Opening up coal

India sits on the third-largest coal reserves in the world — enough to last for the next 400 years at current consumption levels. The fossil fuel’s importance to the country cannot be over-emphasised — 66 per cent of India’s electricity is generated from it. Despite its criticality, the sector continues to be plagued by periodic crises, when coal stocks with power plants almost run out. It has happened twice in the last four months. If there is one reason for this dichotomous situation, it was the decision taken way back in 1973 to nationalise the coal sector. With a monopoly over the market for 45 long years, Coal India and its subsidiaries had very little incentive to become efficient and market savvy to meet the demands of their consumers. That ended this week when the Modi government, in a significant reform measure, decided to open up the coal industry for private sector participation — by both domestic and foreign players. That the government has gone the whole hog and allowed private sector to mine without any end-use restriction or price caps is significant. Earlier reforms had at best allowed private players especially in power, cement, steel and aluminium sectors to mine for captive use. It is expected that investments will now flow into this sector and along with it modern technology and global manufacturing. The competition that will ensue should ideally force Coal India to up its game as well.

But will allowing private players prove to be a panacea for all ills facing the coal sector? Not really. Coal output could well rise but challenges involving evacuating it from the pithead to the consumers will remain. Lack of rail links to mines and where such links exist, inadequate availability of railway rakes, cause enormous disruption in supply of coal. The Centre needs to address this bottleneck on a war footing. In fact private players, especially foreign firms, will hesitate to invest if they are unsure how to reach the coal they mine to the users. Also, the move may not, as the government hopes, reduce coal imports significantly for multiple reasons. Coal is a freight-sensitive commodity and most of the coal is mined in the country’s hinterland. The cost per tonne of imports is much lower for consumers who are closer to India’s vast coastline. That imported coal has higher calorific value is an added benefit. Also, Indian coal is inferior in quality due to its high ash content rendering it almost unusable for sectors such as cement which has over the years preferred to import and more recently, shifted to pet coke. Private coal producers will thus have to sell predominantly to power producers, many of whom are not exactly in the pink of health financially.

The Centre’s decision, though belated, is welcome. If the process of allocation of mines is transparently executed and other concerns such as evacuation bottlenecks and the financial health of power producers are addressed, the era of coal shortages could well become history.

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