Month: January 2015

10 things the Modi govt should do in the next budget

narendra_modi

Vivek Kaul


The finance minister Arun Jaitley will be presenting Narendra Modi government’s second budget next month in February 2015. The budget other than being a revenue and expenditure statement of the government is also the time when governments tend to announce their policy stance on various issues. It is also the time around which major economic reforms tend to be announced.
Keeping these factors in mind, here are 10 things that I would like to see Jaitley do in his second budget.

1) The assumptions of revenue growth need to be more realistic. In the budget for this financial year Jaitley had assumed that the government revenue receipts would grow by 15.6%. The total revenue receipts for the period April to November 2014 have grown by half that rate at 7.8%. The tax growth had been assumed to grow at 16.9%, whereas the actual growth in tax collections between April to November 2014 has been around one-fourth of that at 4.3%.
The Indian economy has been growing at the rate of around 5% per year. There haven’t been any major changes that tell us that the economy will grow at a significantly faster rate in the next financial year. Keeping these factors in mind Jaitley should keep his revenue projections realistic, unlike this year. Between April to November 2014, the fiscal deficit was already at 99% of the annual target, making Jaitley’s projections look totally ridiculous. Such a situation can be avoided next year.

2) Over the last few years, the government has assumed that disinvestment of its holdings in public sector units will bring in a lot of money. But that hasn’t turned out to be the case. Take the case of the last financial year when it was assumed that the government will raise Rs 54,000 crore through disinvestment. It actually managed to raise only Rs 19,027 crore.
For this financial year, Jaitley has projected that the government will raise Rs 58,425 crore through disinvestment. But only Rs 1,700 crore has been raised so far, with only around 11 weeks left for the financial year to end.
News-reports now suggest that the government is really trying hard to push disinvestment through. Instead of waking up at the end of the financial year, the government along with a big disinvestment target also needs to have an annual plan where they go about disinvestment all through the year. This is a better way of approaching the issue and Jaitley should look at it seriously in the next budget.

3) The fiscal deficit number needs to be correctly stated. In the last financial year, the then finance minister P Chidambaram managed to meet the fiscal deficit target that he had set through accounting shenanigans like postponing the payment of expenditure that had already happened and forcing public sector companies like Coal India to pay up huge dividends.
From the looks of it, Jaitley might want to do the same thing this year as well, in order to meet the fiscal deficit target of 4.1% of GDP that he had set when he presented the budget in July 2014. As mentioned earlier, the fiscal deficit for the first eight months of the financial year was already at 99% of the annual target. And the only way that Jaitley can now meet the fiscal deficit target is by doing the same things that Chidamarbam did last year. The finance minister should not fall for this temptation and come up with the “real” fiscal deficit number. My bet is he won’t.

4) In the Mid Year Economic Analysis, the Chief Economic Adviser to the finance ministry Arvind Subramanian wrote that: “Over-indebtedness in the corporate sector with median debt-equity ratios at 70 percent is amongst the highest in the world. The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12 percent of total assets. Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend to the real sector.” This has led to a situation where banks aren’t interested in lending and corporates aren’t interesting in investing.
In order to get around this problem Subramanian suggested that: “it seems imperative to consider the case for reviving public investment as one of the key engines of growth going forward, not to replace private investment but to revive and complement it.”
In simple words, the government should increase its capital expenditure to “pump-prime” the economy and get the investment and growth going again, feels Subramanian. It would make huge sense to have a dedicated revenue stream to finance this expenditure, instead of financing it all through borrowing. This could be through a massive disinvestment programme, a cess on petrol/diesel etc. This will make great accounting sense as well, where sale of public assets will finance the creation of newer public assets instead of financing regular expenditure of the government.

5) Every year along with the budget the government releases a revenue foregone statement. The revenue foregone for the government during the year 2013-2014 has been estimated to be at Rs 5,72,923.3 crore. “The estimates and projections are intended to indicate the potential revenue gain that would be realised by removing exemptions, deductions, weighted deductions and similar measures,” the statement of revenue foregone points out.
The following table shows the exact breakdown of the revenue foregone by the government under various kinds of taxes. It is clear from the table that Indian businesses benefit the most with corporate income tax, excise duty and customs duty foregone, forming a bulk of the revenue foregone by the government.

