Every country needs foreign currency to pay for its imports. The foreign currency needed is typically the American dollar or the euro. This foreign currency is earned through exports. India is no different on this account.
But what happens when the imports are greater than exports as is the case with India? This leads to a situation where the country does not have enough foreign currency to pay for its imports. How does the country then pay for its imports? What comes to the rescue are remittances of foreign currency made by the citizens of the country living abroad. These remittances can then be used to pay for imports. India is the world’s largest receiver of remittances. In 2012, it received $69 billion, as per World Bank data.
But even with such large remittances being made, a country may not have enough foreign currency going around to pay for its imports. In such a situation, the country is said to be running a current account deficit (CAD). In technical terms, the CAD is the difference between total value of imports and the sum of the total value of its exports and net foreign remittances.
In 2012, India’s CAD stood at $93 billion, which was only second to the United States in absolute terms. As Amay Hattangadi and Swanand Kelkar of Morgan Stanley Investment Management point out in a report titled Don’t Take Your Eye of the Ball “At $93billion, India’s CAD in 2012 was second only to the US in absolute terms, and higher than the UK, Canada and France.”
The following table from the report shows the list of countries with the highest CAD in absolute terms. Even if we compare CAD as a percentage of GDP, only South Africa and Turkey are ranked ahead of India.
India’s high CAD is primarily because of the fact that it has to import a large portion of the oil it consumes. For the year ending March 31, 2013, the country imported $169.25 billion worth of oil. This forms nearly 34.4 percent of India’s total imports.
With oil prices falling in the recent past, this has given reason for hope that India will be able to control its CAD in the time to come. The price of the Indian basket of crude oil stood at $101.58 per barrel as on May 3, 2013. On January 31, 2013, the price was $111.44 per barrel. So, clearly the oil price has fallen over the last three months and this should help India control the CAD is a logical conclusion being made.
And this has led to a lot of optimism among the lot who run this country. The finance minister on a recent visit to the United States said, “If exports rise sharply, if the oil prices soften more quickly, the current account deficit could be contained at 2.5 percent even by next year.”
This is being a tad too optimistic, as Hattangadi and Kelkar put it, “even if we assume lower energy prices will result in a saving of about $20 billion in the current fiscal year”. This means the CAD will stand at over $70 billion, which is not a small amount by any stretch of imagination.
What has also helped in controlling a galloping CAD to some extent has been a fall in the price of gold and various steps taken by the government to discourage buying of gold, like increasing the import duty on it. Gold imports declined by 11.8 percent to $50 billion during the period April 2012-February 2013.
Falling oil and gold prices may have come as a boon but what has somewhat negated this effect is rise in the import of coal. In the first nine months of the financial year 2012-2013 (i.e. the period between April 1, 2012 and December 31, 2012), coal imports jumped 70 percent. This trend is likely to continue. “Despite having the fifth largest coal reserves in the world, India’s coal imports this year may rise to 130 million tonnes, up 50 percent from two years ago,” write Hattangadi and Kelkar. In 2012-2013 (i.e. the period between April 1, 2012 and March 31, 2013), the coal imports are expected to be around 110 million tonnes.
So unless India takes concrete steps to address its energy sufficiency, its high CAD is likely to continue. As Hattangadi and Kelkar write, “India has done little to adequately address energy self-sufficiency. After declining for almost 20 years until 2005, US energy self-sufficiency has gone up from 69 percent to 80 percent. In contrast, India’s energy self sufficiency has been falling from 90 percent in 1984 to 63 percent in 2011.”
With the coalgate scam currently haunting the government, it is unlikely that much will happen in the area of encouraging private production of coal in the months to come.
As mentioned earlier India ran a CAD of $93 billion in 2012-2013. What this means is that the sum total of foreign exchange that came in through exports and remittances was not enough to pay for imports. So where did the remaining foreign exchange to pay for imports come from?
This is where foreign investors came in. Foreign investment in the form of foreign direct investment and portfolio investment (the money that comes into the stock market and the debt market) has been in the range of $40-50 billion in the five out of last six years.
Foreign investors bring money into India in the form of dollars, euros or yen, for that matter, and exchange it for rupees to invest in India. This foreign exchange accumulates with the Reserve Bank of India or any of the banks, and is bought by importers looking to pay for their imports.
Hence it is safe to say that to a large extent India remains dependant on foreign investors to continue financing its CAD. And that explains why Finance Minister P Chidambaram has been on several foreign roadshows over the last few months trying to encourage foreign investors to invest more in India.
But there are two problems here. As Chidambaram said in the budget speech earlier this year, “The key to restart the growth engine is to attract more investment, both from domestic investors and foreign investors. Investment is an act of faith.”
