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Why Coal is Still So Important for the Indian Economy

Editor, TRANSFIN.
May 24, 2020 12:46 PM 5 min read
Editorial

The Government recently announced that the coal sector would be opened up further to boost domestic production and cut the import bill. The eagerness to reform the coal industry stems from its importance for the national economy. Coal is king in India, despite the push towards renewables and systemic challenges faced by the sector. The sector is as interesting to study as it is influential. In this article, we explore India’s all-important coal industry.

 

 

A Brief History of Coal

Coal production in India dates back to the days of British colonial rule when coal deposits along the Damodar River began to be mined in 1774. In the decades that followed, production was stymied by low demand and transportation challenges. The emergence of rail networks eased this a bit. And the two World Wars saw coal production soar as Britain exported large amounts to fuel its war effort.

Following Independence, coal production was pursued via Five Year Plans. In the 70s the sector was nationalised. Coal India Limited (CIL) was established in 1975 to manage coal mines. This was reversed in 2015 when the current Government began permitting commercial mining by private players.

Coal in India is broadly classified into two types – coking and non-coking. Coking coal is mainly used in steel and metallurgical industries and non-coking coal is used for power generation.

Some stats to keep in mind:

  • India is one of the top five countries when it comes to coal reserves (more than 300bn tonnes). 
  • It is the second-largest coal-producing nation in the world (729 MT in 2018-19, after China). 
  • It is also the second-largest coal importer (235 million tonnes (MT) in 2018-19, after China)....somewhat counter-intuitive given the previous two stats but more on that later.

 

Reforms in the Coal Sector

As mentioned above, the push to denationalise the coal sector began in 2015; it accelerated in 2018 when the Government allowed commercial mining by private entities. Companies engaged in iron, steel, power and coal washing were allowed to bid for coal blocks. (Coal blocks are geographical areas where a company is allowed to mine). In January this year, this policy was extended to companies outside these sectors and captive end-use criteria was scrapped, permitting companies to sell surplus coal in the market. 

In August 2019, the Cabinet approved 100% FDI via the automatic route for coal mining. And last week, Finance Minister Nirmala Sitharaman announced the further opening of the sector as part of the Atma Nirbhar Bharat Stimulus Package. This included the announcement of coal mining on a revenue share basis instead of the erstwhile fixed payment per tonne model.

 

Why India Imports Coal. Plus Other Challenges

India still imports a lot of coal. And in increasing rates. Even as global coal prices have been rising. Most imports are thermal coal, which is used to generate electricity. 

(Note: Imports have fallen in recent months YoY but that’s because of the coronavirus pandemic and lockdown.)

Coal imports are undoubtedly a drain on the exchequer with a bill over$20bn. So why do we import even with such vast reserves? 

The reasons behind this are manifold.

Majority of India’s coal production is non-coking coal; coking coal has to be imported. Additionally, indigenous coal is of average quality – with high ash and low calorific content. This means a lot of investment has to be made to improve its grade (this process is called coal beneficiation).

On the other hand, the reasons for India importing so much coal are a textbook description of policy paralysis and poor infrastructure. Coal production is limited by factors like land acquisition for mining (a costly process that can take years), various clearance requirements (environmental, forestry etc.) and infrastructure challenges (like poor railway links to evacuate coal). Moreover, the decades-long uncontested monopoly of Coal India stagnated the coal sector considerably for a long time.

Then there are miscellaneous factors like occasional flooding of mines, labour unrest and of course slump in consumer demand and growth in renewable energy use that have taken a hit on coal production in recent months.

The advent of private coal mining has brought much-needed hope and competition but these new companies face challenges themselves. Without structural reforms in land acquisition, cutting red tape, simplifying labour laws etc., privatising the coal sector won’t bring the boost in coal production the Government seeks. 

Let’s say the auctions for coal block allocations take place this fiscal; that doesn’t mean mining will commence immediately thereafter. Private companies will still have to endure the myriad of regulatory processes that could take years, meaning actual mining could begin only after FY26. Such a drawn out process is not something that reforms like privatisation and 100% FDI can offset.

 

Why Coal is Important for India

Coal caters to more than half of India’s domestic energy needs. And coal is likely to remain king till 2030 - and beyond.

Besides energy, coal is important in other ways. State-owned Coal India - the world’s largest coal mining company - is a major source of revenue for state coffers through dividend payments and taxes.

The push to boost and liberalise coal production is rooted in two factors: (1) the importance of coal as an energy source and (2) a race against time for India’s energy industry.

The first is obvious. Coal powers everything from the nation’s trains to its power grids. Meeting this demand through domestic production instead of foreign imports is basic fiscal logic.

The second factor needs more discussion. There is a global push towards renewable energy right now. Be it in electric vehicles or windmills or solar panels, virtually all countries - and especially India - are embracing unconventional sources of energy. 

This is not only because these sources are “green” but also because they are “clean” in that they don’t affect people’s health and well-being. And coal may be important but it is also stained, having contributed to so much pollution of the air and water and immense degradation of nature and biodiversity over the years.

India sees the world’s appetite for renewable energy growing and the market for conventional energy sources like coal diminishing in the near future. As things stand, however, coal is a profitable commodity, of which the country has copious reserves. 

So the energy industry is in a race against time to extract and profit from it as much as possible before demand (and therefore prices) plummet.

FIN.

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