Coal auction: Seven reasons why Vinod Rai was right about Coalgate

Inclusive Governance: Enabling Capability, Disabling ResistanceLawyers who become politicians are very good at giving things a good spin.
The Congress led United Progressive Alliance(UPA) was full of such individuals, who could provide a good spin 24/7 to various things that were going wrong during the regime.
The biggest spin came when the Comptroller and Auditor General(CAG) Vinod Rai exposed the coalgate scam and estimated that the losses to the nation were around Rs 1,86,000 crore. (You can read how the number was arrived at here).
Various Congress politicians worked overtime to suggest that there were no losses. The then finance minister P. Chidambaram had said: “If coal is not mined, where is the loss? The loss will only occur if coal is sold at a certain price or undervalued.” Other leaders suggested that the CAG Rai(who former bureaucrat turned politician N.K.Singh labelled as the bhumihar from Ghazipur) had political ambitions.
Manish Tewari, the Congress leader who during his heydays could have an opinion on anything and everything, had said: “R-virus has infected the Indian growth story. The R-virus stands for a phenomenon were responsible individuals decide to become loose cannons.”
On another occasion, Tewari had commented that: “When individuals decide to go rogue, institutions suffer. That possibly has the most detrimental effect on the India growth story.” Montek Singh Ahluwalia, the former deputy chairman of the now defunct Planning Commission, had claimed that “untrained staff [is] auditing CAG reports.”
Long story short—the official propaganda machinery worked overtime to discredit Rai. They told us time and again that giving away coal free was not leading to any losses. Even without getting into any technicalities, how can giving away something ‘free’ not lead to losses is not something that any of these politicians bothered to explain.
In the early 1990s, the government realized that enough coal was not being produced to meet the demand. Hence, it decided to amend the the Coal Mines(Nationalisation) Act with effect from June 9, 1993. This was done largely on account of the inability of Coal India Ltd (CIL), which produces most of India’s coal, to produce enough coal.
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.”
The amendment allowed companies which were in the business of producing power and iron and steel, to own coal mines for their captive use. Any excess coal that was produced had to handed over to the local subsidiary of CIL.
Using this amendment, the government gave away 204 coal blocks for free over nearly two decades. Most of these free coal blocks were given away between 2004 and 2011, when the Congress led UPA was in power (and that explains why the businessman turned Congress politician Naveen Jindal was the biggest beneficiary with nine coal blocks allotted to him). Nevertheless even by 2011-2012, these coal blocks produced only 36.9 million tonnes of coal. This amounted to around 6.8% of the total production of 539.94 million tonnes during the course of that year.
In August 2014, the Supreme Court cancelled the allocation of these blocks. The Screening Committee method used to allot blocks was not up to the mark, it suggested in the judgement. The coal blocks were allocated based on the recommendations of an inter ministerial screening committee.
As Rai writes in Not Just an Accountant—The Diary of the Nation’s Conscience Keeper “This committee was to scrutinize applications for captive mining and allocate coal blocks for development, subject to statutes governing coal mining, following which the coal minister would approve the allotment…The screening committee is expected to asses applications based on parameters such as the techno-economic feasibility of the end-use project, status of preparedness to set up the end-use project, past track record in executing projects, financial and technical capabilities of applicant companies and the recommendations of the concerned state governments and ministries.”
The Supreme Court judgement dated August 25, 2014, did not find this approach up to the mark. It pointed out that: “the entire exercise of allocation through Screening Committee route thus 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.” The judgement further pointed out that “there is no evaluation of merit and no inter se comparison of the applicants.”
After the cancellation, the government decided to auction the coal mines. Over the last few days the government has been auctioning the first lot of these coal blocks. Fourteen out of the 19 blocks that are on auction have been sold till now, for a whopping Rs 80,000 crore.
What this clearly shows is that Vinod Rai was right about the losses all along. And it wasn’t just about the money. Here are seven reasons that justify that:

