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)
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.
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])
Raj Krishna, a professor at the Delhi School of Economics, came up with the term “Hindu rate of growth” to refer to Indian economy’s sluggish gross domestic product (GDP) growth of 3.5% per year between the 1950s and the 1980s. The phrase has been much used and abused since then.
A misinterpretation that is often made is that Krishna used the term to infer that India grew slowly because it was a nation dominated by Hindus. In fact he never meant anything like that. Krishna was a believer in free markets and wasn’t a big fan of the socialistic model of development put forward by Jawahar Lal Nehru and the Congress party.
In fact he realised over the years looking at the slow economic growth of India that the Nehruvian model of socialism wasn’t really working. This was visible in the India’s secular or long term economic growth rate which averaged around 3.5% during those days.
The word to mark here is “secular”. The word in its common every day usage refers to something that is not specifically related to a particular religion. Like our country India. One of the fundamental rights Indians have is the right to freedom of religion which allows us to practice and propagate any religion.
But the world “secular” has another meaning. It also means a long term trend. Hence when economists like Krishna talk about the secular rate of growth they are talking about the rate at which a country like India has grown year on year, over an extended period of time. And this secular rate of growth in India’s case was 3.5%. This could hardly be called a rate of growth for a country like India which was growing from a very low base and needed to grow at a much faster pace to pull its millions out of poverty.
So Krishna came up with the word “Hindu” which was the direct opposite of the word “secular” to take a dig at Jawahar Lal Nehru and his model of development. Nehru was a big believer in secularism. Hence by using the word “Hindu” Krishna was essentially taking a dig on Nehru and his brand of economic development, and not Hindus.
The policies of socialism and the license quota raj followed by Nehru, his daughter Indira Gandhi and grandson Rajiv ensured that India grew at a very slow rate of growth. While India was growing at a sub 4% rate of growth, South Korea grew at 9%, Taiwan at 8% and Indonesia at 6%. These were countries which were more or less at a similar point where India was in the late 1940s.
The Indian economic revolution stared in late July 1991, when a certain Manmohan Singh, with the blessings of PV Narsimha Rao, initiated the economic reform process. The country since then has largely grown at the rates of 7-8% per year, even crossing 9% over the last few years.
Over the years this economic growth has largely been taken for granted by the Congress led UPA politicians, bureaucrats and others in decision making positions. Come what may, we will grow by at least 9%. When the growth slipped below 9%, the attitude was that whatever happens we will grow by 8%. When it slipped further, we can’t go below 7% was what those in decision making positions constantly said. On a recent TV show Montek Singh Ahulwalia, the Deputy Chairman of the Planning Commission, kept insisting that a 7% economic growth rate was a given. Turns out it’s not.
The latest GDP growth rate, which is a measure of economic growth, for the period of January to March 2012 has fallen to 5.3%. I wonder, what is the new number, Mr Ahulwalia and his ilk will come up with now. “Come what may we will grow at least by 4%!” is something not worth saying on a public forum.
But chances are that’s where we are headed. As Ruchir Sharma writes in his recent book Breakout Nations – In Pursuit of the Next Economic Miracles “India is already showing some of the warning signs of failed growth stories, including early-onset of confidence.”
The history of economic growth
Sharma’s basic point is that economic growth should never be taken for granted. History has proven otherwise. Only six countries which are classified as emerging markets by the western world have grown at the rate of 5% or more over the last forty years. These countries are Malaysia, Singapore, South Korea, Taiwan, Thailand and Hong Kong. Of these two, Hong Kong and Taiwan are city states with a very small area and population. Hence only four emerging market countries have grown at a rate of 5% or more over the last forty years. Only two of these countries i.e. Taiwan and South Korea have managed to grow at 5% or more for the last fifty years.
“In many ways “mortality rate” of countries is as high as that of stocks. Only four companies – Procter & gamble, General Electric, AT&T, and DuPont- have survived on the Dow Jones index of the top-thirty U.S. industrial stocks since the 1960s. Few front-runners stay in the lead for a decade, much less many decades,” writes Sharma.
The history of economic growth is filled with examples of countries which have flattered to deceive. In the 1950s and 1960s, India and China, the two biggest emerging markets now, were struggling to grow. The bet then was on Iraq, Iran and Yemen. In the 1960s, the bet was Philippines, Burma and Sri Lanka to become the next East Asian tigers. But that as we all know that never really happened.
