Arvind Jain: The coming coal crisis

What needs to be done to narrow the demand-supply gap.

India has coal reserves of 330 billion tonnes and the sector is about 150 year old. Even though we have one of the largest coal reserves in the world, industry and the power sector are always short of supplies.

Today, the nation is tittering on the brink of an energy crisis from a resource within. The import of coal is increasing every year. Power-grade coal import is likely to increase from 1.5 million tonnes last year to 60 million tonnes in 2012.

While the import of coking coal is something the country can't do without, non-coking coal imports, too, have increased alarmingly "" primarily to overcome a crisis situation.

Economists would argue that this is because imports are cheaper on a like-to-like basis, that is, on the basis of calorific value. However, this is not true.

India is one of the cheapest producers of coal even with all the inefficiencies of the public sector and the low unproductive labour force.

This is not to say that the public sector is an efficient producer of coal. Indeed, it is likely that in the few instances where coal in India is being produced by the private sector, India is internationally cost-competitive.

In this scenario, one possible explanation of rising imports is that the demand for coal has outstripped its supply of coal. In other words, we are just not producing enough.

Although imports are now no longer a cause of concern in view of the comfortable foreign exchange position, it is clear that to the extent imports substitute to domestic production, they have an adverse impact on employment and growth.

It is, therefore, imperative to scrutinise the reasons for inadequate production of coal.

Roughly 80 per cent of the country's coal production is in the hands of the public sector, that is, Coal India and its subsidiaries, in addition to Singareni Collieries (excluding Neyveli Lignite, which produces lignite for power).

Although the Eleventh Plan (2007-12) has set a production target of 620 million tonnes a year, it is unlikely that the target will be met. In 2004-05, the public sector produced only 236 million tonnes of coal.

There are various reasons for this.

The approval procedures are cumbersome with up to six-seven stages of clearance. Importantly, any question raised at any of the stages implies that the whole process has to be repeated.

Besides this, there are serious difficulties in land acquisition and getting environmental clearances. Despite coal royalty being one of the largest revenue sources for the states, the authorities have been rather uncooperative.

What is even more shocking is that approved projects either don't take off or are implemented with considerable delays.

Part of the reason for this is that the coal bureaucracy is afraid to take decisions in view of the recent inquiries against some of its officers. This is not to argue that the corrupt should not be prosecuted but that a system should be evolved wherein bona fide decisions are not subjected to prosecution.

A situation has come when not taking a decision is championed in the ministry.

The Coal Amendment Bill recognised the need to increase coal production. In fact, the raison d'être of the Bill was the demand-supply gap, particularly in terms of the projected requirements of the power sector.

While the coal unions questioned the figures, they did not question that there would be a shortage. Their argument against the Bill rested on the premise that the required production could be taken care by Coal India itself, with sufficient infusion of funds from the government.

In any case, there does not seem to be much progress in the passing of the Bill.

Can anything be done to increase coal production to meet the rising demand, especially from the power sector? There is an urgent need to address the issue because such shortages will lead to an increase in prices and since 80 per cent of the coal is used in the power sector, this could result in tariff increases.

While it may be argued that coal price increases could be contained through imports, this may not be possible in the short-term because of limited coal-handling capacity at the ports.

Clearly, there is an urgent need to implement quickly the approved projects by the public sector undertakings, while simultaneously processing other projects expeditiously.

Another issue is that of reservation of coal blocks by Coal India and their allotment to the private sector. Even if the current system effectively leads to pre-emption of capacity by Coal India, at least the available blocks should be allotted immediately.

While there may be a need to look at the overall allotment method, the existing system should continue till a simpler and better one is in place. The proposal to auction blocks, while good in theory, would be cumbersome.

As it is, the current system has only allotted 42 blocks in the past nine years. Moreover, it is a debatable issue as to whether or not maximising profits in coal, which is a basic input into intermediate production, is beneficial to the economy, in view of the impact increased coal prices would have on the competitiveness of the economy.

To sum up, the coal ministry needs to: (i) implement approved projects for Coal India and its subsidiaries on a war footing; (ii) speed-up process approvals; (iii) allot non-reserved blocks based on the current system, till a thoroughly debated new system is in place; and (iv) put a new allocation system in place only after the current backlog for captive mine allocation and coal linkage is cleared.