a) All the zero loss theories offered by the various Congress politicians were bogus. The government has already earned close to Rs 80,000 crore, which will be paid by winning companies over the years.
It needs to be mentioned that more than 200 coal blocks will be eventually auctioned. Imagine the kind of money we are talking about here.
A report in the Business Line points out that “according to government estimates, from the entire 204 blocks to be allocated/auctioned in phases, over Rs 15-lakh crore was expected to be garnered over the lifetime of the mines.” “But now we see this number could be higher,” a Coal Ministry official told the newspaper.
Interestingly, the CAG had said in its report that:  “A part of this financial gain could have been tapped by the government by taking timely decision on competitive bidding for allocation of coal blocks.”
b) Vinod Rai and the loss estimate of Rs 1.86 lakh crore made by the CAG, was very conservative at best. But accountants are expected to be conservative. The CAG worked with fairly conservative estimates on this front as well.
Typically extractable reserves are around 80-95% of the geological reserves of coal. The portion of the geological reserves that can be extracted are referred to as extractable reserves. As Rai writes in his book: “Audit based its computation on [the] conservative estimate of 73 million tonnes for every 100 million tonnes given in the GR [geological reserve]…Can audit be faulted if its computation was based on a conservative estimate of 73 per cent?…The extractable reserves…based on the aforementioned method, was found by the CAG to be 6282.5 million tonnes, which is mentioned in the report.”
Hence, only 6.28 billion tonnes of the 44.8 billion tonnes of geological reserves was assumed as extractable reserves while calculating the losses of the government. You can’t hold that against Rai. c) The ‘auction’ is a very clean way of doing things unlike the ‘behind the doors’ screening committee method. Further, there was no ‘fair’ way of going about allocation of coal blocks through the screening committee method. It went against the basic principle of equity.
Former coal secretary P C Parakh explains this in 
Crusader or Conspirator—Coalgate and Other Truths: “By the time I took charge of the ministry, the number of applicants for each block had increased considerably although still in single digits. I found a number of applicants fulfilling the criteria specified for allocation of each block on offer. This made objective selection extremely difficult.”
In fact in the years to come the situation became significantly worse. As Parakh writes: “According to CAG’s report, 108 applications were received for Rampia and Dip Side of Rampia Block [names of two coal blocks]. I found it difficult to make an objective selection when the number of applicants was in single digits. How could the Screening Committee take objective decisions when the number of applicants per block had run into three digits?”
Allocating blocks through an auction takes care of such issues.
d) By attaching a certain price to the coal block the government should be able to keep the non-serious players out. Take the case of the Rampia coal block mentioned earlier, where 108 applications were received. When something is available for free everybody wants it.
e) Also, once companies have to pay for a block, the chances are that they will try and ensure that they start producing coal as soon as possible. This was something that was not happening earlier. As per the 11th five year plan, which started in 2007-08, the production from the captive coal blocks was to expected to touch 111 million tonnes of coal per year by 2011-12. The captive coal blocks produced 36.2 million tonnes of coal during the course of that year. By 2016-17, the production of coal from these blocks was expected to touch 330 million tonnes. In 2013-2014, these blocks produced only 39 million tonnes. What this tells us is that many non-serious players had got the blocks as well.
f) Indian businesses have for too long been used to getting things for free, including coal. This has led to the misconception that thermal power is cheap, which is not. Once, the right price of coal is taken into account, other forms of generating electricity might start to look viable. And that will be good for the environment.
g) And finally, transparency is very essential whenever the government is selling a public asset. It goes a long way in controlling crony capitalism. Coal auctions are worth all the trouble just for this one reason.

The column originally appeared on on Feb 20, 2015

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

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


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
on Jan 7, 2015

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

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


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 as a part of The Daily Reckoning, on January 7, 2015

As tax collections slow down, govt fiscal deficit shoots to its highest level in 16 years

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010Vivek Kaul

The Controller General of Accounts declares the fiscal deficit number at the end of every month. The cycle works with a delay of month. So, at the end of November 2014, the fiscal deficit for the first seven months of the financial year (April to October 2014) was declared.
The fiscal deficit for this period stood at a rather worrying 89.6% of the annual target of Rs
5,31,177 crore. Fiscal deficit is the difference between what a government earns and what it spends.
One reason the fiscal deficit is number is so high is because the government’s expenditure is spread all through the year, whereas it earns a substantial part of its income only towards the end of the year. But even keeping that point in mind, the fiscal deficit for the first seven months of this financial year is substantially high than it usually has been in the years gone by.
For the period April to October 2013, the fiscal deficit had stood at 84.4% of the annual target for that year. In fact, the accompanying table shows us that the fiscal deficit for the first seven months of this financial year has been the highest over the last sixteen years. 

