economic survey

Jobs, jobs and more jobs is what India needs

jobs
Buried somewhere in the last financial year’s Economic Survey are some very disturbing data points, which the pink papers do not like to talk about. The usual news reports that you will read in the business newspapers published in the country are about professional colleges (MBA/Engineering) being flush with jobs.
None of the newspapers get into detail about how bad the overall job scenario in India is. The fact of the matter is that we just aren’t creating enough jobs for the youth who are entering the workforce every year.
The Economic Survey points out that between 1999-2000 and 2004-2005 the employment as measured by the usual status method increased from 398 million to 457.9 million. This was the period when the Bhartiya Janata Party led National Democratic Alliance was in power.
After this, the job growth just came to a complete standstill. Between 2004-2005 to 2009-2010, the employment increased by just 1.1 million to 459 million. The first term of the Congress led United Progressive Alliance was a period of jobless growth, despite the gross domestic product(GDP) registering solid growth. So, the size of the overall economy was growing but the jobs weren’t.
The situation improved over the next two years. Between 2009-2010 and 2011-2012, the number of employed individuals increased by 13.9 million to 472.9 million. Hence, the employment growth between 2004-2005 and 2011-2012 was at a minuscule 0.5% per year. In comparison, the employment growth was at 2.8% per year between 1999-2000 and 2004-2005.
Mihir S Sharma in Restart—The Last Chance for the Indian Economy looks at the data over a longer time frame and comes up with a similar conclusion: “In the years from 1972 to 1983—not celebrated as a time of overwhelming prosperity—the total number of jobs in the economy nevertheless grew by 2.3 percent a year. In the years between liberalization in 1991 and today, jobs have grown at an average of 1.6 percent a year.”
The trouble is that this is not enough. “13 million Indians will join the workforce every year from now on till 2030…But, if these young people have to absorbed, then jobs must grow at least 3 per cent a year—almost twice the rate at which they have since liberalization. This is simply not happening. In other words, one out of every two youngsters who starts looking for a job next year won’t find one,” writes Sharma.
What makes the scenario worse is that as per the last census nearly 47 million Indians under the age of 25 have been looking for a job, and not been able to find one.
So what is the way out? The Economic Survey provides what looks like an answer. As it points out: “The defining challenge in India today is that of generating employment and growth. Jobs are created by firms when firms invest and grow. Hence it is important to create an environment that is conducive for firms to invest…The ultimate goal of economic policy is to create a sustained renaissance of high growth in which hundreds of millions of good quality jobs are created. Good quality jobs are created by high productivity firms, so this agenda is critically about how firms are created, how firms grow, and how firms achieve high productivity.”
Theoretically the above paragraph makes perfect sense. But there are several problems with it. India grew at the rate of 7.4% per year between 2004-2005 and 2011-2012. Despite this the job growth came to a standstill. Between 1999-2000 and 2004-2005 the economic growth was around 6% per year. Nevertheless, jobs grew at a much faster rate than they grew between 2004-2005 and 2011-2012.
So, faster economic growth does not always create jobs. Further, the Economic Survey talks about highly productive firms creating quality jobs. The question is what portion of Indian firms are highly productive or want to achieve high productivity. A significant portion of big Indian firms are essentially run by crony capitalists who are more interested in short term gains rather than building a highly productive organization.
Then there is the question of labour laws as well. Sharma provides a comparison between Bangladesh and India, and how the countries stack up when it comes to their respective textile industries. As he writes: “Before the expansion of trade thanks to new international rules in the twenty-first century, India made $10 billion from textile exports, and Bangladesh $8 billion. Today India makes $12 billion—and Bangladesh $21 billion.”
So what happened here? The textile industry, explains Sharma, needs to turnaround big orders quickly and efficiently. “Really long assembly lines still matter in textiles: in some cases, 100 people can sequentially work to make a pair of trousers in least time. In Bangladesh, the average number of people in a factory is between 300 and 400; in the South Indian textiles hub of Tirupur, it’s around 50,” writes Sharma.
Why is there such a huge differential is a question worth asking? The answer lies in the surfeit of labour laws that firms in this country need to follow. And this ensures that most Indian textile firms start small and continue to remain small.
In their book India’s Tryst with Destiny, Jagdish Bhagwati and Arvind Panagariya point out that 92.4% of the workers in this sector work with small firms which have forty-nine or less workers. Now compare this to China where large and medium firms make up around 87.7% of the employment in the apparel sector.
In fact, the Indian Constitution allows both the central as well as state governments to pass labour laws. This has led to a surfeit of labour laws. As Bhagwati and Panagariya point out: “The ministry of labour lists as many as fifty-two independent Central government Acts in the area of labour. According to Amit Mitra (the finance minister of West Bengal and a former business lobbyist), there exist another 150 state-level laws in India. This count places the total number of labour laws in India at approximately 200.”
What leads to further trouble is that these laws are not consistent with one another. This has led to a situation where “you cannot implement Indian labour laws 100 per cent without violating 20 per cent of them,” write Bhagwati and Panagariya.
This explains why Indian textile firms continue to remain small and not enough jobs are created in the process. As Bhagwati and Panagariya write “As the firm size rises from six regular workers towards 100, at no point between these two thresholds is the saving in manufacturing costs sufficiently large to pay for the extra cost of satisfying the laws”.
In fact, the textile sector is an excellent representation of the overall Indian business. Businesses which have less than 10 workers, employ more than 90% of India’s workers. What this clearly tells us is that the government of India needs to start simplifying its labour laws. At the same time this needs to trickle down to the level of state governments as well.
Sharma summarizes it best when he says: “[India] tried to protect workers instead of work; and it failed.” And that needs to change.

