Coal India is crucial for India’s future. To grow GDP at nine per cent, energy consumption has to grow by six per cent. Two-thirds of this energy demand is met by coal, and Coal India accounts for 70 per cent of total coal consumption. There are two major market imperfections in the sector. One, Coal India enjoys a virtual monopoly. Private mining of coal is allowed only for own or captive consumption, merchant sale being reserved for the public sector. Within this space Coal India is the big daddy, accounting for 80 per cent of domestic output. Two, marketing of merchant sale of coal is severely circumscribed by state control. So Coal India ends up selling its output mainly to power-generating companies, at less than half the global price for comparable grades.
A beginning has been made in moving towards market-related pricing by letting Coal India sell 10 per cent of its output through e-auction, and, from this year, pricing coal at its calorific value, which is the global practice. Expectedly, chief ministers who do not like to raise power rates, like Mamata Banerjee, are protesting vehemently.
It is imperative to move towards market-related pricing for all kinds of energy to promote energy efficiency. That is required for both a healthy balance of payments in an energy-deficient country, and for reducing carbon emissions to combat global warming. Subsiding the consumption of domestically produced energy reduces the demand for imported energy — but creates huge distortions.
To disentangle this mess, the public sector’s monopoly in merchant mining has to go, and it has to be allowed to charge market-related prices. To get the domestic coal industry to become efficient, it is also necessary to keep import duties low. If it is considered necessary to keep energy prices high to promote energy efficiency, both imported and domestically produced energy can be taxed at similar levels.
Against this scenario, two realities stand out. One, the monopoly position of Coal India enables it to reap handsome profits. It is sitting on Rs 55,000 crore of cash, provoking covetous attention from the Union finance ministry. Two, the cash has accumulated despite siphoning off through subsidised prices for priority-sector consumers and endemic pilferage.
Earlier pit-head stocks were written off periodically as they were simply non-existent. Recently, it was announced with much fanfare that information technology would be employed to deal with the problem — by equipping consignments with a global positioning system to track them. All this should make Coal India one of the most efficient mining companies in the world.
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Is it possible that its bottom line is partially enabled by savings on investment needed to make operations more environmentally friendly? Reality seems to have caught up with Coal India, with the environment ministry crippling its expansion programme by declaring many forest areas as no-go areas. Consequently, over the last two years (2009-11), output has stagnated.
One way to save on investment and costs is to scrounge on washing coal. Overall, 20 per cent of coal produced in India is washed, compared to 50 per cent globally. Coal washeries raise the cost of production but save on volume – extraneous matter is removed – and carrying cost. But if you sell on FOB (free on board, that is the buyer pays the freight) basis, then that the saving is not yours. Most importantly, washed coal is less polluting. The environment ministry has laid down a maximum ash content of 34 per cent for coal carried longer than 1,000 km. Washing coal can reduce its ash content by seven or eight per cent from the current 35 to 38 per cent.
Going by publicly available figures, Coal India’s coal washing numbers appear to have stagnated at 40 million tonnes for most of the last decade. Recently, major announcements have been made on taking coal washing capacity to 111 million tonnes and more, by building 20 new washeries at a cost of Rs 2,500 crore by the end of the 12th Plan. Subsequently, the investment figure has been raised to Rs 3,500 crore.
Another major way in which mining can be made relatively environmentally friendly at greater cost is to go in for more underground mining as opposed to open-cast mining. In India, the number of open-cast mines has been steadily increasing, compared to underground mines. While open-cast mines have low gestation periods and high productivity, they involve severe environmental degradation. The top of the earth is literally shaved off, including all the vegetation. Naturally, forest dwellers staying on such land get displaced. The sharp rise in output and profitability of Coal India in recent decades is largely explained by extensive recourse to open-cast mining. Underground mining (sinking shafts and excavating gullies) is also polluting — but less so, and certainly less disruptive to life overground.
Matters can be eased by making the environment ministry do its job more efficiently — be tough where it matters, but don’t stall things by simply sitting on them. But beyond that, the country has to decide what price to pay for preserving its environment. If you allow mining in areas that are only nominally forest (degraded forests) and be strict about not touching areas with deep forest cover, then the balance of energy requirement can be imported, as is being done now. The import cost may not be as high as it may seem, because India’s much-touted coal reserves are mostly of inferior quality, with high ash content. After ensuring a minimum operating mining capacity needed for energy security, the trade-off is between forests and foreign exchange. What is not negotiable is creating a more competitive environment in which the sector can become more efficient.