And faith can turn around very quickly. When the financial crisis erupted in 2008-09, foreign investment fell to $8 billion from the $40-50 billion level. Any sense of a crisis can lead to foreign investors stopping to bring money into India. They might also start withdrawing the money they have invested in India.
The other problem here is that how does the finance minister motivate foreigners to invest in India, when Indian businessmen are looking to invest abroad. As Ruchir Sharma writes in Breakout Nations, “At a time when India needs its businessmen to reinvest more aggressively at home in order for the country to hit its growth target of 8 to 9 percent, they are looking abroad. Overseas operations of Indian companies now account for more than 10% of overall corporate profitability, compared with 2 percent just five years ago.”
And if all this wasn’t enough imports are not the only thing competing for foreign currency. Over the last few years more and more Indian businesses have borrowed abroad given the low interest rates that prevail internationally. This money now needs to be returned. Hattangadi and Kelkar estimate that “the total amount of debt that will likely come up for redemption or refinancing in the current year is about $165billion, which is about $20billion higher than last year.” Hence, imports and repayment of debt will be competing for foreign currency.
So yes, oil prices and gold prices are falling, but there are other reasons to worry about, when it comes to the current account deficit, something the political class that runs this country, isn’t really talking about.
The article originally appeared on www.firstpost.com on May 7,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
The dirty business
“Every action has an equal and opposite reaction,” states Newton’s Third Law of Motion. The law holds in political and economic space as well, the only difference being that sometimes the gap between the action and the reaction can be as long as two decades.
The Coal Mines (Nationalisation) Act 1973 was amended with effect from June 9,1973. 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 survey points out.
The reason for the change was simple. The government owned Coal India Ltd wasn’t producing enough coal to meet the growing energy needs of the country. The total coal production in the country in 1993-94 stood at 246.04million tonnes having grown by 3.3% from the last financial year.
What also did not help was the fact that there were huge time and cost escalations on the newer projects to mine coal. As the 1994-95 economic survey put it “As on December 31,1994, out of 71 projects under implementation in the coal sector, 22 projects are bedeviled by time and cost over-runs. On an average, the time overrun per project is about 38months.There is urgent need to improve project implementation in the coal sector”.
This change made nearly two decades ago allowed the government to give away coal blocks free to both government owned as well as private sector companies. The repercussions of this move are being felt now with the Comptroller and Auditor General(CAG) of India coming out with a report and putting the losses of giving out coal mines for free at Rs 1,86,000 crore. It also has led to a political deadlock in the functioning of the Parliament.
So what happened in between 1993 and 2011?
Between 1993 and 2003, the government wasn’t in any hurry to give away mines free. In a period of over ten years, the government gave away around 41 blocks (17 to private sector companies and 24 to government owned companies) for free. Even 2004 was a slow year with only 5 blocks being given away for free.
But come 2005 and the government was suddenly in a hurry to give away blocks for free. Twenty four blocks were given away during the course of the year. This continued over the next few years. Between 2006 and 2009 a total number of 145 coal blocks were handed for free to private sector companies, government companies and ultra mega power projects. The total geological reserves of these coal blocks amounted to around 40.9billion tonnes. As the CAG report points out the total geological reserves of coal in India, as on April 1, 2011, were at around 285.9billion tonnes. Hence, 14.3% of the total coal reserves in the country were given away by the government for free. For most of this period between 2006 and 2009, the Prime Minister Manmohan Singh doubled up as the coal minister as well.
Why was there a sudden increase in giveaways post 2005?
Data from ministry of coal shows that the total production of coal in India in 2005-2006 stood at 437.3million tonnes. As pointed out earlier the production in 1993-1994 was 246.04million tonnes. Hence over a period of 12 years, the coal production had grown at the rate of 4.9% per year on an average. Of the 437.3million tonnes produced in 2005-2006, Coal India Ltd produced around 348million tonnes or around 80% of the total produce.
The trouble was that the economy was growing at a much faster rate than the rate of coal production. Hence the total coal demand could not be satisfied by the coal being produced by Coal India and other few government owned companies.
This meant coal had to be imported. The amount of coal imported doubled from 19.7 million tonnes in 1999-2000 to 38.6million tonnes in 2005-2006. In 1999-2000 these imports cost Rs 3,548 crore. In 2005-2006, the coal imports cost Rs 14,910 crore. Hence, even though the amount of coal that the country imported had doubled, the total amount paid for it had gone up by 4.2 times.
This was primarily because the price of coal started to shoot up from mid 2003 onwards. The price was a little over $20 per metric tonne of coal at that point of time. It shot up to around $40 per metric tonne in mid 2005 and kept rising after that. Prices shot up to around $190 per tonne internationally in mid 2008. As can be seen from the following table, the import of coal kept going up over the years, but the money paid for it went up at a much faster rate.
