New Delhi: In a move that may have a cascading impact on inflation, the Union government may shortly approve a proposal of state-run Coal India Ltd (CIL), the country’s largest coal miner, to increase the price of coal—a key raw material for companies in the business of cement, power and steel.

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/Content/Videos/2009-08-07/0608_Coal QT_MintTV.flve8ba0806-82a0-11de-a480-000b5dabf636.flvIf accepted by the government, the price hike will help CIL partly offset the increase in input costs, such as a higher wage bill on account of the Sixth Pay Commission, and thereby show a healthier balance sheet ahead of its proposed listing on bourses.

Shriprakash Jaiswal, minister of state (independent charge) in the ministry of coal, has said several times in the past two months that the government is considering divesting up to 10% stake in CIL.

CIL is a holding firm under the coal ministry that contributes 85% of India’s coal output and is free to fix the price at which it sells the fuel. However, this needs to be approved by the government. The last price revision was in December 2007. Currently, domestic coal is priced around 30-40% cheaper than international coal, depending on its quality.

“We have gone through a huge revision of pay and perks of our 410,000 executives and employees on account of the Sixth Pay Commission, on account of which we have to bear an additional burden of Rs4,000 crore per annum. Based on current prices, this will significantly hit our bottomline. There is a need for an increase, which will be modest. The PMO (Prime Minister’s Office) is closely involved in the exercise. It should not take too long," said Partha S. Bhattacharyya, chairman of CIL.

The pay commission is a government body that defines the pay of government staff.

An increase in price would also give CIL’s profit and loss account a makeover. “We posted a profit of only Rs300 crore on a turnover of Rs46,000 crore last year, which is not good, keeping in mind our plans for a listing," Bhattacharyya added.

Jaiswal was away on a trip to Kanpur. He did not respond to repeated phone calls and a message to his cellphone. A message left for coal secretary C. Balakrishnan in his office also remained unanswered.

India’s apex planning body, the Planning Commission, has also favoured an increase in the price of domestic coal in an effort to bring this on a par with international coal prices.

“There is a need for a coal price hike," B.K. Chaturvedi, member, Planning Commission, had said in July.

Any increase in coal price will have a cascading effect, as consumers are likely to pass it on. That could increase inflation. Wholesale prices in India fell for an eighth week, declining 1.58% in the week to 25 July from a year earlier after falling 1.54% in the previous week, the government said on Thursday. However, there is fear in some quarters that a revival in growth could be accompanied by higher inflation.

In demand: A file photo of an open cast coal mine in Godavarikhani, Andhra Pradesh. Domestic coal is priced around 30-40% cheaper than the international variety, depending on its quality. Noah Seelam / AFP

Indian coal (with a calorific value of 3,500 kilo calorie per kg) is priced at around $38 (Rs1,809) per tonne, around 30-40% lower than international prices. In 2008, before the onset of the economic slowdown, prices in global markets spiked and the difference between these and the price of Indian coal was as high as 55-60%.

“CIL’s push for higher prices may appear justified in light of the inflated employee costs and the resultant prices may still appear lower than the comparable international coal prices, but such price hike may lead to input cost escalation for power (plants), steel (makers) and other consumers," said Dipesh Dipu, principal consultant (mining) with audit and consulting firm PricewaterhouseCoopers.

“CIL’s IPO (initial public offering) may enhance accountability and transparency in the company, and increase the capital market depth for mining investments. While the government may look at unlocking value in the company ownership, a listing may help investors and other stakeholders get a better view of CIL’s operations," he added.

India has 256 billion tonnes of coal reserves, of which around 455 million tonnes (mt) per annum is mined. CIL is targeting a production of 435 mt this year, against 403.73 mt achieved in 2008-09.

India currently imports around 40 mt of coal. Demand is expected to reach about 2 billion tonnes a year by 2031-32, about five times the current rate of extraction, with the maximum demand coming from the power sector.