Subsidising imported coal impinges on the revenue-raising rights of coal-rich eastern States.

The Supreme Court recently questioned the Centre’s mandate in allocating coal blocks, in the context of the Coalgate scam.

However, the moot issue here is whether the Indian government is exceeding its Constitutional mandate in drawing up coal mining strategies to be followed by mineral-rich States?

The Cabinet Committee on Economic Affairs (CCEA) has granted in-principle approval to the proposal of pooling the prices of domestic and imported coal.

The stage may, therefore, finally have been set for a heated debate on India’s federal structure — the role of mineral-rich States in fuelling India’s growth, and how they are compensated (or deprived of compensation) for the same.

Why pooling?

The proposal in question requires the buyers of domestic coal to pay extra to subsidise the use of imported coal in coastal power stations — mostly promoted by the private sector — commissioned after March 2009.

Apparently, the planners intend to address the looming fuel shortage that has impacted the viability of 35,000 MW worth of private sector capacities, entailing an estimated investment of Rs 2,00,000 crore.

The projects are in trouble partly due to a flawed Central policy that encourages private investors to enter into aggressively priced power purchase agreements (PPA) with State utilities, without much room to pass on the volatility in fuel costs.

To add to the problem, the Central government-owned monopoly — Coal India Ltd — failed to reach the projected level of production. CIL is now offering 65 per cent of the required fuel required for new projects — down from a guaranteed supply of 90 per cent in the past.

The investors thought they would mint money through higher capacity utilisation and open market sale of power.

Now, they are lobbying with the Union government to arrange for cheaper fuel and allow for a tariff revision in the long-term (up to 25 years) PPAs (and cheaper fuel). Pleas in this regard from Tata Power and Adani Power are already under the CCEA’s consideration.

While the constitutional validity of such post-facto change in tender norms (based on which such projects were established) is debatable, expectation is rife that the private players’ pleas will receive a favourable response. This will open the floodgates for private sector investors to seek tariff revision.

Till then, pooling of imported fuel will offer some cushion to private sector investors.

Robbing the poor

Clearly, the coal-bearing States have had nothing to do with the crisis in the power sector.

In fact, barring some exceptions, the large coal-bearing States have never had a stake in India’s growth story.

For four decades till 1991, India continued with the freight equalisation policy, which ensured growth of industries and swelling tax revenues of Mumbai or Delhi, at the cost of major coal-bearing States such as Odisha, Chhattisgarh, Jharkhand, West Bengal and Andhra Pradesh.

It is only in the last two decades (more so the last decade) that coal-bearing States started utilising their natural resources to attract investment, but not without constraints.

First, though the States attracted pit-head generation capacities, most of this power was wheeled away (due to lack of a local consumption base) to Delhi, Mumbai, Chennai or Bangalore.

And, since electricity generation does not generate tax revenues, coal bearing States were only left with the pollution.

Second, beginning 1993, the Centre stepped up domestic coal production, leading to aggressive mining activity in Odisha and Chhattisgarh. This accentuated the negative effects — political, social and environmental.

All that these States have been left with are: Uprooted forests, dug-up hills and millions of displaced people spitting venom against the political leadership — either through mobilisation of ultra-left forces, or through increasingly violent protests against land acquisition initiatives that, in turn, block the scope of future development.

In sum, mineral-rich States were not allowed to utilise their natural advantage even in a liberalised environment.

As the Court rightly asked, the existing policies hardly leave a chance for Chhattisgarh, Odisha or Jharkhand to be active and equal partners in ensuring growth of the mining sector.

But, that is not enough — the country now wants them to pay for the industrial growth of a Gujarat or Karnataka.

Another face of colonialism?

Speaking purely in market economy terms, coal-bearing States should enjoy the right to optimise utilisation of their mineral resources — unless, of course, the rest of the country decides to share the revenue, generated at each and every stage of value creation, with coal-producing States.

If the Centre can ask all users of domestic coal to bear the extra burden, so as to encourage imports, there is no reason why a Jharkhand cannot be offered an incentive to tighten its law and order, and step up coal production.

Given the rising neo-nationalism in coal-producing destinations such as Indonesia and Africa, this approach seems like a viable solution.

But, that would require our policymakers in Delhi to think beyond the colonial mindset of exporting development from resource-rich regions.

No escape this time

The Centre is targeting implementation of the price pooling mechanism as early as in June 2013. It is, however, a million dollar question as to whether it will be successful in pushing it through.

The objections have come not merely from the non-Congress-ruled States such as West Bengal, Odisha and Chhattisgarh but also from the Congress-ruled coastal state of Andhra Pradesh.

A policy of pooling resources may finally end up risking the growth agenda of the country.


(This article was published on February 10, 2013)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.