Table


It needs to be stated here that the revenue foregone is based on certain assumptions. As the statement points out “ The estimates are based on a short-term impact analysis. They are developed assuming that the underlying tax base would not be affected by removal of such measures….The cost of each tax concession is determined separately, assuming that all other tax provisions remain unchanged. Many of the tax concessions do, however, interact with each other. Therefore, the interactive impact of tax incentives could turn out to be different from the revenue foregone calculated by adding up the estimates and projections for each provision.”
While there are many assumptions behind the revenue foregone number, it is too big a number not to be taken seriously. It is even greater than this financial year’s projected fiscal deficit of Rs 5,31,177 crore. The government needs to go through these exemptions carefully and figure out are they really needed. This maybe too big an exercise to be carried out along with the budget, but it can be announced along with the budget and can be carried out over a longer period of time.

6) One of the ticking time bombs in India is the amount of money that needs to be pumped into public sector banks in the years to come. The Report of The Committee to Review Governance of Boards of Banks in India (better known as the PJ Nayak committee) released in May 2014, estimates that between January 2014 and March 2018 “public sector banks would need Rs. 5.87 lakh crores of tier-I capital.”
The report further points out that “assuming that the Government puts in 60 per cent (though it will be challenging to raise the remaining 40 per cent from the capital markets), the Government would need to invest over Rs. 3.50 lakh crores.”
Where is this money going to come from? The government needs to start thinking about the issue seriously. It is not in a position to pump in so much money into public sector banks. So it should start seriously looking at either selling out some of these banks or simply shutting down the poor performing ones. The government does not need to own so many banks. Again, the finance minister needs to tell us what he is thinking about this and the budget would be a great time to do this.

7) Jaitley needs to come up with a time frame and a plan around how soon the government will start paying out all subsidies in bank accounts of citizens directly. This will go a long way in ensuring that subsidies actually reach citizens and do not get siphoned off by the system.

8) Since coming to power the BJP government has made a lot of noise about getting back all the black money that has left the shores of the country. But what about all the black money that is still there in the country? Why not try to recover that? It will be significantly easier to do that. It is time that the government came up with a plan to recover black money within the country as well. The budget would be a great time to announce such a plan.

9) In the previous budget Arun Jaitley came up with 29 new schemes to which he allocated Rs 100 crore each. It is very tempting for the government to try and do everything and in the process spread itself too thin. The government cannot be a part of everything, simply because neither does it have the expertise nor the money. It would be better if it concentrated on a few big things(or ideas) in the budget. But there is no point in being absolutely all over the place.

10) The government expenditure is categorised into two categories—plan and non-plan. Interest payments on debt, pensions, salaries, subsidies and maintenance expenditure are all non-plan expenditure. As is obvious a lot of non-plan expenditure is largely regular expenditure.
Plan expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government. It is asset creating expenditure.
Nevertheless, what seems to be happening is that plan expenditure gets held back and is only released in the latter months of the year. Take the case of the current financial year. Between April to November 2014, the total plan expenditure of the government stood at Rs 2,93,651 crore or around 51.1% of the annual target of Rs 5,75,000 crore. The ratio was 52.8% for the period between April to November 2013.
The main reason why the government goes slow on plan expenditure and stacks it up towards the end of the year is that it has become the balancing factor in the budget. If the revenue projections go wrong, then the government slashes plan expenditure in order to meet the fiscal deficit target. This is what Chidambaram did in the last two financial years. In 2012-2013, he had budgeted Rs 5,21,025 crore towards plan expenditure. The final expenditure came in 20.6% lower at Rs 4,13,625 crore. In 2013-2014, the plan expenditure was budgeted at Rs 5,55,322 crore. The final expenditure came in 14.4% lower at Rs 4,75,532 crore.
Jaitley is looking to do the same in this financial year as well. He had budgeted Rs 5,75,000 crore for plan expenditure but my guess is that he will have to slash it by Rs 1,00, 000 crore to meet the fiscal deficit target. This practice needs to be done away with and it can only happen if the government works with more realistic projections of both revenue as well as expenditure. The next financial year is a good time to start.

