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Captive of delays

UPA's slowness on coal reform has hastened the supply crisis

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Business Standard New Delhi
Last Updated : Jan 20 2013 | 3:11 AM IST

The leaked draft report of the Comptroller and Auditor General (CAG), published in several newspapers, may or may not eventually be very different from the final report to be tabled in Parliament next month. But, even in its current version, the draft report has correctly focused attention on the severe errors in the government’s coal policy. While it may be logically fallacious to claim vast amounts of loss to the state’s exchequer based on the output from blocks that Coal India may not have been planning to exploit anyway, there are other serious questions that should be asked. After all, India’s power crisis has gone from bad to worse — and a large part of the problem is coal shortage. India’s annual coal production is about 530 million tonnes; this falls short of requirements by 80 million tonnes, and the shortfall is only growing as power demand rises. Meanwhile, companies with “captive” blocks assigned by the government, on which only nominal royalties are charged, earn supranormal profits for the industry. This is not surprising, since their cost for inputs is below that of other firms, which have been assured supply from Coal India — and far below those that have to buy coal in the open market.

The model that India has been following so far is complex in the extreme. Some output prices for power companies are regulated. Other recipients of natural-resources largesse from the government – in the steel sector, for example – have no such constraints on their revenue. However, the government, in order to maintain a steady supply, has chosen to subsidise and control inputs, instead of ensuring a fully functioning market for the sector’s eventual output. Hence the allocation of “captive” coal blocks. It is this model that has been demonstrated to be both unfair and inefficient. And it is not as if the original error, in not auctioning natural-resource extraction rights, has not already been recognised. As this newspaper has reported, the prime minister’s office decided in 2004 that all further allocations would be auctioned. The law ministry subsequently determined that this change in policy required only an executive order, and no additional legislation. However, the coal ministry did not act on these recommendations, choosing instead to wait for legal changes. The direct consequence is that an expensive and inefficient policy has continued for the entire tenure of the United Progressive Alliance (UPA) so far, leading to the current problems. A new law on competitive bidding for coal blocks is now in place, but it is yet to become fully operational. No amount of spin by the UPA’s political leadership can conceal these basic facts, which depend not on the CAG’s interpretation but on the sequence of events.

The coal ministry has made what it believes are corrections to this policy, true. Yet its choices will only prolong the crisis. It has moved to confiscate the coal blocks assigned to 58 companies that it believes are being underutilised. There will be, thus, more delays in the start of commercial production from these blocks. Meanwhile, the government, pressed by private-sector power producers, has tried to ensure coal supply to electricity-generation plants through “linkages” with Coal India. These are, however, only short-term palliatives. The only possible solution is what has been postponed through this government’s entire tenure: the auctioning of raw material by enforcing the law that has just been passed, and creating a real, decontrolled market for power.

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First Published: Mar 26 2012 | 12:51 AM IST

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