There is a crisis in the coal industry | Opinion - Hindustan Times

There is a crisis in the coal industry | Opinion

ByRohit Chandra
Jun 07, 2020 07:41 PM IST

Coal will continue to power India but recent measures will not lead to improvements in mining

The headwinds against the coal industry both domestically and internationally have been evident for some time. Drying up financing for new thermal power plants, private sector announcements of exiting the business, and declining plant load factors have been stoking pessimism about the future of the industry. Despite this, there was hope that the production triumphalism around coal would be accompanied by forward-looking policy measures which would focus on productivity, moderating coal’s considerable externalities, and some form of local equity. The recent policy announcements of the Government of India regarding the industry are evidence that these dreams will remain an unfulfilled fiction.

The failure of the auctioning system, Coal India’s financial decline, and the MDO mode of mining have not helped(Bloomberg via Getty Images)
The failure of the auctioning system, Coal India’s financial decline, and the MDO mode of mining have not helped(Bloomberg via Getty Images)

The first nail in the coffin was the announcement to do away with mandatory coal washing. In theory, a process like coal washing was supposed to be good for everyone; thermal power plants would have fewer operational problems due to poor coal quality, combustion of washed coal would be better from an emissions and local air pollution perspective, and the unnecessary transport of large amounts of ash and non-combustible material would be minimised. In practice, most consumers of washed coal (both in steel and power) have regretted their decision; they were usually delivered a substandard product for which they had paid a premium. Not surprisingly, much of domestic coking coal today tends to be used for power generation as steel companies prefer to import their coking coal than rely on domestic products. The dream of Indian coal washing had morphed into a nightmare, and the environment ministry’s notification was a delayed acceptance of the ground reality.

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The second nail in the coffin has been the failure of India’s coal mine auction mechanism. In the last five years, aggregate production from auctioned mines has remained less than the heights of captive coal mining prior to the Supreme Court’s de-allocation decision in 2014. Bringing auctioned mines into production is a three to five-year process, and it is unlikely that the current commercial coal mining regime will ever rival Coal India’s established production base. Despite the repeated energetic announcements of introducing competition in the coal industry, the majority of domestic power consumers will continue to remain dependent on Coal India. Very few companies (public sector or private) have been able to match Coal India’s ability to navigate the complicated bureaucratic and political hurdles associated with opening new coal mines. Despite all the revisions announced in the stimulus package, new coal mine auctions are unlikely to attract significant domestic or international interest except from the few large players who already exist in the sector domestically. International companies, which have avoided India’s coal industry so far because of regulatory and reputational issues, have zero incentive to take new risks in the coronavirus disease (Covid-19) world. Smaller Indian companies simply do not have access to credit or cash on hand to open new mines.

The third nail in the coffin has been the deliberate weakening of Coal India’s financial position. In addition to the usual royalty payments, cesses, taxes, and other fiscal contributions reasonably expected of Coal India, there has been a concerted effort to extract cash from the organisation. Between inflated dividend payments, unnecessary share buybacks, and questionably useful corporate social responsibility contributions, Coal India has transferred tens of thousands of crore to the central government in various ways. Coal India’s cash could have been used to further diversify the company, reinvest in new operations, promote research and development for alternative uses of coal (like the coal gasification mentioned in the stimulus package). Coal India could have been strategically repurposed as a vehicle of industrial investment to help coal-bearing regions (where it has operated for 50 years) diversify their economies. Instead, it appears to have become a victim of a larger strategy to weaken the Indian public sector. Not surprisingly, Coal India’s market capitalisation is less than a third of what it was in 2014.

The fourth and final nail in the coffin has been the spectacular rise of the mine development operator (MDO) mode of mining. Subcontracting of mine operations has been a major feature of the coal industry for more than two decades now. It has also brought considerable financial and operational efficiencies to Coal India. But as the demise of coal mine operator EMTA showed, the MDO model remains rife with problems related to transparency, undue transfer of gains to private entities and a general deterioration of social contract in mining regions. In fact, the retreat of Coal India from the front lines and the increasing use of various forms of subcontracting has led to a much harsher face of mining in India today. The MDO model also creates an incentive mismatch; why would a large mining company take the risks of buying a mine if they could make good money subcontracting for coal block owning public sector units instead?

To be clear, the status of coal as India’s energy incumbent in the power sector will not be evaporating any time soon; this will be a decades-long process. But with the coffin nailed tightly shut, it may not be reasonable to have any new dreams about India’s coal industry. We might just have to settle for decades of stagnation until its ultimate decline.

Rohit Chandra is a fellow, Centre for Policy Research
The views expressed are personal
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