These are the 10 things that I strongly feel the government should be trying to do in the next budget. Let’s see how many of these things happen.

The column originally appeared on www.Firstpost.com on Jan 9, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek) 

The stories that business media and market analysts tell us

bullfightingVivek Kaul

Over the last few days I have had great fun watching business news channels. After the BSE Sensex crashed by 855 points or over 3% on January 6, 2015, all kinds of explanations have been offered for the fall by the business media in general and market analysts in particular. Greece will soon be in major trouble. The dollar is rising against other currencies. The global cues are not good. Oil price has fallen to below $50 per barrel. This means that the world is entering an era of deflation (Deflation, a scenario of falling prices, is the opposite of inflation, and I am amazed how easily market analysts who appear on television use this term). The Modi effect is slowing down. The foreign investors need to realign their portfolios with the changing global economic scenario. And the proverbial, Indian economy is not doing well and corporate investment is needs to pick up. Two days later on January 8, 2015, the Sensex rallied 366 points or 1.4%. Market analysts and the business media told us that value buying was now coming in and this had led to the rally. What amazes me is that investors suddenly saw value in stocks with the market falling by just 3%? Benjamin Graham must be turning in his grave. He clearly never would have envisaged a day like this. Also, the investors did not see value on January 7, 2015, when the Sensex was almost flat. It fell by around 78.6 points or 0.3% on that day. But they suddenly saw value on January 8, 2015. What changed overnight? That no market analyst bothered to explain. In the Indian context, the foreign institutional investors have been driving the market for a while now. On January 6, 2015, they net sold stocks worth Rs 1,534.23 crore. But this was neutralized to some extent by domestic institutional investors buying stocks worth Rs 1,079.6 crore on the same day. Markets go up. Markets go down. And just because analysis exists doesn’t mean we analyse everything. I haven’t heard a single market analyst or a journalist in the business media till date say that today’s stock market movements were due to random fluctuations. As John Allen Paulos writes in A Mathematician Reads the Newspaper: “Almost never does a stock pundit say that market’s or a particular stock’s activity for the day or the week or the month was largely a result of random fluctuations.” With so many numbers and stories going around it is always possible to say something which on the face of it sounds very sensible. “The business pages, companies’ annual reports, sales records, and other widely available statistics provide such a wealth of data from which to fashion sales pitches that it’s not difficult for a stock picker to put on a good face…All that’s necessary is a little filtering of the sea of numbers that washes over us,” writes Paulos. This is precisely what has been happening over the last few days. The information and analysis being provided is essentially adding to the clutter. As Nassim Nicholas Taleb writes in Fooled by Randomness: “The difference between noise and information…has an analog: that between journalism and history. To be competent, a journalist should view matters like a historian, and play down the value of the information, he is providing.” This Taleb, feels can be done by saying: “Today the market went up, but this information is not too relevant as it emanates from noise”. But in an era of 24 hour news channels this is easier said than done. “Not only is it difficult for the journalist to think more like a historian, but it is, alas, the historian who is becoming more like the journalist [and to add my two bit so are market analysts]…If there is anything better than noise in the mass of “urgent” news pounding us, it would be like a needle in a haystack. People do not realize that the media is paid to get your attention. For a journalist, silence really surpasses any word,” writes Taleb. To be fair to the business news channels, the business newspapers follow the same formula of trying to come up with an explanation for market movements all the time. It’s just that since they do not have to react instantly to everything, some amount of noise gets filtered out in their reporting. A few years back I happened to interview valuation guru Aswath Damodaran and asked him a fairly straightforward question: How much role does media play in influencing investment decisions of people? The reply he gave was very interesting: “Media and analysts are followers…Basically when I see in the media news stories I see a reflection of what has already happened. It is a lagging indicator. It is not a leading indicator. I have never ever found a good investment by reading a news story. But I have heard about why an investment was good in hindsight by reading a news story about it. I am not a great believer that I can find good investments in the media. That’s not their job anyway.” This is something that investors need to keep in mind while following the media in their quest to understand why are the markets moving the way they are. It is worth remembering that business news channels and the business newspapers need to operate even when there is no major news. As Maggie Mahar writes in Bull—A History of the Boom and Bust, 1982-1984: “The perennial problem for the media is that balance sheets do not fluctuate on a daily basis. Once a reporter has laid out a company’s assets and debts, how does he fill the news hole the next day? Only by tracking market’s daily performance.” Analysts help the business press in filling up the daily space. This is something that former Morgan Stanley analyst Andy Kessler writes about in his book Wall Street Meat: “The market opens for trading five days a week… Companies report earnings once every quarter. But stocks trade about 250 days a year. Something has to make them move up or down the other 246 days [250 days – the four days on which companies declare quarterly results]. Analysts fill that role. They recommend stocks, change recommendations, change earnings estimates, pound the table—whatever it takes for a sales force to go out with a story so someone will trade with the firm and generate commissions.” And once analysts have a daily opinion, the media gets some masala to fill up its daily space. The trouble is that while the media ends up filling up space, investors who follow the media are bound to end up confused if they follow the media on a daily basis. It is worth remembering here what hedge fund manager Bill Fleckenstein told Mahar: “The trouble is that investing doesn’t lend itself to play-by-play reporting…Speculation does, but investing doesn’t.” The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning on Jan 9, 2015

