million tonnes of coal annually. Even granted the relative ease of open cast mining, there is still scope for augmenting underground mine production, more so since coal bed methane is another useful energy product that can be produced. With India being the fourth largest net importer of crude oil in the world, there is need to step up coal production to meet energy requirements to ease the burden on the balance of payments. This is all the more so since India’s nuclear power programme has gone nowhere after the “nuclear deal” euphoria of 2008 and India is still neither a major producer nor user of natural gas.

Open cast mining has a deleterious impact on the natural environment. Acres of land are laid waste and water sources suffer pollution, not to mention the high air pollution in the coal producing areas. Environmental safeguards are meant to be rigorously implemented, but it is open to question how far pollution control boards at the state and national level will confront violations by public sector producers, especially given the low level of citizen awareness and organisation in the coal belts, most of which are located in some of the most economically and socially backward areas of the country. Administered prices for coal set by the government (kept on the lower side to cushion the price impact on end-users) also act as a disincentive to introduction of environment-efficient coal production. But the adverse effects of artificially government-fixed (as opposed to market-determined) pricing go far deeper. Firstly, it acts as a disincentive to efficient production by reducing the expenditure on research and development to develop more cost-effective methods of production. Secondly, the legacy of the freight equalisation policy, in force till 1993, by making coal available at the same price in areas in North, West and South India (where coal was not mined), removed any incentive to go in in a big way for end-user power, steel and cement plants in the eastern states, where the coal was mined. Till this day, these states are yet to recover from this warped policy, which saw power plants coming up in areas far removed from coal production, like Delhi, Panipat (Haryana) and Bathinda (Punjab). The recent Supreme Court order has sounded the death knell for these poorer states: with coal mine allocations to captive power and steel producers having been cancelled, there will be further delay in commissioning of these projects, more so if the e-auction process runs into any problems.

By far the most insidious and long-term impact of an unrealistic natural resource pricing policy is on the development of alternative clean renewable energy sources. Whether it be natural gas or coal, artificially low prices lead to depletion of scarce fossil fuels through excessive use in production processes. In the case of coal, the development of environmentally friendly production processes will raise its price even further. This is likely to make harnessing of renewable energy sources like solar, wind and geothermal energy more viable by making their costs of production competitive with that of coal and natural gas. Not only will this strengthen the country’s energy security, it will also improve the ecology and environment at a time when growth imperatives will place a great strain on fossil fuels.

In a blog written two years ago (,  23 November 2012), I had outlined the path for decontrol of and attracting private investment in the coal sector. I had also sketched out a mechanism for offer of coal blocks through a bidding process, somewhat similar to what is being done in the petroleum exploration sector from the 1980s onwards. The sooner this course of action is adopted, the better it will be for the future of development of coal reserves in India. Hopefully, this day will dawn sooner rather than later.

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