PeriodFiscal deficit as a proportion of the annual target
April to Oct 201489.60%
April to Oct 201384.40%
April to Oct 201271.60%
April to Oct 201174.40%
April to Oct 201042.60%
April to Oct 200961.10%
April to Oct 200887.80%
April to Oct 200754.50%
April to Oct 200658.60%
April to Oct 200560.90%
April to Oct 200445.20%
April to Oct 200356.00%
April to Oct 200251.50%
April to Oct 200154.50%
April to Oct 200045.70%
April to Oct 199972.20%
April to Oct 199867.00%


Also, I couldn’t look for data beyond 1998, given that it wasn’t available online. The table makes for a very interesting reading. The fiscal deficit level up to October 2007 was under control. It took off once the government decided to crank up expenditure to meet its social obligations.
Further, the average fiscal deficit for the first seven months of the year between 1998 and 2013 stood at 61.75% of the annual target. Hence, the number for this year at 89.6% of the annual target, is very high indeed.
Why has this happened? The income of the government during the period has gone up by only 5.3%. The budget presented in July earlier this year assumed that the income would grow by 15.6% in comparison to the last financial year.
The collection of direct as well as indirect taxes has been significantly slower than what was assumed. The direct taxes (corporation and income tax primarily) were assumed to grow at 15.7% in comparison to the last financial year. They have grown at only 5.5%.
The indirect taxes (customs duty, excise duty and service tax) were supposed to grow at 20.3%. They have grown by only 5.9%. In fact, within indirect taxes, the collection of customs duty has fallen by 1.7%.
What this clearly tells us is that the finance minister Arun Jaitley made very aggressive assumptions when it came to growth in tax collection and will now have a tough time meeting the numbers.
What makes the situation worse is the fact that Jaitley’s predecessor, P Chidambaram, had made the same mistake. In fact, in 2013-2014,
Chidambaram had projected a total gross tax collection of Rs 12,35,870 crore. The final collection stood around 6.2% lower at Rs 11,58,906 crore. Given this, Jaitley could have avoided falling into the same trap and worked with a more realistic set of numbers. But then those projections wouldn’t have projected “acche din”, the plank on which the Bhartiya Janata Party had fought the Lok Sabha elections.
Even with such a huge fall in tax collections, Chidambaram managed to beat the fiscal deficit target that he had set by essentially pushing expenditure of more than Rs 1,00,000 crore into the next financial year (i.e. the current financial year 2014-2015).
Chidambaram essentially ended up passing on what was his problem to Jaitley. Jaitley cannot do that because he will continue to be the finance minister (or someone else from the BJP government will).
So what can Jaitley do if he needs to meet the fiscal deficit target of Rs 5,31,177 crore or 4.1% of GDP that he has set? The first thing that will happen and is already happening is that the plan expenditure will be slashed. The plan expenditure for the first seven months of the year fell by 0.4% to Rs
2,66,991 crore.
This was the strategy followed by Chidambaram as well in 2013-2014. The plan expenditure target at the time of the presentation of the budget was at Rs 5,55,322 crore. The actual number came in 14.4% lower at Rs 4,75,532 crore. This is how a major part of government expenditure was controlled.
The government expenditure is categorised into two kinds—planned and non planned. Planned expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government.
Non-plan expenditure is an outcome of planned expenditure. For example, the government constructs a highway using money categorised as a planned expenditure. But the money that goes towards the maintenance of that highway is non-planned expenditure. 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 that cannot be done away with. The government needs to keep paying salaries, pensions and interest on debt, on time. These expenses cannot be postponed. Hence, the asset creating plan expenditure gets slashed.
The second thing that the government is doing is not passing on the benefit of falling oil prices to the consumers. It has increased the excise duty on petrol and diesel twice, since deregulating diesel prices in October.
The third thing the government will have to do is to get aggressive on the disinvestment front in the period up to March 2015. The disinvestment target for the year is Rs 58,425 crore. But until now the government has gone slow on selling shares that it owns both in government and non-government companies because of reasons only it can best explain.
The recent sale of shares in the Steel Authority of India Ltd(SAIL) was pushed through with more than a little help from the Life Insurance Corporation of India and other government owned financial firms. This is nothing but moving money from one arm of the government to another arm. It cannot be categorised as genuine disinvestment.
This is something that Chidambaram and the UPA government regularly did in order to meet the disinvestment target. Despite this they couldn’t meet the disinvestment target in 2013-2014. The government had hoped to earn
Rs 54,000 crore but earned only Rs 19,027 crore.
Also, selling assets to fund regular yearly expenditure is not a healthy practice. If at all the government wants to sell its stake in companies, it should be directing that money towards a special fund which could be used to improve the poor physical infrastructure throughout the country. Right now, the money collected through this route goes into the Consolidated Funds of India.
In the months to come we could also see the government forcing cash rich companies like Coal India (which has more than Rs 50,000 crore of cash on its books) to pay a special interim dividend to the government, as was the case last year.
This is the way I see things panning out over the next few months. Nevertheless, the proper thing to do would be to put out the right fiscal deficit number, instead of trying to use accounting and other tricks to hide it.
The first step towards solving a problem is to acknowledge that it exists.

