Coalgate: SC's final order shouldn't be only about legality, but economic impact also

When the Supreme Court gives its final verdict in the coal blocks allocation case on 1 September, one can only hope that it pays as much attention to the economic damage it will be inflicting on the nation as the ethical lapses over two decades that it is trying to correct.

The court’s order yesterday (25 August) pronouncing every block allocated since 1993 through an opaque screening process as illegal will affect not only the coal and power sectors, but also metals, mining and banking. The resultant loss of market and business confidence can roil the entire economy and set back growth. It will have a medium term impact on everything from people’s incomes, energy costs, inflation, jobs and poverty alleviation - all negatively.

Two numbers should indicate the gravity of the problems ahead: Banks are said to have an exposure of nearly Rs 5,00,000 crore to the power and steel sectors. This Economic Times report puts the investments involved in the power sector alone at over Rs 2,86,000 crore. Since coal blocks were also allotted to steel plants, who got 31 percent of the coal blocks, the total could add up to Rs 5,00,000 crore - not very different from the bank exposures figure. Together, the coal block illegalities may thus impact investments equal to around 5 percent of GDP.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

This is not to suggest that anything was wrong with the Supreme Court order. It was bang on; India cannot become a low-graft and efficient economy if it cannot create transparent and fair procedures for the transfer of scarce resources. But the court must also be careful not to throw the baby of nascent economic revival out with the dirty bathwater of corruption.

The indictment of politicians and the system was scathing in Chief Justice RM Lodha’s order. It is thus worth quoting what the three-judge bench said while declaring the allocation of 218 blocks illegal. “The entire coal block allocations, as per recommendations made by the screening committee from July 14, 1993, in 36 meetings, and the allocations through the government dispensation route, suffer from the vice of arbitrariness and legal flaws….There was no fair and transparent procedure, all resulting in unfair distribution of the national wealth…common good and public interest have thus suffered heavily.”

That’s a big black mark against all governments, all concerned babus and the whole system created after 1993. Three different regimes (Narasimha Rao, NDA and UPA), more than eight or nine coal ministers belonging to several parties (Congress, BJP, LJP, BJD, JMM, etc), and as least one Prime Minister, Manmohan Singh, under whose watch the bulk of the total allocations took place, were involved. As _Firstbiz_ has reported , “156 of 195 mines with geological reserves amounting to 41.24 billion tonnes of the total 44.8 billion tonnes were allocated between 2004 and 2011. Hence, nearly 94 percent of the reserves were allocated between 2004 and 2011…. Manmohan Singh was the minister of coal for a large part of this period between 2006 and 2009. During this period a little over 78 percent of the total 44.8 billion tonnes of coal reserves were allocated.”

There is no doubt that illegalities in coal block allocations have to be recognised and penalised. This means exemplary fines are warranted - especially for mines that are in production and already serving the economy. According to estimates, some 31 of the 218 mine allocations declared illegal are currently in production, and they are expected to produce around 53 million tonnes of coal in 2014-15.

On the other hand, it may make sense to cancel allocations that have not resulted in the start of mining operations - which is the bulk of the allotments. No economic damage may be caused to anyone beyond the parties who got the wrong allocations. These mines can be reallocated, with the money already spent in obtaining permissions being partially treated as the penalty.

However, it’s never as simple as that.

One, just because the screening committee that allocated blocks was non-transparent it does not follow that all the parties that benefited were involved in bribery or were at fault. Would the Supreme Court be right to penalise all parties when it was the process that was at fault?

Two, if it was the opaque process that was wrong and illegal, the real people to be prosecuted and penalised must be the ministers, bureaucrats and private businessmen who may have paid bribes to get things done. But this needs proof. Is this proof forthcoming? Or will we spend years chasing the crooks and get nowhere?

Three, if only 31 of the 218 coal blocks are in production after more than two decades of a flawed policy that was intended to speed up things, clearly we have created a system that is built for graft and non-transparency and delays. If making a mine productive is going to take years - with forest, environmental and other clearances making life difficult - you are going to get corruption.

What this means is that the Supreme Court cannot just take a legalistic position on the issue - for the issue is systemic and even politicians are unable (or unwilling) to solve it. In fact, the Supreme Court’s own interventions may be adding to the delays - making the need for speed even greater.

Of the 218 blocks involved, 99 went to public sector organisations, which obviously cannot really involve bribery; another 105 went to private parties; 12 more were actually hawked through a tariff-based system (since the coal was meant for power production, and so it could not have been the process that was at fault here), and two more went for coal liquefaction projects.

Since each case can thus have its own characteristics and justification, cancellation or confirmation with penalties cannot be the only option for all projects. One cap cannot fit all.

This is perhaps why the court announced that a panel of retired judges will look into each case separately to decide their separate fates.

However, this is going to make things worse. The Supreme Court will be straying into territory that is really in the executive’s domain - making policy, correcting it, and taking remedial steps. The court’s job ends with the declaration of the process of coal block allocations as illegal; it should ideally have asked the government to work out a scheme for cancellation, levying of penalties and/or continuation of mining leases and then put its seal of approval on it before final execution. Now, it appears that the Supreme Court will directly deal with the issue.

This will needlessly delay the whole process since any court-appointed system will be legalistic and time-consuming.

Once again, the court needs to think twice about what its core competence is and what it should leave to others. The court should not take on more than it can chew - or even more than what is its due.

The court should not create a precedent where it has effectively encroached on the executive’s policy-making domain. How coal blocks should be allocated or deallocated falls squarely in the policy domain. The court’s job is only to decide on the fairness of it all.