Letter from Mumbai: Coal mining imbroglio

Published September 1, 2014
A worker unloads coal from a goods train at a railway yard in Chandigarh July 8. Scarce coal supplies has led to the overall power 
shortage of more than 40,000MW in India.—Reuters
A worker unloads coal from a goods train at a railway yard in Chandigarh July 8. Scarce coal supplies has led to the overall power shortage of more than 40,000MW in India.—Reuters

INDIA’S coal mining industry, which has been racked by scandals in recent years that have led to an acute shortage of the commodity, could see the light at the end of the tunnel and undergo a major transformation after the Supreme Court delivers an important verdict this week.

The apex court last week dec­lared the allocation of nearly 200 coal blocks to different companies since 1993 as illegal.

The court ruled that all the 216 coal block allocations made since 1993 were illegal and done with ‘an ad-hoc and casual approach, without application of mind.’ Many of the blocks were awarded to favoured business groups with links to politicians. This week it will decide the face of these coal blocks — whether they would be cancelled, or whether there would be stiff new rules imposed on the sale of the commodity.

The Comptroller and Auditor General of India had in 2012 accused the government of allocating coal blocks to companies — instead of auctioning them — resulting in a loss of Rs1.76trn to the exchequer. While 70 coal blocks had been allocated between 1993 and 2005, most of the remaining had been handed over to firms, either owned by politicians, or those with close links to ministers and other leaders, between 2005 and 2010.

The national auditor claimed that such arbitrary allocations had resulted in windfall gains for the companies, but depriving the exchequer of huge sums. The Central Bureau of Investigation was also directed to launch a probe into the ‘coalgate’ scam, and the apex court began monitoring the probe after allegations surfaced that the United Progressive Alliance was trying to influence the probe agency.

The saga of the under-performance and corruption in the Indian coal mining sector can be traced back to 1973 when the then government decided to nationalise the industry. State-owned mining behemoth Coal India Ltd was the sole miner. Over the decades, it failed to invest in new technologies, resulting in an acute shortage of coal.

The country’s power and steel sectors are dependent on the commodity for their survival, but Coal India was unable to meet the growing demands of the two crucial industries. Even after the launch of the reforms programme in 1991, the Indian government failed to bring about changes in the coal mining sector by opening it up for private investments.

In 1992, it came out with a policy of allocating mines to power companies and steel producers, who would have to use the coal for captive consumption. But this was done in an arbitrary fashion, instead of being auctioned to the highest bidders. Besides state-owned power producers, coal was allocated to many private firms with strong links to politicians.

After the ‘coaltgate’ scam surfaced, the government took back about 80 coal blocks and the bank guarantees of 42 companies was forfeited. In the process, the coal shortage got exacerbated and the country’s power and steel production suffered a great deal.

India today has a power generation capacity of 250,000MW, but because of the shortage of coal, nearly 35,000MW is not being produced, according to the Central Electricity Authority (CEA).


THE Indian government, in a bid to push power generation, had a few years ago initiated a policy of encouraging private companies to put up ‘ultra-mega power plants’ of 4,000MW capacities. The power producers were also allotted coal blocks. Many leading power producers bid for the projects, quoting low tariffs, as they were assured of coal supplies.

However, after the allocation of coal blocks were cancelled, they were given permission to import coal from Indonesia and other countries. With demand from Indian power producers soaring, Indonesia also hiked tariff on export of coal, leading to a crisis on the power front. The independent power producers who had promoted UMPP projects complained that it was not viable to produce electricity at such low tariffs, especially when the cost of coal was high.

Two leading producers, Tata Power and Adani Power — who had installed UMPPs — sought and obtained a hike in power tariffs from the Appellate Tribunal for Electricity. However, the decision was challenged and last week the Supreme Court ruled that the two firms cannot seek higher tariff as they had won the contracts on tariff-based competitive bidding.

The two companies are now facing a crisis, both on the liquidity and coal fronts and have been forced to cut down on their power generation. The result: the western power grid, which serves the industrialised states of Gujarat, Maharashtra and Haryana and the minerals-rich states of Madhya Pradesh and Chhattisgarh is facing a massive power shortage.

Shortage in coal supplies has led to a 7,000MW power shortfall in the region. The overall power shortage has gone up to more than 40,000MW in India, nearly a sixth of the country’s total power generation capacity.

The new BJP-led government, however, believes that the Supreme Court verdict in the coal blocks allocation case will do a world of good for the sector. “The fact that this has brought to finality and closure a dispute that has been going on for many years is a big plus for the Indian economy,” said Piyush Goyal, the minister for power and coal. “The economy can now move forward rapidly rather being cast with the shadow of uncertainty.”

Industry body, the Federation of Indian Chambers of Commerce and Industry (FICCI) has, however, urged the Supreme Court to consider the implications of any decision — relating to cancellation of the allocations of coal blocks — on the economy.

“This judgement has once again brought to the fore concerns about the country’s policy regime and has the potential to disrupt restoration of investors’ trust,” said Sidharth Birla, president, FICCI. “We reasonably expect that any extreme step (such as possible en-masse cancellation of allocations) shall not compromise legitimate business and investors who participated in good faith in processes laid out over an extended period by the governments of the day.”

According to him, the fate of productive assets, estimated at Rs2.86trn, are at stake. “We urge the fullest consideration of multiple levels of serious economic implications to the nation, including loss of employment, replacing domestic loss of production with imports and compromising energy security,” added Birla.

Published in Dawn, Economic & Business, September 1st, 2014

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