Revealed: The real reason why Coal India unions were on a strike

coal
Late yesterday evening, the trade unions representing Coal India workers called off their five day strike. “Consequent to the intervention by Mr Piyush Goyal, Union Miinister for Coal, strike by Coal India workers called off,” Coal secretary Anil Swarup said on Twitter.
The meeting of the trade unions with the coal minister Piyush Goyal lasted for over six hours. “The strike has been called off,” Lakhan Lal Mahato, leader of All India Trade Union Congress (AITUC), one of the five trade unions supporting the strike told the Press Trust of India (PTI) after the strike was called off. “Mahato, however, did not share the details of the terms and conditions of the agreement reached between the government and the unions,” PTI reported. The real damage of this agreement (if any) will be revealed only once the details of the compromise agreed upon come out.
The strike lasted two days and led to a dramatic fall in coal production. A Reuters report quotes a Coal India official as saying that “Coal India produced 645,000 tonnes on Tuesday (January 6,2015), less than half of its usual daily output at this time of year.”
The unions were protesting the government’s decision to disinvest its shares in Coal India and at the same time they don’t want any private participation in the coal sector in the country.
The government wants to sell 10% of its stake in Coal India, which will help the government bring down the fiscal deficit. The fiscal deficit for the period April to November 2014 was at 99% of the annual target. Fiscal deficit is the difference between what a country earns and what it spends.
The government currently owns 89.65% of Coal India and even after selling a 10% stake it will continue to own almost 80% of the company, which is good enough to continue to have managerial control over the company. Hence, the government is not selling out of the company lock, stock and barrel.
Coal India was and will continue to be a government owned company. So what is it that the trade unions really feared? For that one needs to take a look at the following table.

