Why giving away coal blocks for free was never a solution

The issues in the coal sector was not created overnight. The Congress, which ruled the country for most of the post-independence era, should have seen the coalgate coming.

Vivek Kaul September 11, 2012 10:17:57 IST
Why giving away coal blocks for free was never a solution

In 2011-12 (April-March) India produced around 540 million tonnes (mt) of coal. This was 1.36% more than the that produced in 2010-11 (April-March).

Of the 540 mt, Coal India accounted for around 436 mt or a little over 80%. The balance was produced by Singareni Collieries Company and a host of other small companies.

This wasn't enough to meet the demand for coal in India. Hence, 99 mt of coal was imported, primarily from countries such as Australia, Indonesia and South Africa.

India's coal import has been growing significantly over the years (as can be seen from the table here). What also comes out clearly is that during 2003-09, the cost of the import grew at a much faster rate than the quantity. This was the period when the international prices of coal were rallying and touched $190 per tonne in mid-2008.

Why this was not par for the course

This would have been par for the course if India did not have enough coal reserves, as in the case of oil. (We don't have enough known reserves of oil and hence we don't produce enough to meet the demand. So we import oil).

But as numbers from the Geological Survey of India (as on April 1, 2012) indicate, India has 293.5 billion tonnes (bt) of coal reserves. These reserves are referred to as geological reserves and are for valid for a depth between 0.9 metres and 1,200 metres.

Not all of these reserves can be mined. Open cast mining of coal typically goes to a depth of around 250 metres below the ground whereas underground mining goes to a depth of around 600-700 metres.

The quantity of coal that can be extracted is referred to as extractable reserves. P.C. Parekh, a retired IAS officer in a presentation, puts the extractable reserves at around 60 bt. (You can access the presentation here). Another expert this writer spoke to said this number could be significantly higher.

But that's beside the point. What this clearly tells us is, unlike oil, India has enough coal to mine.

Given this, India should not be importing the nearly 100 mt of coal that it did during the last financial year.

So, why is India not able to mine enough coal?

The simple answer is that Coal India, which is the biggest producer of coal in the country, is not able to produce enough. One look at the table clearly proves that. Click here for table.

Why coal blocks were given away for free

During 2004-12, the total coal produced by Coal India increased by 17.5%, or at a minuscule rate of 2.3% per year. The slow increase in the production fell short of the demand growth, as during the period energy needs surged with India becoming the second fastest growing country in the world. A study published in 2011 shows that coal is used to meet 40% of India's energy needs against the global average of 27%.

Adding to the import cost was the spurt in global commodity prices during 2004-09 as China expanded at a breakneck speed. Global coal prices shot up as China gobbled up commodities from all over the world.

The international price of coal, which was at a little over $20 per metric tonne in mid-2003, rose to around $40 per metric tonne in mid-2005 and then to around $190 per tonne in mid 2008.

Given these reasons, the government felt that there was a need to look beyond Coal India. In fact, the inability of Coal India to produce enough coal was the main reason why The Coal Mines (Nationalisation) Act 1973 was amended with effect from June 9, 1993, to allow the government to give away coal blocks for free.

The Economic Survey for 1994-95 points out the reason behind the decision. "In order to encourage private sector investment in the coal sector, the Coal Mines (Nationalisation) Act, 1973, was amended with effect from June 9, 1993, for operation of captive coal mines by companies engaged in the production of iron and steel, power generation and washing of coal in the private sector."

The total coal production in the country in 1993-94 was 246.04 mt, up 3.3% from 1992-93. The government understood the production growth was not going to gain greater momentum anytime soon because newer projects were hit by delays and cost over-runs.

"As on December 31, 1994, out of 71 projects under implementation in the coal sector, 22 projects are bedevilled by time and cost over-runs. On an average, the time over-run per project is about 38 months. There is urgent need to improve project implementation in the coal sector," the economic survey of the government noted in 1994-95.

Even though the decision to give away coal blocks for free came into effect in 1993, nothing much happened until 2004. But after that the government went into an overdrive to give away coal blocks for free.

