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    South Asia
     Sep 7, 2012

India's coal output failure
By Siddharth Srivastava

NEW DELHI - India's struggling coal sector has been thrown into sharp relief by the country's independent Comptroller and Auditor General (CAG), which estimates that the national treasury has lost nearly US$33 billion because of the way the government handles mining rights.

New Delhi, according to the CAG, nominated more than 142 coal-mining rights between 2005 and 2008 to 75 private and 67 state entities, instead of instituting competitive auctions to determine the real price of the coal blocks that have been deemed to be worth more.

Even as the opposition Bharatiya Janata Party seeks the resignation of Prime Minister Manmohan Singh over the "Coalgate" scandal, the fact remains that the coal sector has


been in dire need of reforms for some time, predating 2005. Competitive bidding as has been formulated for the oil and gas sectors forms only one cog in the overall dismal scenario.

Coal output stagnant
India's coal output has remained nearly stagnant over the years even as demand has increased rapidly. Given the absence of domestic fuel linkages, electricity producers such as Adani, Reliance Power and Tata Power have been forced to purchase expensive overseas coal blocks, spending billions of US dollars to ensure supplies and guard against price volatility.

Production failures have also meant India's coal imports, which were negligible just five years back, have risen rapidly, causing a drain of foreign exchange. India already imports more than 80% of its oil needs. The Coal Ministry estimates coal demand at nearly 1 billion tonnes by March 2017, up 40% from the current 700 million tonnes. Domestic output is projected to rise by 30%, creating a gap of nearly 300 million tonnes, necessitating imports.
To make matters worse, the monopoly producer Coal India Ltd has been clocking negative growth rates in output. CIL, which produces more than 80% of India's coal, claims it should not be solely blamed as its problems are linked to external factors beyond its control.

These include overzealous implementation of environmental and forest-protection laws, land-acquisition problems and infrastructure issues such as inadequate rail facilities. The entity has also been set back by the threat of Maoist rebels in mineral-rich states in eastern India such as Jharkhand, Bihar and Orissa.

However, many do not buy CIL's arguments. This resulted in the unusual instance of one state-owned entity criticizing another in June when Arup Roy Choudhury, chairman of state-owned NTPC, India's biggest power generator, said CIL's "inability to supply adequate amounts of fuel is threatening NTPC's expansion plans. It is the only company in the world where the production has gone down but the profits have gone up."

Choudhury said NTPC would not be able to add 11,000 megawatts to its output because of the lack of fuel availability. "The solution is not to raise imports but increase local output," he insisted.

Price politics
Populist politics that seeks to dole out free power and fix low electricity tariffs to protect the consumer have messed up the scenario further. Private entities avoid running their plants on expensive imported coal as they are unable to pass on cost increases. This has created the piquant situation of idle and excess capacity alongside power shortages and cuts.

For the same reason, none of the coal blocks nominated by the government to private entities have been developed. The coal producers fear losses due to selling coal at the low controlled prices.

At the same time, they see reasons for holding on to the coal assets in the hope that the government will allow open merchant sales of coal in the future. This could result in huge windfall gains that could dwarf the notional losses that have been attributed by the CAG.

CIL too has refused to import expensive coal and selling it cheaply as per the fixed prices, because of fears of erosion of returns. The price of imported coal is nearly double domestic rates, though the gap has reduced a bit in the recent past.

Despite talk of renewable, hydro or nuclear energy sources playing their part, the bulk of India's electricity continues to be generated via coal-fired thermal power plants.

Further, the primacy of coal will remain, given the exponential rise in power consumption. In this context, the assertions of the CAG could actually turn out to be a blessing in disguise. It could usher in the much-needed changes and amendments in India's coal sector. No future government would want to risk another report that exposes similar failures and losses in allocation of coal blocks.

This will create a constituency that lobbies for prices and tariffs that reflect costs, as is happening in the gas sector, where entities seek parity with prices of imported liquefied natural gas that are much higher.

With such huge and complex problems weighing on the coal sector, some imaginative thinking is clearly required if solutions are to be found.

Siddharth Srivastava is a New Delhi-based journalist. He can be reached at sidsri@yahoo.com

(Copyright 2012 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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