SC coal verdict: Why the Modi government shouldn't expect a revenue bonanza

Most newspapers have talked of a revenue bonanza in excess of Rs 10,000 crore for the government following the Supreme Court’s verdict in the coal blocks case yesterday (24 September). The final order imposes a penalty of Rs 295 per tonne on all coal produced - and to be produced till March 2015 - in the 46 operating mines whose leases have been cancelled.

Forget the bonanza. There will be no big revenue gain worth celebrating even if we assume some of the money flows into the government’s coffers. For several reasons.

First, the money is to be paid for the coal mined, but the mine operators also bought land for the mines. They will have to be compensated for this effective confiscation. A lot will depend on whether the land - possibly acquired cheap in the past - will be paid for at old prices or current market prices which are much higher. Unless the court clarifies that its intention was to expropriate the land at penal prices as a form of punishment, one has to assume the mine owners will have to be paid near-market prices. The government does not have to pay the mineowners, but if Coal India is to take over the land, money will flow from there.

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Second, the revenue “gain” will be neutralised by several factors. The banks which lent money to the mine operators will now have a bigger portfolio of bad loans. Public sector banks have exposures to not only coal miners, but steel, power and other projects dependent on those mines. The Economic Times calculates that the State Bank of India alone has an exposure of over Rs 78,000 crore - nearly eight percent of its net worth. The government will have to make huge provisions for recapitalising public sector banks or allow them to raise more money from the markets and dilute its stake. Some of the alleged bonanza will have to be pumped into banks - directly or indirectly.

Three, short-term revenue gains also have to be counter-balanced by the damage done to overall growth in three major infrastructure sectors (coal, steel and power), not to speak of the financial sector. All of them will have to bear the costs of higher coal prices and bad loans - which translates to a sharp slowdown in growth and a resultant fall in tax revenues for the government. While this quantum of loss cannot be calculated exactly, one can be sure it will be huge. More of the bonanza goes poof.

Fourth, the negative impact will be carried forward to the stock markets where the bull party will be interrupted - at least temporarily. This has consequences for both public sector disinvestment targets and the private sector’s ability to invest in new projects. Foreign money could well enter the markets as valuations become more benign, but the disruption is sentiment cannot be ignored.

Fifth, Narendra Modi’s Make in India campaign gets a black eye at the outset for the mining and metals sectors are really at the core of short-term manufacturing nirvana. Costs in all these areas will go up, and as land costs are already going through the roof, thanks to the UPA’s Land Acquisition law, one wonders how Make in India will start to make sense any time soon. A lot of hard work on policy, laws and easing of regulations will have to precede Make in India. India continues to remain a high-cost destination.

In short, the bonanza is not the point. But we really have to count the pluses coming from this economic loss to the nation in the future.

Three gains are possible - some of them intangible and incalculable.

#1: No government will henceforward make any law that is remotely illegal or non-transparent. If it does, business will be doubly wary. This is good for long-term confidence in India. Foreign investors will be particularly happy to learn the cronyism will die a quick death.

#2: The verdict will force the government to stop thinking it can do everything in the public sector. Coal India has never been up to the job of providing us with the coal we need, and now even private miners will be shy of trying. The government should bite the bullet and repeal the Coal Mines Nationalisation Act , and also start privatising banks. The taxpayer cannot be called to pay for every asset bought in her name and the resultant inefficiency a well. If government’s thinking changes as a result of the verdict - one can’t be sure of this though - then it would be a real gain and can rejuvenate the economy’s animal spirits.

#3: The auction of natural resources in future will bring in fresh revenues, but the only way to counteract the high resultant costs is to foster competition in all sectors to bring down prices. The Modi government is business-friendly, and is surely working hard to make life easier for business, but it now needs to embrace market-friendliness with a vengeance. It is not the government’s job to decide whom or what to protect. It does not matter who makes in India - public, foreign or Indian private sector. The markets and consumers should decide that. The government’s job is to ensure that the weak are protected from failing businesses or banks.