The column appeared on www.equitymaster.com as a part of The Daily Reckoning on Feb 13, 2015

RBI may cut rates, but your loan rates may not fall

RBI-Logo_8

Vivek Kaul
The monetary policy review of the Reserve Bank of India(RBI) is scheduled for March 19,2013 i.e. tomorrow. Every time the top brass of the RBI is supposed to meet, calls for an interest rate cut are made. In fact, there seems to be a formula that has evolved to create pressure on the RBI to cut the repo rate. The repo rate is the interest rate at which RBI lends to banks.
The formula includes the finance minister P Chidambaram giving statements in the media about there being enough room for the RBI to cut interest rates. “There is a case for the Reserve Bank of India (RBI) to cut policy rates, and the central bank should take comfort from the government’s efforts to cut the fiscal deficit,” Chidambaram told the Bloomberg television channel today.
Other than Chidambram, an economist close to the Prime Minister Manmohan Singh also gives out similar statements. “The budget has also gone a long way in containing the fiscal deficit, both in the current year and in the following year, and played its role in containing demand pressures in the system. Therefore, in some sense there is greater space for monetary policy now to act in the direction of stimulating growth,” C Rangarajan, former RBI governor, who now heads the prime minister’s economic advisory council, told The Economic Times. What Rangarajan meant in simple English was that conditions were ideal for the RBI to cut interest rates.
And then there are bankers (most those running public sector banks) perpetually egging the RBI to cut interest rates. As an NDTV storypoints out “A majority of bankers polled by NDTV expect the Reserve Bank to cut interest rates in the policy review due on Tuesday. 85 per cent bankers polled by NDTV said the central bank is likely to cut repo rates.”
Corporates always want lower interest rates and they say that clearly. As a recent Business Standard story pointed out “An interest rate cut, at a time when demand was not showing any sign of revival, would boost sentiments, especially for interest-rate sensitives like the car and real estate sectors, which had been showing negative growth, a majority of the 15 CEOs polled by Business Standard said.”
So everyone wants lower interest rates. The finance minister. The prime minister. The banks. And the corporates.
Lower interest rates will create economic growth is the simple logic. Once the RBI cuts the repo rate, the banks will also pass on the cut to their borrowers. At lower interest rates people will borrow more. They will buy more homes, cars, two wheelers, consumer durables and so on. This will help the companies which sell these things. Car sales were down by more than 25% in the month of February. Lower interest rates will improve car sales. All this borrowing and spending will revive the economic growth and the economy will grow at higher rate instead of the 4.5% it grew at between October and December, 2012.
And that’s the formula. Those who believe in the formula also like to believe that everything else is in place. The only thing that is missing is lower interest rates. And that can only come about once the RBI starts cutting interest rates.
So the question is will the RBI governor D Subbarao oblige? He may. He may not. But the real answer to the question is, it doesn’t really matter.
Repo rate at best is a signal from the RBI to banks. When it cuts the repo rate it is sending out a signal to the banks that it expects interest rates to come down in the days to come. Now it is up to the banks whether they want to take that signal or not.
When everyone talks about lower interest rates, they basically talk about lower interest rates on loans that banks give out. Now banks can give out loans at lower interest rates only when they can raise deposits at lower interest rates. Banks can raise deposits at lower interest rates when there is enough liquidity in the system i.e. people have enough money going around and they are willing to save that money as deposits with banks.
Lets look at some numbers. In the six month period between August 24, 2012 and February 22, 2013 (the latest data which is available from the RBI) banks raised deposits worth Rs 2,69,350 crore. During the same period they gave out loans worth Rs 3,94,090 crore. This means the incremental credit-deposit ratio in the last six months for banks has been 146%.
So for every Rs 100 that banks have borrowed as a deposit they have given out Rs 146 as a loan in the last six months. If we look at things over the last one year period, things are a little better. For every Rs 100 that banks have borrowed as a deposit, they have given out Rs 93 as a loan.