The conclusion that one can draw from this is that before 2004 it was cheap for a company to import coal because international coal prices were low. But after that things changed and it made more sense for companies to have direct access to coal.
Coal Imports In Million tonnes In Rupees crore
1999-2000 19.7 3548
2000-2001 20.9 4053
2001-2002 20.5 4536
2002-2003 23.3 5028
2003-2004 21.7 5009
2004-2005 29 10266
2005-2006 38.6 14910
2006-2007 43.1 16689
2007-2008 49.8 20738
2008-2009 59 41341
2009-2010 67.8 NA
Source: Provisional Coal Statistics 2009-2010, Coal Control Organisation, Ministry of Coal
Coal India has not been able to expand production fast enough to meet this growing need for coal in India. Between 2004 and March 31, 2012, the production of coal has increased by just 65million tonnes to 436million tonnes. This means an increase in production at the rate of 2.3% per year on an average, over the last seven years.
Year Production (in million tonnes)
Source: Coal India Ltd
Hence there was a need to look beyond Coal India. This in a way explains why the government gave away 145 coal blocks free between 2006 and 2009. But all this was of not much use.
The government’s decision to give away coal blocks free in the hope of increasing coal production hasn’t gone anywhere. As per the CAG report, as on March 31, 2011, eighty six of these blocks were supposed to produce around 73million tonnes of coal. Only 28 blocks have started production and their total production has been around 34.6million tonnes, as on March 31,2011.
Why expanding coal production is very difficult?
The root of the decision to give away coal blocks for free has been the inability of Coal India to expand production at the rate which meets the growing coal demands of the country. There are several reasons for the same. These reasons will apply equally even to the private sector companies and government companies which have got coal blocks for free but have been unable to produce coal.
A large part of the coal reserves in India are in the naxal dominated areas of Chattisgarh, Jharkhand, West Bengal, Odisha and Maharashtra. So operating in these regions isn’t really easy. Over and above this, a lot of reserves are in forest areas. Mining in these areas needs clearance from the state governments and that is not easy to come. The overall environmental clearance comes from the Ministry of Environment and Forests and in this day and age of environmental activism, this clearance also takes time.
But the biggest problem for Coal India has been land acquisition. There are several reasons for the same. Over the years the government of India has forcibly acquired land for a lot of its projects and paid peanuts in return to the landholders. In some cases in the state of Jharkhand, money has still not been paid to original landholders even decades after the land was acquired to set up a big public sector unit.
There is a very little attempt made to rehabilitate the people whose land is being acquired. This writer has seen homes that were built by the Central Coalfields Ltd (a 100% subsidiary of Coal India which is headquartered in Ranchi and operates coal mines in the state of Jharkhand) for people whose land was acquired to mine coal and they were unlivable to say the least. Due to these reasons people don’t want to part with their land.
Also acquisition of land requires coordination with the local District Commissioners (DCs). The DCs are usually so overburdened with work that land acquisition isn’t really a top of agenda for them. Over the years the issue has become so politicised that bureaucrats like to stay away. The state governments are not interested because by forcibly acquiring land they are likely to lose votes.
On occasions even when the land is acquired the government can re-allocate the land for some other use like building a railway line. So the main thing to get the coal production going in this country is to have a proper land acquisition process. People whose land is acquired need to be properly compensated and rehabilitated. They should be willing to part with their land.
Several suggestions have been made for setting the prevailing situation right. Commentators have asked for setting up of another government owned coal company. Several others have asked for auctioning of the coal blocks and allowing private sector companies to operate freely to mine coal.
All these are good suggestions in their own right but they won’t work unless the land acquisition process is cleaned up. If that does not happen coal production in India cannot be increased fast enough to meet all the emerging demand. And that is the main learning that the government needs to take from what is being called Coalgate.
(The article originally appeared in The Pioneer on September 9,2012. http://www.dailypioneer.com/sunday-edition/sundayagenda/cover-story-agenda/93154-the-dirty-business.html)
(Vivek Kaul is a Mumbai based writer and can be reached at [email protected])
Canaries and coal mines
Music has got its share of one hit wonders. Delhi born singer and musician Peter Saerdest fits that category. His most famous claim to fame being the 1969 hit “where do you go to (my lovely)”.
The song is about a fictional girl called Marie Clare. There is a paragraph in the song which brings out the unhappiness in her life. Here is how it goes:
But where do you go to my lovely
When you’re alone in your bed
Tell me the thoughts that surround you
I want to look inside your head, yes i do.