Between 2005 and 2009, the government gave away 149 coal blocks for free. For Indian companies, which were scrambling for the fuel to meet their growth aspirations, it also made sense to have direct access to domestic coal during the period as the international prices were ruling high.

Why giving away coal blocks for free was never a solution


But, as it has become clear now, giving away the coal blocks for free did not solve the problem. As per the audit report by the Comptroller and Auditor General of India, as many as 86 blocks were supposed to produce around 73 mt of coal as on March 31, 2011. In reality, however, only 28 blocks started production and their total output was just around 34.6 mt.

Why Coal India output is capped

Coal India has probable reserves of around 18.9 billion tonnes, but is still unable to expand production at a higher rate. Why, seems to be the question nobody is asking.

Had I been a television journalist, I would simply attribute it to Coal India's inefficiency, as is the case with most public sector companies.

But the truth is a lot more complicated than that, and, to a large extent, explains why the government's decision of giving away coal blocks for free hasn't worked.

India's coal reserves are largely concentrated in the middle of the country in the states of Jharkhand, West Bengal, Odisha, Madhya Pradesh, Chattisgarh and Maharashtra. There are some reserves in the Northeast as well but they are, at the best, minuscule.

The trouble is that the states with the biggest coal reserves are also dealing with the Naxalite problem. Hence, operating in these regions is not very easy.

A lot of the coal reserves are also in regions categorised as forest areas and getting clearances from the state governments is not easy. What also has not helped is that the Ministry of Environment and Forests, which gives the overall environment clearance, is not known to be very efficient.

"Our 168 projects are pending environment and forest clearances at the Centre and State levels. Sixty-seven of these projects are greenfield and we are unable to make any investment in these. Remaining are ongoing expansion schemes, which too have been stalled," NC Jha, then Chairman of Coal India, had told The Times of India at the beginning of the year.

But these are small issues. The biggest problem facing Coal India is the acquisition of land. The right to property is not a fundamental right in India. And over the years, the government has acquired land forcibly from the citizens of this country at rock bottom prices.

In Ranchi, where this writer grew up, original landholders have still not been paid after their land was acquired to set up what was then one of the biggest public sector units in the country. Attempts are rarely made to rehabilitate those who gave up the land. The homes built for them are not livable, to say the least, in most of the cases. Hence, people are reluctant to hand over their land, their only source of income.

The government's attitude has only politicised the issue. Hence, the state governments are not interested as they are likely to lose votes if they use force to acquire land.

Due to these same reasons for giving away coal blocks for free has not worked and will not work. Of the 195 coal blocks that the government has given away for free, 193 are in Jharkhand, West Bengal, Odisha, Madhya Pradesh, Chhattisgarh and Maharashtra.

All these states have a Naxalite problem and that will affect the private and other government players as much as it has been impacting Coal India. The government's environmental policy and the land acquisition policy continue to remain in a mess.

What also does not help is the fact that the expertise required to get a coal mine up and running is largely limited to Coal India. Mining coal is not exactly as easy as digging a tube-well.

In order to get a block up and running, companies need to prepare a mine plan, carry out the environmental impact study (EIS) of the area etc. The EIS essentially looks at what the current environment of the area is like, how mining coal will change that and what can be done to ensure that the current environment can be maintained.

For Coal India, this planning is done by its subsidiary Central Mine Planning and Design Institute (CMPDI). Such expertise is very difficult to find in the private sector.

To conclude

Coalgate is not a problem that emerged overnight. It is a problem created by the various Congress governments (given that the party has ruled the country for the most part since independence) over the years. This led to the Congress-led UPA government giving away coal blocks for free to ensure that India produces more coal. But that is a problem that remains and will remain.

Most of the data regarding coal production in India unless otherwise stated has been sourced from Provisional Coal Statistics, 2011-2012, Coal Controller's Organization, Ministry of Coal.

(Vivek Kaul is a writer. He can be reached at vivek.kaul@gmail.com)

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