What this clearly tells us is that banks have not been able to raise enough deposits to fund their loans. For every Rs 100 that banks borrow, they need to maintain a statutory liquidity ratio of 23%. This means that for every Rs 100 that banks borrow at least Rs 23 has to be invested in government securities. These securities are issued by the government to finance its fiscal deficit. Fiscal deficit is the difference between what the government earns and what it spends.
Other than this a cash reserve ratio of 4% also needs to be maintained. This means that for every Rs 100 that is borrowed Rs 4 needs to be maintained as a reserve with the RBI. So for every Rs 100 that is borrowed by the banks, Rs 27 (Rs 23 + Rs 4) is taken out of the equation immediately. Hence only the remaining Rs 73 (Rs 100 – Rs 27) can be lent. This means that in an ideal scenario the credit deposit ratio of a bank cannot be more than 73%. But over the last six months its been double of that at 146% i.e. banks have loaned out Rs 146 for every Rs 100 that they have raised as a deposit.
So how have banks been financing these loans? This has been done through the extra investments (greater than the required 23%) that banks have had in government securities. Banks are selling these government securities and using that money to finance loans beyond deposits.
The broader point is that banks haven’t been able to raise enough deposits to keep financing the loans they have been giving out. And in that scenario you can’t expect them to cut interest rates on their deposits. If they can’t cut interest rates on their deposits, how will they cut interest rates on their loans?
The other point that both Chidambaram and Rangarajan harped on was the government’s effort to cut/control the fiscal deficit. The fiscal deficit for the current financial year (i.e. the period between April 1, 2012 and March 31,2013) had been targeted at Rs 5,13,590 crore. The final number is expected to come at Rs 5,20,925 crore. So where is the cut/control that Chidambaram and Rangarajan seem to be talking about? Yes, the situation could have been much worse. But simply because the situation did not turn out to be much worse doesn’t mean that it has improved.
The fiscal deficit target for the next financial year (i.e. the period between April 1, 2013 and March 31, 2014) is at Rs 5,42,499 crore. Again, this is higher than the number last year.
When the government borrows more it “crowds out” and leaves a lower amount of savings for the banks and other financial institutions to borrow from. This leads to higher interest rates on deposits.
What does not help the situation is the fact that household savings in India have been falling over the last few years. In the year 2009-2010 (i.e. the period between April 1, 2009 and March 31, 2010) the household savings stood at 25.2% of the GDP. In the year 2011-2012 (i.e. the period between April 1, 2011 and March 31, 2012) the household savings had fallen to 22.3% of the GDP. Even within household savings, the amount of money coming into financial savings has also been falling. As the Economic Survey that came out before the budget pointed out “Within households, the share of financial savings vis-à-vis physical savings has been declining in recent years. Financial savings take the form of bank deposits, life insurance funds, pension and provident funds, shares and debentures, etc. Financial savings accounted for around 55 per cent of total household savings during the 1990s. Their share declined to 47 per cent in the 2000-10 decade and it was 36 per cent in 2011-12. In fact, household financial savings were lower by nearly Rs 90,000 crore in 2011-12 vis-à-vis 2010-11.”
While the household savings number for the current year is not available, the broader trend in savings has been downward. In this scenario interest rates on fixed deposits cannot go down. And given that interest rate on loans cannot go down either.
Of course bankers understand this but they still make calls for the RBI cutting interest rates. In case of public sector bankers the only explanation is that they are trying to toe the government line of wanting lower interest rates.
So whatever the RBI does tomorrow, it doesn’t really matter. If it cuts the repo rate, then public sector banks will be forced to announce token cuts in their interest rates as well. Like on January 29,2013, the RBI cut its repo rate by 0.25% to 7.75%. The State Bank of India, the nation’s largest bank, followed it up with a base rate cut of 0.05% to 9.7% the very next day. Base rate is the minimum interest rate that the bank is allowed to charge its customers.
A 0.05% cut in interest rate would have probably been somebody’s idea of a joke. The irony is that the joke might be about to be repeated in a few day’s time.
The article originally appeared on www.firstpost.com on March 18,2013. 
(Vivek Kaul is a writer. He tweets @kaul_vivek) 
 

