The Supreme Court's decision to cancel the overwhelming majority of coal block allocations is guaranteed to have interesting consequences. As of the time of writing, many of those consequences remain unclear. The government has six months to decide what it would like to do. Quite a few of the cancelled allotments -reportedly around 168 - have not gone into production, and 46 of the cancelled allotments are in some stage of production. The holders of the 46 operating allotments will have to pay Rs 295 per tonne to continue production during this six-month grace period.
The government might decide to auction the allotments or it could take them all back and ask Coal India (CIL) or some other government-controlled agency to operate them. Or, it may just decide to hand the blocks back to the same set of corporates under a new allocation policy.
Let us suppose the government opts to auction these blocks. The question of environmental and statutory clearances would remain and may need to be reviewed. Land would also need to be acquired for every new mine, as it enters production. Bids for these mines would depend on the solutions the government devises for the above issues.
If it decides to go with handing those blocks over to CIL, the additional issue would be CIL's capacity to develop those blocks at speed, since that was supposedly one reason for allotments to other entities. The issues with land acquisition would remain, regardless of the course of action. The statutory clearance process may be easier with a government-controlled company in charge, though there are no guarantees of this. There would also be the usual issues with road-rail connectivity and local law and order conditions, and so on.
So there are no obvious beneficiaries yet from the Supreme Court judgment. There are obvious losers in the form of the companies which have been hit by the lost allotments. The public sector banks with exposure in those specific companies could come under greater stress. Banks already have huge exposure to the power sector and the recovery of a large number of these loans is already in question with a series of restructuring exercises having occurred.
The cancellation of coal blocks' allocation could lead to more loans going sticky in the sector. Even if the blocks are re-allocated to the same players (or redistributed in some way among the same players), they will be losers in the financial sense. Power is on the concurrent list and most state governments run loss-making utilities. The Centre has not been able to persuade states to adopt more sensible policies. It is not clear that this government will be any more successful at this task than previous ones. Most of the state governments which have large power sector losses think it is political suicide to have rational power tariffs.
At the same time, one of the major planks in this government's poll platform was that it could deliver affordable power to consumers, 24x7. Delivering on that front is desirable from the economic angle as well. If there are power shortages with GDP growth at below 6 per cent, it would be difficult to ramp growth up to higher levels. This judgment will make the task of meeting power demand (without incurring massive losses) even more difficult in the short run. Thermal coal is, by far, the largest component of the power sector energy mix, and the lower availability of coal will hit capacity expansion plans. In the longer term, however, this judgment gives the government a chance to start over with a clean sheet when it comes to coal allocations. It can conceptualise a policy that works better in terms of linkages. It can also juggle the energy mix if it thinks that is desirable in the policy sense.
It's not clear how long it will take for the government to come to decisions on this front. It's also not clear if those decisions will be driven by populist considerations, or by obligations to the corporate sector which supported the BJP's election campaign so wholeheartedly, or by the need to clean up government finances. There will certainly be winners and losers in the sector. Right now, it is easier to pinpoint the losers in the form of public sector banks with exposure and companies which have lost linkages. But things could change and given the time-bound deadline, there could be a turnaround in six months.
