SC order shows that Coalgate's real villain is govt coal monopoly, not just bad processes

There is often a root cause for problems that keep manifesting themselves again and again. Is there a root cause to the fact that government after government kept using the same opaque system to allocate coal blocks over two decades, often to ineligible applicants?

It is possible to suggest that the system was created to enable political and bureaucratic corruption. That could certainly be one explanation.

However, if you were to drill deep down in the misallocations of coal blocks, all of which were declared illegal by the Supreme Court yesterday (25 August), there could be one more explanation: our socialist orientation. It always requires a socialist justification to enable favours to capitalists. It is difficult to do favours to businessmen openly when there is no public justification. The pretense of furthering some “public good” is thus vital to enable arbitrary allocations of scarce resources.

My conclusion is this: the root cause of the coal scam is the unwillingness of several government to dump the Coal Mines Nationalisation Act, which gave government a monopoly on coal mining, preventing open allocations of coal blocks to all comers. What was invented was a fudge, and this ensured opaque allotments.

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Let’s begin with history.

In the late 1960s and early 1970s, Indira Gandhi’s politics involved wooing the Left - and the Coal Mines Nationalisation Act (CMNA) of 1973 was one of them. This Act reserved the mining and production of coal for the public sector - all in the name of the people. A few years later, during her infamous emergency, the world “socialist” was even force-fitted into the Constitution’s preamble.

What this means is that every policy action has to be justified keeping “socialist” principles in mind.

By 1991, when India went externally bankrupt under public sector socialism, it was becoming clear that the CMNA was a drag on growth, with monopoly producer Coal India and its subsidiaries proving unequal to the demands of a growing economy. The Narasimha Rao government decided that the Act needed a change. Given the precarious minority government he was running, just scrapping the Act and ending the public sector monopoly was out of the question.

So what was invented was a fudge - an amendment to section 3(3) of CMNA to enable coal mining for captive use by power, steel and cement plants. Only steel was allowed captive production under CMNA earlier; now power and cement and coal washing were added.

However, even here there was a problem - as the Supreme Court judgment showed. Coal blocks could be allocated only if you already had a steel plant, power station or cement unit in existence. Blocks could not be allocated if there was only an intention to put up such plants.

Was this a major flaw in the law legislated by the Narasimha Rao government, or was it deliberately left vague? Was this done to fool Leftists into believing that captive mining was intended to help already built plants and keep workers in jobs?

Was the screening committee process deliberately left opaque since the intention was to link future projects to coal blocks rather than offer the blocks to pre-existing power, steel and cement units?

We don’t know the answer, but this was one reason why the Supreme Court ruled that all allocations were illegal from 1993. The judgment says: “The power for grant of captive coal block is governed by section 3(3)(a) of the CMN Act, according to which, only two kind of entities, namely, (a) central government or undertakings/corporations owned by the central government; or (b) companies having end-use plants in iron and steel, power, washing of coal or cement can carry out coal mining operations. The expression “engaged in” in section 3(3)(a)(iii) means that the company that was applying for the coal block must have set up an iron and steel plant, power plant or cement plant and be engaged in the production of steel, power or cement. The _prospective_engagement by a private company in the production of steel, power or cement would not entitle such private company to carry out coal mining operation. Most of the companies, which have been allocated coal blocks, were not engaged in the production of steel, power or cement at the time of allocation…Thus, the requirement of end-use project was not met at the time of allocation.”

The coal block allocations were clearly built on a flawed law that did not allow many of the allocations to actually take place. The court also pointed out that even state-level public sector undertakings were not eligible for coal blocks, since this was reserved for central undertakings. The judgment said: “The allocation of coal blocks through government dispensation route, however laudable the object may be, also is illegal since it is impermissible as per the scheme of the CMN Act. No state government or public sector undertakings of the state governments are eligible for mining coal for commercial use. Since allocation of coal is permissible only to those categories under Section 3(3) and (4), the joint venture arrangement with ineligible firms is also impermissible.”

Clearly, the Narasimha Rao amendments to CMNA in 1993 served no purpose since no one would have set up a steel (or cement or power) plant without having the comfort of coal blocks, and no coal blocks could have been allocated without promoters already having built one. It was a chicken-or-egg situation.

It is possible to speculate that fear of flouting the “socialist” principle was what kept Narasimha Rao’s legislative changes ambiguous, perhaps with the idea that allocations could be made through executive action (the screening committee, etc). This is what has boomeranged on the industry today with the Supreme Court going by the letter of the CMNA.

It is clear what needs to be done. Even transparent laws will not make it possible to allocate coal blocks to private parties any more. Only a complete repeal of the Coal Mines Nationalisation Act will make even transparency relevant.

The Supreme Court verdict is a pointer to the fact that our fundamental socialist laws are the reason for our problems - and not just political rapaciousness and lack of transparency.

We need to dump the Coal Mines Nationalisation Act into the dustbin of history. All laws that lead to monopolies must go. Socialist principles lead to crony capitalism just as fast as non-transparency in government dealings.