Subsidies = Inflation = Gold problem

ES gold
The government has a certain theory on gold as per which buying gold is harmful for the Indian economy. Allow me to elaborate starting with something that P Chidambaram, the union finance minister, recently said “I…appeal to the people to moderate the demand for gold.”
India produces very little of the gold it consumes and hence imports almost all of it. Gold is bought and sold internationally in dollars. When someone from India buys gold internationally, Indian rupees are sold and dollars are bought. These dollars are then used to buy gold.
So buying gold pushes up demand for dollars. This leads to the dollar appreciating or the rupee depreciating. A depreciating rupee makes India’s other imports, including our biggest import i.e. oil, more expensive.
This pushes up the trade deficit (the difference between exports and imports) as well as our fiscal deficit (the difference between what the government earns and what it spends).
The fiscal deficit goes up because as the rupee depreciates the oil marketing companies(OMCs) pay more for the oil that they buy internationally. This increase is not totally passed onto the Indian consumer. The government in turn compensates the OMCs for selling kerosene, cooking gas and diesel, at a loss. Hence, the expenditure of the government goes up and so does the fiscal deficit. A higher fiscal deficit means greater borrowing by the government, which crowds out private sector borrowing and pushes up interest rates. Higher interest rates in turn slow down the economy.
This is the government’s theory on gold and has been used to in the recent past to hike the import duty on gold to 6%. But what the theory doesn’t tells us is why do Indians buy gold in the first place? The most common answer is that Indians buy gold because we are fascinated by it. But that is really insulting our native wisdom.
World over gold is bought as a hedge against inflation. This is something that the latest economic survey authored under aegis of Raghuram Rajan, the Chief Economic Advisor to the government, recognises. So when inflation is high, the real returns on fixed income investments like fixed deposits and banks is low. As the Economic Survey puts it “High inflation reduces the return on other financial instruments. This is reflected in the negative correlation between rising(gold) imports and falling real rates.”(as can be seen from the accompanying table at the start)
In simple English, people buy gold when inflation is high and the real return from fixed income investments is low. That has precisely what has happened in India over the last few years. “The overarching motive underlying the gold rush is high inflation…High inflation may be causing anxious investors to shun fixed income investments such as deposits and even turn to gold as an inflation hedge,” the Survey points out.
High inflation in India has been the creation of all the subsidies that have been doled out by the UPA government. As the Economic Survey puts it “With the subsidies bill, particularly that of petroleum products, increasing, the danger that fiscal targets would be breached substantially became very real in the current year. The situation warranted urgent steps to reduce government spending so as to contain inflation.”
Inflation thus is a creation of all the subsidies being doled out, says the Economic Survey. And to stop Indians from buying gold, inflation needs to be controlled. “The rising demand for gold is only a “symptom” of more fundamental problems in the economy. Curbing inflation, expanding financial inclusion, offering new products such as inflation indexed bonds, and improving saver access to financial products are all of paramount importance,” the Survey points out. So if Indians are buying gold despite its high price and imposition of import duty, they are not be blamed.
A shorter version of this piece appeared in the Daily News and Analysis on February 28, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