Coal India

Year

Total employee benefits expenses (in Rs crore)

Number of employees

Average employee compensation

2010-2011

19,851.78

39,0243

Rs 5.09 lakh

2011-2012

26,387.42

37,7747

Rs 6.99 lakh

2012-2013

27,320.78

36,4736

Rs 7.49 lakh

2013-2014

27,769.43

35,2282

Rs 7.88 lakh

Source: Coal India Annual Report 2013-2014

As is clear from the above table the average employee compensation for Coal India has gone up from Rs 5.09 lakh in 2010-2011 to Rs 7.88 lakh in 2013-2014, an increase of 55%. What needs to be kept in mind is the fact that 85% of the employees of Coal India are workmen. Their jobs fall largely in the semi-skilled category.
In yesterday’s column I had said that the well performing subsidiaries of Coal India, like Mahanadi Coalfields and Northern Coalfields have been doing well primarily because they have been outsourcing the excavation of coal. Interestingly, coal experts point out that the firms to which the excavation of coal is outsourced hire workers at around one fourth the cost of what Coal India employees get paid. And that makes the entire exercise of excavating coal through outsourcing more productive. What this tells us clearly is that Coal India employees are paid extremely well.
Now look at the following table which has the average employee compensation of ICICI Bank over the years.

ICICI Bank

Year

Total employee benefits expenses (in Rs crore)

Number of employees

Average employee compensation

2010-2011

2,817

56,969

Rs 4.94 lakh

2011-2012

3,515

58,276

Rs 6.03 lakh

2012-2013

3,893

62,065

Rs 6.27 lakh

2013-2014

4,220

72,226

Rs 5.84 lakh

Source: ICICI Bank annual reports

ICICI Bank is the largest private sector bank in the country (in terms of total assets). It has more or less a 100% skilled workforce. Nevertheless, the average employee compensation of the bank in 2013-2014 was only at Rs 5.84 lakh.
Hence, an average Coal India employee makes 35% more than an average ICICI Bank employee. This is surprising given that Coal India has a largely a semi-skilled workforce. As on December 1, 2014, out of a total workforce of around 3.38 lakh, the total number of workmen were at 2.86 lakh. And these Coal India employees get paid significantly more than they should be, given the skill-set that they have.
The trade unions are essentially trying to protect this. Their big fear is that if private companies are allowed to commercially mine coal (as the recently re-promulgated Coal Mines (Special Provisions) Ordinance allows for), salaries in the organised coal sector will go down. Private companies will have no reason to pay the kind of compensation that Coal India pays its workers. As mentioned above outsourced workers get paid one fourth of what Coal India workers make. Hence, trade unions are basically trying to protect this interest of the organised coal labour.
In the process they are hurting the interests of the country. Coal India produced 323.58 million tonnes of coal in 2004-2005. In 2013-2014, it produced 462.42 million tonnes of coal. The rate of production has increased at an average annual rate of 4.05%. The production of coal hasn’t kept pace with demand. During the same period, the total amount of coal imports has increased from 28.95 million tonnes to 171 million tonnes, at an average annual rate of 21.8%.
The per employee productivity of Coal India is very low in comparison to its global peers. A Reuters news-report points out that: “Coal India digs out about 1,100 tonnes of coal per employee a year, compared with 36,700 tonnes per employee at U.S.-based Peabody Energy and 12,700 tonnes per employee at China’s Shenhua Energy.” What Coal India needs is some competition and that is exactly what allowing private companies to commercially mine coal will do.
As Partha Bhattacharya, a former Chairman of Coal India put it in a September 2014 column in The Indian Express: “With multiple players that have both bandwidth and competence, a competitive scenario is expected to emerge sooner than later. Besides turning the current situation of acute coal shortage into one of abundance, competitive pressures are expected to bring prices well below the imported coal price, since the wage cost is likely to remain far lower in India than elsewhere, whereas productivity is expected to converge to international levels.”
To conclude, India clearly needs more coal. And that is only going to be possible if more companies are allowed to produce coal. But the labour unions representing the workers of Coal India do not want that. In the process the country needs to import coal at a price which is higher than the price of the coal produced domestically. Also, the country ends up using precious foreign exchange.
In fact, if India does not produce more coal in the years to come, the coal imports will only go up.
What does that really mean? It means that increasing Indian coal imports will help create jobs in foreign countries. Ultimately, the unions representing the workers of Coal India will be responsible for this. And this is clearly not a happy thought.

