I am not going to comment on whether the Supreme Court gave the right decision or not. Instead, I am going to address the debate regarding the implications of this judgment. In particular, the most significant criticism coming from many quarters is (a) it will frighten off potential investors, both domestic and foreign, from investing in India; and (b) it will have a severe negative impact on the power-generation industry, among others, when increased power is essential for getting India back on a high-growth trajectory. Before digging into either of these, let me make one obvious point.
Regardless of whether the criticisms are right or wrong, the court cannot be expected to change its decision to accommodate them. The court's job was to check whether the allocations were legal or not, and if they were illegal, then the court had to cancel the allocations. And that is all the court has done. In a democratic rule-of-law society, it is not the court's job to ensure growth and investor confidence; that is the job of the government and of policymakers. Hence, even if the court's decision has had negative economic consequences, one cannot, and should not, expect the court to change its decision based on that. In fact, the court went out of its way to first ask the government what its problems would be if these allocations were cancelled and would it be able to handle them. When the government said "yes", the court went ahead with its announcement. As for going against the government's request to forgive 46 allocations, the court offered a compromise of settling the illegality of 42 of them within the next six months. In other words, while all but four stand cancelled, 42 operational blocks could continue operations for the next six months provided they paid a penalty. If we do not question the illegality of the allocations, we have to commend what the court has done.
Now let us consider point (a) above. The allocations were made by the government, and the investors who got the allocations had followed all the procedures laid down by the government. If the government had done something illegal - and no one expects the government to deliberately do so - why punish the investors who based themselves on the "reputation" for adhering to its own laws that any government has? If indeed the private parties had not colluded with the government to implement the illegal action, this decision is a breach of an implicit promise made to them by the government. And for this, the government must compensate them if they suffer any losses because of this. However, when calculating these losses, one has to distinguish between windfall profits made by the firm because of the free allocation of coal blocks, and what is essentially a reduction in the profits because of wrong promises made by the government. For example, from the penalty of Rs 295 a tonne of coal, based on Coal India Ltd (CIL)'s price of coal, one has to deduct the extra costs that these investors had in extracting coal from pits that are less lucrative than what the CIL has.
If, however, there was collusion between the government and those allotted the coal blocks, then one would expect many honest (or non-collusive investors) to be overjoyed at the turn of events and become more confident about the rule-of-law status in India. And, really, we do not want all investors, only those who believe in the rule of law.
Now let me consider point (b) above. Yes, the availability of additional electricity and, hence, the price of power will be adversely affected. However, the government will have additional revenue by auctioning the blocks. This money can be used to subsidise the power industry directly, or subsidise the users of power. Indeed, regardless of the illegality of the earlier allocations, unless there is a very good, transparent and well-reasoned argument, allocating coal blocks should not be governed by what is going on in the power industry. First, it is in principle better to address the problem directly. Second, giving free coal blocks distorts the input mix in the power-generation industry since coal is not the only source of generating power. Third, when we are trying to get rid of fossil fuels as much as possible, it looks kind of silly to give coal away for free. And finally, the best incentive for greater power generation is the high demand for power, reflected in high prices and the large profits to be made in this industry. Keeping the prices that producers get low and then compensating them through free or subsidised inputs is not the way to go. All the way till 1991, we had seen the drawbacks of such approaches. Yet as we sing the praises of the reform process initiated more than two decades ago, we worry about the impact on the power industry of properly priced coal blocks.
The writer is research director, India Development Foundation, and director, School of Humanities and Social Sciences, Shiv Nadar University