It is Sonia who needs to read Rajan’s Economic Survey


Vivek Kaul 
Raghuram Govind Rajan, the chief economic advisor to the government of India, likes to talk straight and call a spade a spade. He was the first economist of some standing to take on Alan Greenspan’s economic policies at a public forum. In a conference in 2005, Rajan said “The bottom line is that banks are certainly not any less risky than the past despite their better capitalization, and may well be riskier. Moreover, banks now bear only the tip of the iceberg of financial sector risks…the interbank market could freeze up, and one could well have a full-blown financial crisis.”
This was during the time when the United States of America was in the middle of a real estate bubble. Everyone was having a good time. And no one wanted to spoil the party.
Alan Greenspan hadn’t achieved the ignominy that he now has, and was revered as god, at least in economic circles. Hence, any criticism of the American economy was seen as criticism of Greenspan himself. Given this, Rajan came in for heavy criticism for what he said. But we all know who turned out to be right in the end.
Recalling the occasion Rajan later wrote in his book Fault Lines “I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions. As I walked away from the podium after being roundly criticised by a number of luminaries (with a few notable exceptions), I felt some unease. It was not caused by the criticism itself…Rather it was because the critics seemed to be ignoring what going on before their eyes.”
What this tells us is that Rajan doesn’t hesitate in pointing out what is going on before his eyes, even though it might be politically incorrect to do so. This clearly comes out in the Economic Survey for the year 2012-2013. A part of the summary to the first chapter State of the Economy and Prospects reads “With the subsidies bill, particularly that of petroleum products, increasing, the danger that fiscal targets would be breached substantially became very real in the current year. The situation warranted urgent steps to reduce government spending so as to contain inflation.”
The last sentence of the above paragraph makes for a very interesting reading. This is probably the first occasion where a government functionary has conceded that it is the increased government spending during the second term of the UPA that has led to a high inflationary scenario. This is not surprising given that Rajan holds a full time job teaching at the University of Chicago.
Rajan’s thinking is in line with what the late Milton Friedman, a doyen of the University of Chicago, had been talking about since the early 1960s. As Friedman writes in Money Mischief – Episodes in Monetary History: “The recognition that substantial inflation is always and everywhere a monetary phenomenon is only the beginning of an understanding of the cause and cure of inflation…Inflation occurs when the quantity of money rises appreciably more rapidly than output, and the more rapid the rise in the quantity of money per unit of output, the greater the rate of inflation. There is probably no other proposition in economics that is as well established as this one.”
And that is what has happened in India with the government spending more and more money over the last five years. This money has chased the same number of goods and services and thus led to higher prices i.e. inflation.
Rajan has never been a great fan of subsidies and he looks at them as a short term necessity. In an interview I did with him after the release of his book Fault Lines, for the Daily News and Analysis(DNA), I had asked him whether India could afford to be a welfare state, to which he had replied “Not at the level that politicians want it to.”
In another interview that I had done with him in late 2008, for the same newspaper, he had said “There is a real concern in India that government in India is not doing enough of what it should be doing…I don’t agree that we should overspend and run large deficits but I think we should bite the bullet and cut back on subsidies where we can for the larger good of the public investment into agriculture, roads etc.”
This kind of thinking that Rajan is known for clearly comes out in the Economic Survey. The subsidy bill (oil, food and fertilizer primarily) for the current financial year 2012-2013 (i.e. the period between April 1, 2012 and March 31, 2013) is estimated to be at Rs 1,90,015 crore. This has to come down. As the Economic Survey points out “Controlling the expenditure on subsidies will be crucial. Domestic prices of petroleum products, particularly diesel and liquefied petroleum gas (LPG) need to be raised in line with the prices prevailing in international markets. A beginning has already been made with the decision in September 2012 to raise the price of diesel and again in January 2013 to allow oil marketing companies to increase prices in small increments at regular intervals.”
The question is that will this be enough. The amount budgeted for oil subsidies during the course of this financial year was Rs 43,580 crore. These subsidies are given to oil marketing companies because they sell diesel, cooking gas and kerosene at a loss.
The amount budgeted against oil subsidies will not be enough to meet the actual losses. As the Chapter 3 of the Economic Survey points out “The Indian basket crude oil was $107.52 per bbl (April-December) in 2012 and even with the pass through effected in the course of the year, under-recoveries of OMCs surged and were estimated at Rs1,24,854 crore during April-December 2012-13.”
So for the first nine months of the year the oil subsidy bill was more than Rs 81,000 crore off the target. By the end of the financial year this might well touch Rs 1,00,000 crore. This of course will need some clever accounting to hide. Chances are that the finance minister P Chidambaram might move this payment that will have to be made to the oil marketing companies to the next financial year.
Hence it becomes even more important to cut these subsidies in the years to come. As Rajan writes “The crucial lesson that emerges from the fiscal outcome in 2011-12 and 2012-13 is that in times of heightened uncertainties, there is need for continued risk assessment through close monitoring and for taking appropriate measures for achieving better fiscal marksmanship. Openended commitments such as uncapped subsidies are particularly problematic for fiscal credibility because they expose fiscal marksmanship to the vagaries of prices.”
The phrase to mark over here is that ‘open ended commitments such as uncapped subsidies are particularly problematic‘. This is something that Sonia Gandhi, president of the Congress party, and Chairman of UPA wouldn’t want to hear. This specially during a time when Lok Sabha elections are due in a little over a year’s time and this budget is the last occasion which the government can use to continue bribing the Indian public through subsidies.
It will be interesting to see whether the finance minister P Chidambaram takes any of the suggestions put forward by Rajan and his team, when he presents the annual budget tomorrow. Or will this Economic Survey, like many before it, be also confined to the dustbins of history?
The piece originally appeared on www.firstpost.com on February 27, 2013