The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning on January 8, 2015

Coal India unions are blackmailing the nation. Modi govt must call their bluff

coal

Starting yesterday (i.e. January 6, 2015) five trade unions representing the workers of Coal India have gone on a five day strike. The strike is backed the Bhartiya Mazdoor Sangh, which is the labour union affiliated to the Bhartiya Janata Party and the Sangh parivaar.
The unions are essentially demanding that the government should not disinvest its shares in Coal India and at the same time they don’t want any private participation in the coal sector in the country. In December 2014, the government had re-promulgated the Coal Mines (Special Provisions) Ordinance. This ordinance allows the auctioning of coal blocks. The ordinance also has an enabling provision for commercial mining of coal by private companies.
This is something that has not gone down well with the unions. “A consensus has emerged among the unions after the government showed arrogance over re-issuing the ordinance without consultations with the trade unions,” Jibon Roy of Centre of Indian Trade Union (CITU), told the Financial Express. The Indian National Trade Union Congress, All India Trade Union Congress (AITUC) and Hind Mazdoor Sabha (HMS) are the other three trade unions backing the strike.
Reports in the media suggest that the strike has been effective and the production of coal has come down dramatically. A news-report filed by the Press Trust of India suggests that “out of the total production of 1.5 million tonnes a day, nearly 75 per cent has been hit.” Another report by Bloomberg puts the figure at a much lower 50%.
Coal India produces 80% of the nation’s coal. A major portion of this coal is supplied to thermal power plants. As the Bloomberg news-report points out: “Of the 100 power plants that run on local coal, 42 had supplies of less than seven days as of 1 January, according to the power ministry’s Central Electricity Authority. Twenty of these plants had less than four days of stock.”
What this means is that if the strike continues for five days the inventory levels of the power plants will fall further and that may lead to a power crisis. The unions understand this and are using this as a negotiating tool with the government. A Press Trust of India report points out that Yasar Shah, the minister state for Power in Uttar Pradesh, said the state may face electricity crisis if the strike by coal workers extended longer.
The question to ask here is are the points on which the unions have gone on a strike valid enough? Or are they simply resorting to blackmail?
The government needs to auction coal blocks/mines because the Supreme Court in September 2014 had cancelled the allocation of 204 out of the 218 blocks that various governments since 1993 had allocated to private companies for captive consumption.
The idea, as the Economic Survey of 1994-1995 pointed out, was 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.” This allowed private companies engaged in the production of iron and steel, power and cement to own coal blocks for their captive use.
The Supreme Court cancelled these allocations and in its decisions said that the “the entire exercise of allocation…appears to suffer from the vice of arbitrariness and not following any objective criteria in determining as to who is to be selected or who is not to be selected.”
Given this, the government now needs to auction these coal blocks. So, its just following a decision made by the Supreme Court. The trade unions by opposing this are essentially going against a decision made by the Supreme Court.
The trade unions are also protesting against the decision of the government to allow private companies to commercially mine coal. Why has the government made this decision? For the simple reason that Coal India is not producing enough coal to meet the demand.
As per estimates made by the Geological Survey of India, India has third largest coal reserves in the world of 301.56 billion tonnes. Nevertheless, we still need to import coal. Why is that the case?
Coal India produced 323.58 million tonnes of coal in 2004-2005. In 2013-2014, it produced 462.42 million tonnes of coal. The rate of production has increased at an average annual rate of 4.05%. During the same period, the total amount of coal imports has increased from 28.95 million tonnes to 171 million tonnes, at an average annual rate of 21.8%.
So what India needs is more coal. Coal India hasn’t been able to increase its rate of production at a rate which matches the rate of increase in demand for coal. Given this, it is common sense that more companies need to be allowed to produce coal, whether they are run by the government or they are privately run, doesn’t really matter.
Further, should the government be thinking about the more than 120 crore Indians as a whole or about around 3 lakh employees of Coal India who do not want private participation in the coal sector? The decision is a no-brainer. India needs more coal whether the unions representing the workers of Coal India like it or not.
It also needs to be pointed out that when it comes to paying its workers, Coal India is doing a good job. During the year 2010-2011, the total employee benefit expenses (salary, wages, allowances, bonus, leave travel encashment, contribution to PF, gratuity etc.) of Coal India amounted to Rs 19,851.78 crore. The company had an average manpower of 3,90,243 individuals during the course of the year. This means that the average amount of money that Coal India paid a single employee in 2010-2011 was at Rs 5,08,703.
In 2013-2014, the total employee benefit expenses amounted to Rs 27,769.43 crore. The average manpower during the course of the year had fallen to 3,52,282. This means that the average amount of money that Coal India paid a single employee in 2013-2014 mounted to Rs 7,88,273. This means that an average Coal India employee has seen a jump in payment of 55% over a period of four years, which is not bad by any stretch of imagination. Workmen make up nearly 85% of the employees of Coal India.
What these points clearly tell us is that the trade unions of Coal India are essentially blackmailing the nation and nothing more. The government needs to call their bluff even if it leads to some pain in the short term.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)


