It was the best of times; it was the worst of times; it was the age of wisdom; it was the age of foolishness. While the current dynamics of coal may not match the intrigue and tumult of A Tale of Two Cities, the initial sentiments certainly reflect how things are shaping up in the sector. Recently, newspapers were all abuzz with Coal India’s emergence as the country’s “most valued company” in terms of market capitalization. In stark contrast to this misplaced financial jubilation, India has been confronting severe coal shortages over the last few years which has led to persistent complaints by state governments, public and private sector power generators, and steel companies regarding the availability and timely delivery of coal.
This deterioration in India’s ability to extract its considerable domestic coal reserves has basically been encoded in policy as well. The newest coal fuel supply agreements (FSA) by the Ministry of Coal guarantee at most 75 percent of a power plant’s fuel requirement; the balance must be procured privately. Even if an FSA is obtained, which itself is a major uncertainty given the complications of the linkage approval process, the method of evacuation from source to destination – typically some mix of rail and road – and logistical management is often poorly coordinated by the responsible agencies leading to further losses and delays. Not surprisingly, many large coal consumers are choosing to resort to higher quality imported coal instead, where the contractual and logistical obligations are more predictable. In response, coal exporting countries – most recently Indonesia – have begun responding to the global upsurge in coal demand by increasing prices and changing regulations.
India is expected to import upwards of one hundred million tonnes of coal in the next few years. Why has domestic coal production failed to keep up with demand? This is the question that has been perhaps the most difficult to answer while various explanations have been put forward. Some say that environmental clearance and land acquisition issues have been the main bottleneck. Others have blamed the inability of the state-owned coal companies to effectively integrate modern mining practices and technology into their operations. Captive coal mine owners, both public and private, have also received criticism; many of their allotted blocks have been de-allocated after they failed to bring the blocks into production. Anecdotally, the association of criminal gangs with the coal industry and the resulting theft and dilution of grade is also understood. Consequently, the precise causes for the current shortcomings in domestic production are hard to establish. However, one thing that is quite clear is that the expected efficiencies of a traditional market have not materialized.
The Indian coal market is an unusual beast. The state-owned production oligopoly between Coal India Limited (CIL), Singareni Coal Collieries Limited (SCCL), and Neyveli Lignite Corporation (NLC), has historically been complemented by a quasi-monopsony. Power, iron and steel, and cement – the largest industrial consumers of coal – were also largely state-run or at least state-controlled until liberalization, but it was actually Railways which had significant pricing power because of its control over the evacuation and distribution of coal. After liberalization, the Ministry of Coal retained control of pricing until the early 2000s, when it formally handed over these responsibilities to CIL. Even then, only the highest grades of coal were sold at import parity prices, and lower grades – most of India’s production – remained under-priced; presumably these prices were guided by the Ministry of Coal to keep down the cost of essential commodities, power in particular. In early 2011, CIL initiated a differential pricing system, which gave market-driven sectors higher prices.
Despite these changing pricing regimes, buying coal in bulk on the open market is actually quite difficult, except in black markets. Of India’s six hundred million tonnes of domestic coal production, almost 80 percent is allocated through the Ministry of Coal’s administrative committees to public and private sector applicants from various sectors. An additional 10 percent is sold through online e-auctions, which have resulted in considerable revenues. In 2009-10 e-auction prices were, on average, almost 60 percent above notified prices. Captive coal blocks, which will soon be allotted to public and private sector companies through competitive bidding, account for an additional 9 percent. Finally, the last 1 percent of domestic coal production is allocated to state government agencies, which make coal available in local markets.
The rationale behind low coal prices was that resultant outputs – power, steel, and cement – were essential and needed to be cheap to encourage growth. But looking at the most recent price statistics from the Office of the Economic Adviser, coal prices have increased by 89 percent from 2004 to 2011, whereas electricity, steel, and cement prices have increased by 13 percent, 26 percent, and 50 percent respectively. The Wholesale Price Index increased by 54 percent in the same period. While electricity prices are regulated, the latter two commodities are not, which means these industries have managed to adequately internalize rising coal costs. If this is the case, then the rationale for input subsidies in the form of artificially low coal prices is quite weak. But pricing is not even the fundamental problem here.
The administrative system that is overseeing coal supply is quickly losing its credibility. Power sector capacity, perhaps somewhat unwisely, has raced ahead of coal supply capabilities. Many currently operating plants, particularly those in the state sector, are functioning well below their plant capacity. In the last year, barely any FSAs have actually been signed because of the inability to meet existing contractual agreements. The fragility of this system has come out in the last few months as labor unrest, heavy rains and the Telangana protests caused dwindling stockpiles at power plants and prolonged power outages in multiple southern states.
In such unpredictable circumstances, even the private sector has become quite risk averse. CIL’s attempt to move towards calorific pricing has been repeatedly objected to by the power sector. If implemented properly, such a move would theoretically improve conditions for the power sector. However, because of CIL’s “poor track record in delivering quality coal,” many operators prefer the status quo to any drastic changes. This kind of equilibrium, where neither side wants change in a clearly dysfunctional system, is unsustainable.
While there is no simple solution to these problems, a serious inward look is in order. Acquiring coal resources abroad may make sense for strategic reasons, but given that it takes five to seven years to fully develop a coal mine, the short-term solutions must lie at home. The Sankar committee report on coal sector reforms predicted many of these problems four years ago, and it may be time to revisit the recommendations of that committee. Several important questions will need to be considered. For example, how has the productivity of Indian coal mining companies changed over the last twenty years? How do coal supply lines function, and where are the bottlenecks and diversions in this process? Is India extracting coal optimally from its domestic mines? How is it possible to transition to a more open coal market in the existing legal framework? Paying some serious attention to these questions will help alleviate the constant fire fighting that has been occurring over the last few years.
Rohit Chandra is a Research Coordinator at CASI. He can be reached at firstname.lastname@example.org
India in Transition (IiT) is published by the Center for the Advanced Study of India (CASI) of the University of Pennsylvania and funded by the Nand and Jeet Khemka Foundation. All viewpoints, positions, and conclusions expressed in IiT are solely those of the author(s) and not specifically those of CASI and the Khemka Foundation.
© 2011 Center for the Advanced Study of India and the Trustees of the University of Pennsylvania. All rights reserved.