 (Vivek Kaul is a writer. He tweets at @kaul_vivek ) 

 

Why giving away coal blocks for free was never a solution


Vivek Kaul
In the year 2011-2012 (i.e. the period between April 1, 2011 and March 31, 2012) India produced around 540million tonnes of coal. This was 1.36% more than the amount produced in 2010-2011 (i.e. the period between April 1, 2010 and March 31,2011).
Of the 540million tonnes Coal India produced around 436million tonnes or a little over 80% of the total coal produced in India. The remaining was produced by Singareni Collieries Company and a host of other small companies.
This production wasn’t enough to meet the demand for coal in India. Hence, India also imported 99 million tonnes of coal during the course of the year primarily from countries like Australia, Indonesia and South Africa.
The amount of coal, India has been importing has been growing significantly over the years (as can be seen from the table below). What also comes out clearly is that the amount paid for importing coal grew at a much faster rate than the amount of coal imported between 2003-2004 and 2008-2009. This was the period when the international prices of coal were rallying and touched $190 per tonne in mid 2008.
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 73.3 39180
2010-2011 68.9 41550
2011-2012 98.9 45723*
*from April-Oct 2011
Source: Provisional Coal Statistics 2011-2012, Coal Control Organisation, Ministry of Coal
Why this was not par for the course
All this would have been par for the course if India did not have enough coal reserves. Like is the case with oil. We don’t have enough known reserves of oil and hence we don’t produce enough oil to meet the demand. So we import oil.
But as numbers for the Geological Survey of India indicate as on April 1, 2012, India had 293.5billion tonnes of coal reserves. These reserves are referred to as geological reserves and are for valid for a depth between 0.9 metres and 1200 metres.
Not all of these reserves can be mined. Open cast mining of coal typically goes to a depth of around 250 metres below the ground level whereas underground mining goes to a depth of around 600-700 metres.
The amount of coal that can be extracted is referred to as extractable reserves. PC Parekh, a retired IAS officer in a presentation puts the extractable reserves at around 60billion tonnes. (You can access the presentation here). A few other experts this writer spoke to said that this number could be significantly higher.
But that’s beside the point. What this clearly tells us is that India has enough coal to mine unlike oil. Given this, India should not be importing the nearly 100million tonnes of coal that it did during the last financial year.
So then why is India not able to mine enough coal? The simple answer is that Coal India which is the biggest producer of coal in the country is not able to produce enough coal. One look at the following table clearly proves that.
Year Production (in million tonnes)
2011-2012 436
2010-2011 431
2009-2010 415
2008-2009 400
2007-2008 372
2005-2006 348
2004-2005 371
Average 396
Source: Coal India
Why coal blocks were given away for free
Between 2004-2005 and 2011-2012, the total coal production has increased by 17.5% or at a miniscule rate of 2.3% per year. The slow increase in the production of coal did not help given that India has been second the fastest growing economy in the world for a while now. Hence, the energy needs of the country have been growing as well. This meant greater demand for coal. A study published in 2011 shows that coal is used to meet 40% of India’s energy needs against the global average of 27%.
What did not help was the fact that between 2004-2005 and 2008-2009 there was a rally on in global commodity prices as China expanded at breakneck speech gobbling up commodities from all over the world. Hence, the price of coal shot through the roof. The international price of coal was a little over $20 per metric tonne in mid 2003. 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.
Given these reasons the government felt that there was a need to look beyond Coal India. In fact, the inability of Coal India to produce enough coal was the main reason why The Coal Mines (Nationalisation) Act 1973 was amended with effect from June 9,1973, to allow the government give away coal blocks for free.
The Economic Survey for 1994-95 points out the reason behind the decision. “In order to encourage private sector investment in the coal sector, the Coal Mines (Nationalisation) Act, 1973 was amended with effect from June 9, 1993 for operation of captive coal mines by companies engaged in the production of iron and steel, power generation and washing of coal in the private sector,” the survey points out.
The total coal production in the country in 1993-94 stood at 246.04million tonnes having grown by 3.3% from 1992-93. The government understood that the production was not going to increase anytime soon because the newer projects were having time delays and cost overruns. 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”.
