Coal is too precious a natural resource to be allocated according to the whims and fancies of the government.
India needs an open market in coal. But, as Mint’s story details today, the screening and allocation of coal blocks for captive use by industry continues to be blatantly subjective. It indicates that bureaucrats and politicians are skimming the commercial premium from the precious resource that should actually accrue to the exchequer. The larger signal is that in a globalized, competitive marketplace, the dice is loaded against applicants who don’t get the prize—a captive mine. The economics is startling. Awardees pay a measly fixed rate of royalty and other levies; in effect, they get coal that’s cheaper to the extent of 40% than the next best alternative—state-owned Coal India Ltd’s (CIL) supply. And this impacts key sectors of the economy—power, steel, cement, etc.—which consume coal.
In fact, it was due to Indian industry’s long-standing criticism of arbitrary, politicized processes which foster corruption that the government had proposed competitive bidding for coal blocks last year. Open bidding would not only clean up the prevailing act, but also ensure the government got the benefit of market play with companies bidding for the coal at market rates. Further, this would set the tone for an eventual opening up of commercial coal mining by the private sector.
(Illustration by: Jayachandran / Mint)
That 187 companies applied for 15 coal blocks is evidence both of shortages as well as preference of captive mines over supply by the monopolist CIL. The latter route is beset with delays, as well as cost inefficiency, which doesn’t entirely reflect in the pricing, since global prices are more than double that of CIL. This, since prices are moderated by the government. It fears a political fallout: If prices are linked to market, the cost of thermal power could rise by 30%—most of the current capacity is in the public sector, which has cost-based tariffs, and fuel cost is passed through to the consumer. However, an open market for coal would rationalize demand vis-a-vis other options such as natural gas-based and hydroelectricity.
Besides, this play-out has been witnessed in other infrastructure sectors. The power sector, where subsidies had become opiate in nature, is now in slow recovery mode—a key driver of reforms is the regulator, which makes the process of power purchase and sale transparent. As participation of regional parties at the Centre is on the ascent, setting up a coal regulator becomes even more important: With rising federalism, the need to ensure equity and fair play becomes all the more paramount.
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