The column originally appeared on www.firstpost.com on Jan 7, 2015

Coal India: India’s biggest industrial strike in 38 years that no one is talking about

coal
The unions of Coal India, the company which produces nearly 80% of the coal produced in India, have gone on a five day strike, starting January 6, 2015. The strike is supported by the five leading trade unions in the country, including the Bhartiya Janata Party backed Bhartiya Mazdoor Sangh (BMS).
The Press Trust of India reports that the strike is the biggest industrial action seen in any sector since 1977. It is also the biggest strike in the history of Coal India. Interestingly, the unions had boycotted a meeting called by coal minister Piyush Goyal last week.
The unions are essentially protesting the disinvestment and restructuring of Coal India. They also don’t like the idea of the government selling coal blocks to private parties. D Ramanandan, President of All India Coal Workers’ federation, told The Times of India that “The protests will not stop till the commercialization of coal blocks is not stopped”.
Long story short, the protesters want Coal India in particular and coal production in general to continue to be government owned in every way and keep private companies as far as possible. Nevertheless, the following table makes for a very interesting reading.

Name of the Coal India subsidiaryNumber of employees (as on Dec 1, 2014)Coal production between April and September 2014 (in million tonnes)
Mahanadi Coalfields22,24555.029
South Eastern Coalfields69,01254.367
Northern Coalfields16,41829.718
Central Coalfields45,72221.593
Western Coalfields50,55717.82
Bharat Coking Coal57,18416.106
Eastern Coalfields69,73915.967
North Eastern Coalfields2,0640.14