Even though the decision to give away coal blocks for free came into effect in 1993, nothing much happened till 2004. Between 2005 and 2009, the government of India gave away 149 coal blocks for free. This was also the time when the global rally in coal prices was on and the Indian demand for coal was also on its way up. 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.
But giving away the coal blocks for free did not solve any problem. As per the report prepared the Comptroller and Auditor General of India, 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 Coal India cannot increase production at a faster rate
In all this, the question that nobody seems to be asking is that why is Coal India not able to produce enough coal? It has probable reserves of around 18.9billion tonnes, but is still unable to expand production at a higher rate.
If I was a television journalist I would say that Coal India has been unable produce more simply because it is inefficient like most Indian public sector companies. But the truth is a lot more complicated than that. And it to a large extent explains why the government’s decision of giving away coal blocks for free hasn’t worked.
India’s coal reserves are largely concentrated in the middle of the country in the states of Jharkhand, West Bengal, Odisha, Madhya Pradesh, Chattisgarh, Maharashtra and Uttar Pradesh. There are some reserves in the North East as well, but they are at best miniscule. It does not help that the states that have the biggest coal reserves are also dealing with naxalite problem. Hence operating in these regions isn’t very easy.
A lot of the coal reserves are also in regions categorized as forest areas and getting clearances from the state governments isn’t always easy. What also has not helped is that the Ministry of Environment and Forests which gives the overall environment clearance isn’t known to be terribly efficient. As NC Jha told Times of India at the beginning of the year “Our 168 projects are pending environment and forest clearances at the Centre and State levels. Sixty-seven of these projects are greenfield and we are unable to make any investment in these. Remaining are ongoing expansion schemes, which too have been stalled.” Jha was the Chairman of Coal India at that point of time.
But these are small problems. The biggest problem facing Coal India is acquisition of land. The right to property is not a fundamental right in India. And over the years the government of India has acquired land forcibly from the citizens of this country at rock bottom prices. In the city of Ranchi, where this writer grew up, original landholders have still not been paid after their land was acquired to set up what was then one of the biggest public sector units in India.
Attempts to rehabilitate people whose land is acquired by the government, is rarely made. The homes built for this people are unlivable to say the least in a lot of cases. Hence, people resist to hand over their land, their only source of income.
Given this attitude of the government of India over the years the issue has become politicised. Hence, the state governments are not interested because by forcibly acquiring land they are likely to lose votes.
Due to these same reasons giving away coal blocks for free hasn’t worked and will not work. 193 out of the 195 coal blocks that government has given away for free are in the states of Jharkhand, West Bengal, Odisha, Madhya Pradesh, Chattisgarh and Maharashtra. All these states have a naxalite problem and that will effect the private and other government players as much as it has been impacting Coal India. The government’s environmental policy and the land acquisition policy continue to remain in a mess.
What also does not help is the fact that the expertise required to get a coal mine up and running is largely limited to Coal India. Mining coal isn’t exactly as easy as digging a tube-well.
In order to get a block up and running, companies need to prepare a mine plan, carry out the environmental impact study (EIS) of the area etc. The EIS essentially looks at what the current environment of the area is like, how mining coal will change that and what can be done to ensure that the current environment can be maintained. For Coal India this planning is done by Central Mine Planning and Design Institute (CMPDI), a 100% subsidiary. Such expertise is not easily available in the private sector.
To conclude
Coalgate is not a problem that emerged overnight. It is a problem created by the various Congress governments (given that the party has ruled the country for the most part since independence) over the years. This led to the Congress led UPA government giving away coal blocks for free to ensure that India produces more coal. But that is a problem that remains and will remain.
All data unless otherwise stated has been sourced from Provisonal Coal Statistics, 2011-2012, Coal Controller’s Organisation, Ministry of Coal.
(The article originally appeared on www.firstpost.com on September 11,2012. http://www.firstpost.com/business/why-giving-away-coal-blocks-for-free-was-never-a-solution-450915.html#disqus_thread)
(Vivek Kaul is a writer. He can be reached at [email protected])