How and why did the Government liberalize coal mining in India?

The Finance Minister, Nirmala Sitharaman unveiled the fourth set of the 20-lakh crore COVID economic package as part of the ‘Atmanirbhar Bharat Abhiyan ’. One of the major reforms announced was giving a boost to commercial coal mining in India.

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Some of the reasons behind the opening up of the sector are: to boost the domestic coal production, reduce the reliance on imports, bring greater efficiencies, to achieve economies of scale, promote effective competition and flexibility in coal procurement for end-use companies.

In order to understand the rationale behind this reform, we need to consider some interesting facts about the coal industry in India.

India has the fourth-largest coal reserves in the world with a cumulative total of 319 billion tonnes. Though India is a coal-rich country, it is heavily dependent on coal for its requirements.

To give you a perspective, key national players such as Coal India Limited along with its subsidiaries produced around 606 million tonnes of coal in the financial year 2019. However, India still imported around 234 million tonnes of coal forcing it to spend Rs. 1.71 lakh crores on the coal import bill.

An intriguing question that arrives here is that despite having large reserves, why there has been any need to import coal from foreign countries. Well, some of the reasons explaining the need for imports are as follow:

• Lower quality of Indian coal: Indian coal has a lower average GCV (gross calorific value) approx. 4,000 kcal/kg and a higher average ash content of around 34 % compared with international coal from Indonesia and Australia. Therefore, Indian firms that require thermal coal as their fuel for producing power blends imported coal with domestic coal to compensate for the lower quality. ( The term GCV means the quantity of energy released by burning 1 kg of coal. Higher the GCV, better the quality of the coal. Lower the ash content, the better the quality of the coal.)
• Bureaucracy and inefficiency: India’s domestic coal production is mostly controlled by Coal India Limited. It is responsible for 80% of the total domestic coal production. Despite CIL’s significant contribution to coal production, it’s rife with bureaucracies and inefficiencies. CIL is not operating to its maximum potential to produce enough for our requirements.
• Rigid rules and red-tapism: The majority of the coal projects get halted due to issues in acquiring land and strict rules and regulations. It’s difficult to obtain environmental clearances as well. Therefore, some of the companies prefer to import coal rather than getting a mine in India.
• Lack of adequate infrastructure for transportation: The coal mines, especially the southern mines, are far removed from the rail networks making it difficult to transport to long distances. The connectivity issue and the mismatch of demand and supply of wagons affect production planning. (This can be improved through better coordination between the Coal and the Railways Ministry, increasing the rake allocation priority for the evacuation of coal by railways, etc)

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Thus, less than required coal production in India and the desire to bring in greater efficiencies and technologies emphasize the need for ramping up domestic coal mining. One of the ways is to get a large number of domestic and foreign players on board. Thus, the Government has undertaken a gamut of reforms over the years to liberalize the coal mining sector. They are:

• In the year 2015, the Government allowed the domestic companies in the private sector to bid for coal blocks but only for captive consumption. (It means power companies, coal processing plants, iron, and steel companies, etc were allowed to bid for coal blocks, provided they use it only for their own consumption, and not for sale in the open market.)
• In 2016, the FDI policy was changed to allow 100% FDI under the automatic route for coal and lignite mining for captive consumption
• In Feb 2018, the Government finally allowed mining for commercial purposes. The Cabinet Committee on Economic Affairs (CCEA) approved the methodology (fixed Rs. per tonne) for the auction of coal mines/blocks to the parties interested in bidding. Fixed Rs per tonne means the companies willing to participate will have to offer a fixed amount or Rs per tonne to the State Government on the actual production of coal. The highest bidder will be the ‘Preferred Bidder’ who will be allotted the coal mine.
• In Oct 2018, it also allowed the captive miners to sell 25% of their output in the open market.
• Further, in the year 2019, the GOI approved 100% FDI under the automatic route for coal & lignite mining for commercial purposes as well.

But the move did not generate expected results because of the numerous clearances required to operate a mine in India. Apart from that, foreign companies would have had to bring in greater efficiencies in the form of best technologies (which means greater capital investments) to compete with CIL’s lower prices. It deterred investments.

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Therefore, the Government realized that it’s time to tie up certain loose ends. Thus, in January 2020 the Government introduced some major reforms that have been listed below:

• The companies participating in the commercial coal block auction need not possess any prior coal mining experience. This would encourage companies who are interested but have little or no experience in mining to take up projects in the sector.
• The end-use clause in bidding for auctions was scrapped. As per the earlier provision, the coal produced by the private companies could only be used for captive purposes and cannot be traded in the market. Therefore, it hindered private participation and provided no alternative to deal with excess coal excavated from the mines.
• A new provision was introduced to allow the NERP (Non-Exclusive Reconnaissance Permit) holders to apply for a composite license that would encourage exploration activities. A reconnaissance permit is granted for preliminary prospecting through regional, aerial, geophysical or geochemical surveys and geological mapping. According to the existing rules, a NERP holder will just explore the mineral block and upon successful exploration will hand over the explored block to the state government for auction. The state government will have the power to auction the block being explored. Thus, private participation in the sector was negligible as the private sector did not get the opportunity to earn money after completing the exploration. Hence, they hesitated in taking up the exploration activities.

As part of the 20 lakh crore package to deal with the economic impact of COVID-19, on 16th May 2020 the Central Government further liberalised the sector. It introduced a slew of reforms to reduce the overarching presence of CIL. The highlights of the reforms introduced are given below:

• Revenue – sharing mechanism instead of fixed Rupee/tonne has been introduced for companies participating in the auction. It means the methodology for coal auction approved in 2018 has been changed to a revenue-sharing mechanism. Companies willing to participate will have to offer to the Government a certain percentage of revenue generated from the sale of coal.
• Earlier only fully explored coal blocks were kept for auction but from now onwards, there will be an exploration-cum-production regime for partially explored blocks in order to attract the private players.
• Nearly 50 mining blocks will be auctioned through an open and transparent auction process immediately. 
• Centre has also simplified the clearance process for coal mining projects.
• The amount worth Rs.50,000 Cr will be spent on the infrastructure development for coal evacuation from the mines.
• The Government will also incentivize coal gasification/ liquefication in order to promote the gas-based economy.

Thus, the series of reforms introduced by the Government of India time to time is a step in the right direction in increasing the utilization of the coal potential of the country. However, we will have to wait and carefully observe the impact of the Centres’ mega -announcements on the industry as a whole.

Only time will tell whether the reforms undertaken would make India ‘ATMA-NIRBHAR’ or not.

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