Coal is the next big problem

The bad news is that India registered its highest trade deficit during FY2012. The ugly news is that besides crude, which was India’s largest import at $155.6 billion (net oil import at $116 billion), there were two new commodities that witnessed a significant rise in imports during FY2012—bullion and coal. In particular,

• Gold and Silver imports, together notched a growth of 44.4% y-o-y at $61.5 billion (net gold imports at $40 billion), while
• Coal imports increased 80.3% y-o-y to $17.6 billion.

We, however, believe that imports of coal could be the next big challenge that we may face. This is because, in the past few years, while demand for coal has continuously grown, production levels have largely failed to meet demand. The situation is unlikely to change in the near future, making our dependence on imported coal even larger. This will possibly impact India’s current account deficit (CAD) in a far more adverse manner. There is no concept of net coal imports; coal is not exported except limited amounts to Nepal and neighboring countries. Hence the impact could be magnified; more than what many of us could actually believe.

Gold Imports declined & Oil Imports moderated in FY 2013, but

In the current fiscal, there has been a significant decline in gold imports, and a simultaneous moderation in oil imports. For example, gold imports for the latest month declined by more than 50% (vis-à-vis a 65% increase in FY12, see Table 1), while oil imports rose by 14%. While these trends per se are encouraging, (notwithstanding the decline in oil prices adding a comforting factor and the regulatory actions on gold imports), the continued increase in coal imports may negate the accrued gains. This trend may further be a weakness in India’s balance of payments, which is unique in itself with large trade gap being funded by surplus on services trade, remittances and capital flows. This sharply contrasts with other emerging economies that attempt to maintain and expand a trade surplus.

Coal Production, Demand and Imports Scenario

The report of the working group on coal and lignite for the formulation of the XII Year Plan estimates that coal-based generation in the terminal years 2016-17 of the XII Plan could be around 975 billion units. With thermal power accounting for 66% of the installed capacity, there will be a substantial increase in the use of washed coal and imported coal at power plants, the coal requirement for the power sector works out to 682 MT (overall projected demand at 982.5 MT) in FY17.

The report also points out that under the most optimistic scenario; coal production may reach 795 MT in 2016-17, the terminal year of the XII Plan, against the anticipated production of 551.9 MT at the end of the XI Plan in 2011-12. The incremental coal production in the XII Plan is envisaged to be 243 MT against 121 MT likely to be achieved in the XI Plan. Furthermore, this production is achievable only if the requisite clearances are processed in a fast-tracked route and delivered within the specified time schedule. The issues affecting land acquisition, rehabilitation and resettlement, law and order and evacuation infrastructure will also have to be addressed in a time-bound manner.

Next, in overall terms, the gap between the projected demand of 981 MT and the projected domestic availability of 715 MT works out to 266 MT in 2016-17. If production is enhanced, the demand-availability gap would reduce to 186 MT. This requirement would need to be met via imports, making us vulnerable to balance of payments problems. This impact could be more hard-hitting given the resource nationalization agenda being followed by the supplier countries leading to spiraling coal prices in the international market.

Based on the trend volume growth rate of coal imports over FY10-FY12 (20%), and the likely trends in production, we estimate that coal imports may expand by 25% in value terms in FY2013. This may add an incremental 0.2% to India’s CAD/GDP. This, in turn, will limit the impact of reduced gold imports in net terms (estimated at as much as 0.8% of GDP, in the case of gold imports declining by 40%) and oil imports in net terms (estimated at a 0.5% reduction for every 10$/bbl reduction in oil prices). These numbers are summarized in Table 2. The bottom-line of the argument is that coal imports may just be a chink in the armor of India’s BOP. Interestingly, as Table 2 shows, the value growth and in particular the volume growth in coal imports far outstrips the growth in crude oil and gold over FY10-12. In addition, it may be noted that the sustainable level of CAD for India is around 2.5% of GDP (as per RBI’s outlook in July 2012).

To summarize, in the context of coal availability, India currently faces a massive shortage of domestic coal leading to a large-scale domestic coal deficit in the power and other end-use sectors. As per independent research, India, which is considered to be the fourth largest coal producer, has a coal mining productivity of 0.58 tonnes per year, which is 1/10th of the US. This is a serious concern and needs to be addressed immediately as domestic and imported coal prices are on a rise, which, in turn, is jeopardizing the economics of the power sector. With Coal India assuring to supply only 65% of the contracted quantity to domestic linked customers for the first three years of the FSA, the coal imports will only move northwards.

The solution is near

We believe that the government must immediately usher competition in the coal sector by privatizing Coal India Ltd and its major subsidiaries, by making suitable amendments in the Coal Mines (Nationalization) Act, 1973. Competition in the sector, along with the involvement of mine development operators, who will infuse both capital and technology in our mining sector, will lead to the enhancement of our domestic production. In addition, coal supply to power companies should be as per the New Coal Distribution Policy 2007. With the collapse of Northern Grid on successive days on July 30 and July 31 being attributed to the brazen overdraw of cheaper power from the grid by some of the states, the future seems to be bleak with rising coal prices putting further pressure on the price of power and actually disincentivising the states to purchase power at market rates. So let us make a new beginning; otherwise, it may be too late.

¹ Dr Rajiv Kumar relinquished his position has Secretary General, FICCI on October 23, 2012. Dr A Didar Singh took charge in his place on November 01, 2012.
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