The article originally appeared on as a part of The Daily Reckoning, on Dec 11, 2014

There’s one simple solution to solve India’s coal woes: Shut down Coal India


Vivek Kaul

The government owned Coal India which produces a major portion of India’s coal, releases production numbers every month.
In October 2014, the company met its production target for the first time during this financial year. The company produced 40.20 million tonnes of coal during the course of the month. The target was at 39.74 million tonnes.
Nevertheless, this is where the good news ends. Between April and October 2014, the company was supposed to produce 259.85 million tonnes of coal, but managed to produce only 250.96 million tonnes or around 97% of its target.
Coal India produces more than four fifth of the coal produced in the country. Hence, India is more or less totally dependent on the company to produce the coal that is needed. And the fact of the matter is that Coal India has not been able to increase coal production at the same pace as coal demand has increased. This despite the fact that India has close to 301.56 billion tonnes of coal reserves as per estimates of the Geological Survey of India.
Coal India produced 323.58 million tonnes of coal in 2004-2005. Since then the company has managed to boost production to 462.42 billion tonnes of coal in 2013-2014, at an average annual rate of 4.05%. During the period coal imports have shot up from 28.95 million tonnes to 171 million tonnes, at an average annual rate of 21.8%. This clearly shows the disconnect between coal production and coal demand.
The production of coal by Coal India has not been able to keep pace with the rate at which demand for coal has grown in the last decade. And this explains to a large extent why 61 out of India’s 103 power plants had a coal inventory of less than four days as on last Thursday.
The basic reason for this lies in the fact that Coal India’s productivity is very low. The number to look at here is the output per man shift. In 2013-2014, this number had stood at 5.62 tonnes. For underground mines this had was at 0.76 million tonnes, whereas for open cast mines it was at 12.18 tonnes.
The number has seen some improvement over the last decade. In 2004-2005, it had stood at 3.05 tonnes for open cast mines. For underground mines the number was at 0.69 tonnes.
While on the face of it there has been an improvement in the productivity of Coal India, but this increase falls flat when we compare it to the output per man shift number at the international level.
Let’s take the case of Australia. In 1986, the output per man shift of an open cast mine in Australia was at 35 tonnes. For underground mines it was at 12 tonnes. In the Indian case the numbers stood 12.18 tonnes and 0.76 tonnes in 2013-2014. Hence, the productivity of Coal India is not even near the level where it was in Australia nearly 30 years back.
How does the latest output per shift number from Australia look?
 As Swaminathan Aiyar pointed out in a recent column in The Economic Times In Australia, collieries produce 75 tonnes per manshift (of eight hours) in open-cast mines and 40 tonnes per manshift in underground mines.”
There are several reasons for this low productivity of Coal India. As
Suyash Rai and Ajay Shah point out in a recent people titled India needs more coal “A monopoly [like Coal India] does not face the competitive pressure that punishes inefficiency…The relationship with labour in Coal India appears to be lopsided, even by the standards of public sector firms. Junior staff at Coal India are paid rather well when compared with other employment with the similar skill and hardship. This may be attributed to powerful trade unions. The strength of trade unions may explain the low productivity at Coal India.”
Given these reasons there are a few things that need to be done urgently if India is to produce more coal. First and foremost the monopoly of Coal India needs to be ended. A simple way is to allow foreign as well as Indian private investment into commercial mining of coal.
There is another way the monopoly of Coal India could be ended. Coal India currently operates through eight subsidiaries which produce coal. Another subsidiary the Central Mine Planning and Design Institute (CMPDI) essentially does all the planning for Coal India and does not produce any coal.
The time has come to dismantle Coal India and let the eight coal producing subsidiaries operate on their own. This will get some competition going in the sector. It will also unleash the real potential of companies like Mahanadi Coalfields Ltd and Northern Coalfields Ltd, which are the companies which have been driving the performance of Coal India. There operating margins are better than the best private companies in India.
Also, other companies like Eastern Coalfields and Bharat Coking Coal which bring down the overall performance of Coal India will have to fend for their own.
Having said that both proposals are a political minefield and it remains to be seen whether the government is willing to push them through.

The article originally appeared on on Nov 4, 2014 

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