PPPs in the coal sector will transform it
Perhaps one of the most far-reaching policy statements in the Budget was that relating to the likelihood of the government opening up the coal sector to private sector through the PPP route. The coal minister, the FM said, would be announcing the government policy on this in due course. If coal imports are likely to rise to 185 million tonnes in FY17 from 100 million tonnes in April to December FY13, this has serious consequences and not just for India’s ports which are in grave danger of clogging up handling all this coal. It has large implications for power prices since the more imported coal needs to be procured, the higher the price of power—every $10 difference means a tariff hike of around 20-25 paise per unit. Right now, the difference in prices is around $25 per tonne. More than this, keep in mind that of the 1,06,000 MW of coal-based power capacity in India, around 15% is rendered useless due to lack of coal supplies from Coal India—while 43,000 MW of fresh capacity is scheduled to come up by FY16, this will function at just 40% capacity, given expected levels of Coal India’s production. It also has large implications for the current account deficit (CAD). Though oil and gold imports are frequently seen as the villain of India’s high CAD, keep in mind the coal import bill contributed 8.1% to the trade deficit and 22% to the CAD in the first half of FY13. Coal imports’ share in trade deficit has steadily risen from 7.3% in FY08 to 9.5% in FY12. Its impact on CAD was as high as 41% in FY08 when prices were high and the economy was growing at over 9%.
Though the best solution would be to completely open up the coal sector and do away with the Coal Nationalisation Act, it is a good idea to get private players to enter into joint ventures with Coal India to begin with if this makes it more politically palatable. In the case of oil and gas, for instance, for the initial years, private players came in only as joint venture partners of ONGC or OIL. Whether private players come in on their own or as partners with Coal India, it’s important to keep in mind what’s happened in the oil sector—between FY98 and FY11, while ONGC added 749 million tonnes to its ultimate reserves, the private oil firms added around 719 million tonnes. In other words, had the oil sector not been opened up to private players, India’s reserves growth would have halved. Apart from the environment issues that have lowered Coal India’s output, the PSU is not the most efficient. According to Coal India, of the 64.8 billion tonnes of reserves it has, only 21.8 billion is extractable—this is largely because while Coal India typically operates open cast mines with less than 300 metre depths, most global mining firms operate at many times deeper levels. Bringing in global players will do wonders for India’s coal output, power prices and the CAD.