The country is in an economic crisis. The growth rate is coming down. The current account deficit (CAD) has reached 6.7%. A crisis provides an opportunity to take muchneeded decisions that one could not otherwise take.
The finance minister rightly identified the most important challenges facing the Indian economy as achieving fiscal stabilisation and reducing CAD. Yet, after the budget, the CAD has gone up. The main reasons for the high CAD, he pointed out, are increasing imports of coal, oil and gold and decreasing exports. The specific measure suggested to reduce coal imports is to have private participation in coal mining through public-private partnership (PPP) with Coal India Limited (CIL), the public sector monopolist. Similarly, to increase oil exploration, a new exploration policy will be formulated where revenue sharing will be required instead of profit sharing as is done now.
To reduce gold imports the FM indicated that new investment instruments will be introduced that will be preferred by those who currently buy gold as a hedge against inflation and for capital gains. For promoting exports the finance minister promised to support whatever measures the Reserve Bank takes.
Would these work? Despite having adequate resources of coal to produce all that we need domestically, we imported 100 million tonnes of coal in 2011-12, nearly 25% of our consumption. Also, the 12th Plan projects import of 185 million tonnes of coal in 2016-17. CIL says they are stymied by environmental clearances. The ministry of environment and forests will argue that CIL should have planned better accounting for the time needed for environmental clearance.
Under the Coal Nationalisation Act, only public sector firms can mine coal. Some designated users are permitted to mine coal for their own use, which they cannot sell to others. Thus only
public sector firms can sell coal and so CIL mines and sells most of the coal in India. Today, CIL already outsources many activities to private firms. In a sense thus, there is already some form of PPP in coal mining.
What could the new announcement bring? Would it attract private firms to mine coal when it is to be sold through CIL, at the price fixed by CIL? Would private firms get environmental clearances faster than CIL? It is highly unlikely. One can argue that since the private sector will be more efficient than CIL it will make excess profit if it gets the price that CIL gets.
However, since the CIL price is not market determined, it is uncertain when CIL will reset price and if the government will decide to subsidise coal as it does petroleum products.
The sensible response to the CAD and coal crises would be to denationalise coal completely and let coal price be market determined. Only then can we expect the private sector to come in in a substantial way and introduce new technology. That is the only way we can avoid the import of 185 million tonnes in 2016-17 as envisaged by the 12th Plan.
During UPA-I when i was member, Planning Commission, in charge of energy, we were told to suggest anything except denationalisation of coal. At that time one felt that this was because the UPA depended on the communist parties, which would never agree to it. Today, that constraint does not exist. Instead of reforming its coal policy, the government is taking patchwork actions that do not solve the fundamental problem. At this rate our energy security will be even more precarious than it is now, as we will depend on imports not only of oil but also of coal.
Even the short-term policy to deal with coal shortage shows the government's preference for bureaucratic non-market solutions. Today, CIL does not produce all the coal required by power plants, many of them operate below their capacity and power shortages persist. Since domestic coal is cheaper than imported coal, power plants are reluctant to import coal particularly when the coal cost pass through is not allowed by many state regulators.
CIL imports coal and charges a weighted average price of domestic and imported coal. A simpler, more efficient, solution would be to allocate domestic coal to all power plants on a pro rata basis and let the plants trade their allocations. Thus, a faraway coastal plant will sell the allocation to plants near the coalmines and import the coal it needs. The market will pool the price in a more efficient way.
To reduce oil imports we need to encourage efficient use and more exploration for oil and gas. Subsidies on diesel, LPG and kerosene need to be moderated if not eliminated and replaced by cash transfers to the really needy. That will increase the resources of domestic oil companies and their ability to explore and produce more oil domestically as well as acquire oil properties abroad. This is particularly important as the proposed bidding for revenue sharing increases perceived risk of oil exploration and is less likely to attract foreign firms.
Finally, to reduce gold import, inflation indexed bonds or bonds denominated in international gold price and tradable on an exchange at the prevailing gold price at any time, may be issued. Maybe the RBI can be persuaded to do this.
The writer is chairperson, Integrated Research and Action for Development.
Patchwork solutions can no longer reform the coal sector
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