Monopoly pincers

Though steel producers have already come out asking for a rollback of the massive price hike in coal prices, on the grounds that it will increase production costs by around Rs 300 a tonne, the inflationary impact of the decision is likely to be only marginal.

There is competitive pressure in the steel market, and in any cases profits are high, so it is likely that producers will absorb a large part of the hike.

The biggest impact will be on power costs, with around 60 per cent of the country's generation taking place from coal, but it is unlikely the government will want to pass on the hike to consumers.

Such being the case, the improvement in Coal India's books will probably be reflected, almost equally, in a deterioration in the state electricity boards' books.

What is important to keep in mind is that this week's 16 per cent hike comes on top of steady hikes over the decade. Since coal prices were decontrolled in the mid-1990s, prices have gone up almost 80 per cent.

If this happened in other fuels, there would be a huge shift in demand, but in the case of coal the power sector is almost a captive consumer, especially since most power plant boilers have been designed to use high ash-content coal of the type produced by Coal India, and cannot readily shift to imported fuels in a big way. The cement and steel plants, which have more flexibility, use largely imported products.

While it is true that there was a turnaround in Coal India's fortunes a few years ago, productivity levels remain abysmal at around 2 tonnes per man-shift, compared to 30 times as much in countries like Australia.

It doesn't help that the gross calorific value of Coal India's supplies have gone down from 5,900 kcal per kg in 1961 to around 3,400 kcal today.

The previous government had achieved some success in speeding up the opening of new mines and in getting unions to agree to the closure of loss-making mines "" on the condition that miners would be absorbed in new mines.

Eastern Coalfields, for instance, have around 25 mines that lose between Rs 5 crore and 20 crore a year, and have little commercial value left, but salaries have to be paid since the mines have not been shut down.

Perhaps an even larger problem lies in the Railways, which charge so much for freight movement that it is twice as expensive to move coal from east/central India to the west coast than it is to ship it from South Africa.

Today, coal prices at Singrauli in UP are lower than those for imported coal delivered at Gujarat, adjusted for calorific values. Yet, once you add the railway freight, Indian coal becomes prohibitive. If coal has to be transported more than 350-400 km, it's no longer worth it.

Indeed, the Railways use coal freight to subsidise their other services "" in 2003-04, the Railways earned Rs 11,800 crore from moving coal "" about 87 per cent more than what it earned from passenger services.

Coal India's inefficiencies are bad enough, but with the Railways' added on, customers are increasingly forced to look at alternatives.