Now this is a question that I have been wanting to ask the Prime Minister (PM) Manmohan Singh as the country moves from one scam to another. What are the thoughts that go inside his head? The forever quiet PM finally obliged us when he issued a statement on the coal gate scam and put the blame on his predecessors and the Comptroller and Auditor General(CAG) of India, for coming up with a loss number of Rs 1.86 lakh crore.
The policy of the government allocating coal blocks for free was introduced in 1993, and so it was not right to blame the Congress led United Progressive Alliance (UPA) felt the Prime Minister. Fair point, one must say.
But as the numbers calculated by the international stock brokerage CLSA show a major part of the coal blocks were given away for free only after the Congress led UPA came to power in May 2004. Of the 100 coal blocks given away free to government companies between 1993 and 2011, 83blocks were handed over after 2003. The same stands true for private sector companies where 82 out of the 106 blocks were allocated after 2003.
So while it might be true that UPA did not start the policy but what Manmohan Singh cannot deny is that they went around implementing it with a vengeance. The geological reserves of the coal blocks given away for free amounted to around 41billion tonnes. The total geological reserves of coal in India amount to around 286billion tonnes which means 14% of it was given away for free.
Hence, the question that the PM still needs to answer is that why was there a sudden increase in the allocation of blocks between 2004 and 2009, and especially during his tenure as the coal minister between 2006 and 2009?
The answer might most probably lies in the price of coal which started to shoot up around the time UPA first came to power. Prices shot up from around $30-40 per tonne to around $190 per tonne internationally in mid 2008. The conclusion that one can draw from this is that before 2004 it was cheap to just buy coal off the market. But after that things changed and it made more sense for companies to have direct access to coal.
The PM in his statement has also claimed that the loss number of Rs 1.86 lakh crore arrived at by the CAG can be questioned on a number of technical points.
The CAG has calculated the loss number based on certain assumptions. It has only taken into account mines given to private sector companies for free. Those allotted to government companies have been ignored. Underground mines have also not been taken into consideration.
So these assumptions work in favour of the government. If the government blocks had also been taken into account the loss number would have dramatically shot up. It need not be said that the PM does not talk about this anywhere in his statement.
The extractable reserves of these private sector coal blocks come to 6282.5million tonnes of coal. This is the amount of coal that the CAG feels could have been mined and sold and has been given away for free. The average benefit per tonne of this coal was estimated to be at Rs 295.41.
As Abhishek Tyagi and Rajesh Panjwani of CLSA write in a report dated August 21, 2012,”The average benefit per tonne has been arrived at by first, taking the difference between the average sale price (Rs1028.42) per tonne for all grades of CIL(Coal India Ltd) coal for 2010-11 and the average cost of production (Rs583.01) per tonne for all grades of CIL coal for 2010-11. Secondly, as advised by the Ministry of Coal vide letter dated 15 March 2012 a further allowance of Rs150 per tonne has been made for financing cost. Accordingly the average benefit of Rs295.41 per tonne has been applied to the extractable reserve of 6282.5 million tonne calculated as above.”
Using this method CAG arrived at the loss figure of Rs 1,85,591.33 crore (Rs 295.41 x 6282.5million tonnes) or around Rs 1.86 lakh crore. Analysts who track coal believe that assuming a profit of Rs 295.41 per tonne is a fairly conservative estimate.
In fact as has been reported elsewhere, if the e-auction prices of coal would have been considered, the losses would have been at Rs 11.2lakh crore. And if the calculations had been done using the imported coal prices the losses would amount to Rs 18lakh crore. These are huge numbers. The total expenditure of the government of India for the year 2011-2012 was estimated to be at around Rs 13.2lakh crore.
Another bogey that has been raised by the sympathizers of the Congress party (not by the PM) is that coal is a natural resource and hence cannot be “auctioned” or sold at a market price. What they forget to tell us is that coal is a limited natural resource and hence it needs to be priced correctly and not given away for free. If that was not the case why does the government price products like petrol, diesel, telecom spectrum etc? These products are also either natural resources or derivatives of natural resources. Why does Coal India Ltd sell coal at a certain price? Why not give it away for free?
By giving away coal blocks for free the nation has faced huge losses. Whether its Rs 1.86 lakh crore or Rs 18 lakh crore is a matter of conjecture, but that does not take away the fact that losses have been huge. Given this, the PM and the Congress party, are just trying to practice the old adage: “if you can’t convince them, confuse them”.
(The article originally appeared on Asian Age/Deccan Chronicle on September 2,2012. http://www.deccanchronicle.com/editorial/dc-comment/canaries-coal-951)
(Vivek Kaul is a Mumbai based writer. He can be reached at [email protected])