India is going the Brazil way
Brazil was to the world what China is to it now in the 1960s and the 1970s. It was one of the fastest growing economies in the world. But in the seventies it invested in what Sharma calls a “premature construction of a welfare state”, rather than build road and other infrastructure important to create a viable and modern industrial economy. What followed was excessive government spending and regular bouts of hyperinflation, destroying economic growth.
India is in a similar situation now. Over the last five years the Congress party led United Progressive Alliance is trying to gain ground which it has lost to a score of regional parties. And for that it has been very aggressively giving out “freebies” to the population. The development of infrastructure like roads, bridges, ports, airports, education etc, has all taken a backseat.
But the distribution of “freebies” has led to a burgeoning fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
For the financial year 2007-2008 the fiscal deficit stood at Rs 1,26,912 crore against Rs 5,21,980 crore for the current financial year. In a time frame of five years the fiscal deficit has shot up by nearly 312%. During the same period the income earned by the government has gone up by only 36% to Rs 7,96,740 crore. The huge increase in fiscal deficit has primarily happened because of the subsidy on food, fertilizer and petroleum.
This has meant that the government has had to borrow more and this in turn has pushed up interest rates leading to higher EMIs. It has also led to businesses postponing expansion because higher interest rates mean that projects may not be financially viable. It has also led to people borrowing lesser to buy homes, cars and other things, leading to a further slowdown in a lot of sectors. And with the government borrowing so much there is no way the interest rate can come down.
As Sharma points out: “It was easy enough for India to increase spending in the midst of a global boom, but the spending has continued to rise in the post-crisis period…If the government continues down this path India, may meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crowded out private investment, ending the country’s economic boom.”
Where are the big ticket reforms?
India reaped a lot of benefits because of the reforms of 1991. But it’s been 21 years since then. A new set of reforms is needed. Countries which have constantly grown over the years have shown to be very reform oriented. “In countries like South Korea, China and Taiwan, they consistently had a plan which was about how do you keep reforming. How do you keep opening up the economy? How do you keep liberalizing the economy in terms of how you grow and how you make use of every crisis as an opportunity?” says Sharma.
India has hardly seen any economic reform in the recent past. The Direct Taxes Code was initiated a few years back has still not seen the light of day, but even if it does see the light of day, it’s not going to be of much use. In its original form it was a treat to read with almost anyone with a basic understanding of English being able to read and understand it. The most recent version has gone back to being the “Greek” that the current Income Tax Act is.
It has been proven the world over that simpler tax systems lead to greater tax revenues. Then the question is why have such complicated income tax rules? The only people who benefit are CAs and the Indian Revenue Service officers.
Opening up the retail sector for foreign direct investment has not gone anywhere for a long time. This is a sector which is extremely labour intensive and can create a lot of employment.
What about opening up the aviation sector to foreigners instead of pumping more and more money into Air India? As Warren Buffett wrote in a letter to shareholders of Berkshire Hathaway, the company whose chairman he is, a few years back “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down…The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.”
If foreigners want to burn their money running airlines in India why should we have a problem with it?
The insurance sector is bleeding and needs more foreign money, but there is a cap of 26% on foreign investment in an insurance company. Again this limit needs to go up. The sector very labour intensive and has potential to create employment. The same is true about the print media in India.
The list of pending economic reforms is endless. But in short India needs much more economic reform in the days to come if we hope to grow at the rates of growth we were growing.
Raj Krishna was a far sighted economist. He knew that the Nehruvian brand of socialism was not working. It never has. It never did. And it never will. But somehow the Congress party’s fascination for it continues. And in continuance of that, the party is now distributing money to the citizens of India through the various so called “social-sector” schemes. If economic growth could be created by just distributing money to everyone, then India would have been a developed nation by now. But that’s not how economic growth is created. The distribution of money creates is higher inflation which leads to higher interest rates and in turn lower economic growth. Also India is hardly in a position to become a welfare state. The government just doesn’t earn enough to support the kind of money it’s been spending and plans to spend.
Its time the mandarins who run the Congress party and effectively the country realize that. Or rate of growth of India’s economy (measured by the growth in GDP) will continue to fall. And soon it will be time to welcome the new “Hindu” rate of economic growth. And how much shall that be? Let’s say around 3.5%.
(The article originally appeared at www.firstpost.com on June 1,2012. http://www.firstpost.com/politics/sonias-upa-is-taking-us-to-new-hindu-rate-of-growth-328428.html)
(Vivek Kaul is a writer and can be reached at [email protected])