Source: www.coalindia.in

The table lists the eight coal producing subsidiaries of Coal India (the company has a ninth subsidiary called Central Mine Planning Design Institute, which does not mine coal). The North Eastern Coalfields produces a minuscule amount of coal and hence, can be left out of the analysis.
One look at the table will tell you that the two best performing companies of Coal India are Mahanadi Coalfields and Northern Coalfields.
For the period April to September 2014, Mahanadi Coalfields managed to produce 55.029 million tonnes of coal. As of December 1, 2014, it had an employee strength of 22,245.During the course of 2013-2014 it produced 114.34 million tonnes of coal or nearly one fourth of the coal that was mined by Coal India.
In case of Northern Coalfields the employee strength was 16,418. The coal produced amounted to 29.718 million tonnes. In 2013-2014, it produced 72.11 million tonnes of coal or around 15.6% of the total coal produced by Coal India.
It is also clear from the table that the company with the most number of employees, Eastern Coalfields, also produces the least amount of coal. The company with the third largest number of employees, Bharat Coking Coal, comes in second from the bottom when it comes to coal production.  In 2013-2014, Eastern Coalfields produced just 36.25 million tonnes or 7.8% of the coal produced by Coal India. The same was the case with Bharat Coking Coal, which employed 17% of total Coal India employees but produced only 7.4% of coal that was produced.
The trend is clear here. Companies with fewer employees are producing more coal. The only exception to this is South Eastern Coalfields, which with 69,012 employees produced 54.367 million tonnes of coal during the first six months of this financial year.
Why is this the case? Why are companies with fewer employees producing more coal? The answer lies in the fact that companies which are producing more coal with fewer employees are outsourcing the excavation of coal. Also, the coal mines of Northern Coalfields are highly mechanised.
Another reason why Eastern Coalfields has a lower productivity is because it has many underground mines. In fact, during the first six months of this financial year, the company produced around 22.1% of its coal underground. The same stands true for Western Coalfields as well, which mined nearly 20.9% of its coal underground.
The overall number in case of Coal India was at 8%. Of the total of 210.74 million tonnes produced by Coal India between April to September 2014, 16.953 million tonnes was mined underground. The remaining coal was excavated from open cast mines.
This is an important point because the technology used to mine coal from underground mines is still very labour intensive and that to some extent explains the lower productivity of both Eastern as well as Western Coalfields.
Having said that companies like Eastern Coalfields and Bharat Coking Coal also have stronger trade unions (Eastern Coalfields is head-quartered at Sanctoria in West Bengal and Bharat Coking Coal at Dhanbad in Jharkhand, but right on the West Bengal border). This is another major reason which explains why these companies employ so many people to produce very little coal in comparison to other subsidiaries.
Nevertheless, outsourcing has made an inroad in the low productivity companies of Coal India as well. The contractual expenses of Eastern Coalfields have risen by 117% between 2009-2010 and 2013-2014. How does this compare with Coal India as a whole? The contractual expenses of Coal India in 2013-2014 stood at Rs 7812.71 crore, a rise of around 48% from 2010-2011. The annual report of the company points out that the contractual expenses have increased mainly due increased volume of contractual operations.
In simple English, more and more excavation of coal is being outsourced, even in a company like Eastern Coalfields, and this is something that the unions need to be more worried about than the government selling coal blocks to private companies.
It also needs to be pointed out here that the best performing companies of Coal India have huge operating margins. Mahanadi Coalfields earned a total revenue of Rs 12,033 crore during 2013-2014, with an operating profit of Rs 5429.08 crore, which means an operating margin of 45.1%. Interestingly, the company had an operating margin of 51.3% in 2012-2013. Northern Coalfields had an operating margin of of 40.1% in 2013-2014, having fallen from an operating margin of 54.2% that the company had earned in 2012-2013.
These companies should not be subsidiaries of Coal India. They should be allowed to operate on their own. Currently, these companies have a certain “command area” beyond which they cannot operate. Hence, Mahanadi Coalfields cannot operate a coal mine in the command area of Eastern Coalfields, even though the company is more productive at mining coal. These limitations need to be done away with for the simple reason that it will create more competition within the sector.
A recent report in the Business Standard newspaper suggests that the Suresh Prabhu-led ‘Advisory group for integrated development of power, coal and renewable energy’ “has quashed the idea of restructuring Coal India.” Nevertheless, the report does talk about empowering the subsidiaries of Coal India.

“(The) subsidiaries may be given adequate delegation of power, capital expenditure and operational flexibility, along with commensurate accountability, so that their dependence on CIL for decision making does not hamper fulfilment of targets set out for them,” the newsreport in Business Standard pointed out.
This is a good step forward. Ideally, the government should breakdown Coal India and let its subsidiaries operate on their own. Given that it does not want to do that, this is the next best step.
To conclude, India has the third largest coal reserves in the world of 301.56 billion tonnes as per estimates of the Geological Survey of India. But we still import a huge amount of coal.
Coal India produced 323.58 million tonnes of coal in 2004-2005. In 2013-2014, it produced 462.42 million tonnes of coal. The rate of production has increased at an average annual rate of 4.05%. During the same period, the total amount of coal imports has increased from 28.95 million tonnes to 171 million tonnes, at an average annual rate of 21.8%. What this clearly tells us is that India needs more coal. Not more Coal India.
The sooner the government realizes this, the better the energy scenario in the country is likely to be.

The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning, on January 7, 2015