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FEB 11 2013

Pricepooling pitted against coal-rich States

  • Economic Times, ET Bureau / Hyderabad
  • Created: Mon 11th FEB 2013

Subsidisingimported coal impinges on the revenue-raising rights of coal-rich easternStates.

The Supreme Court recently questioned the Centres mandate inallocating coal blocks, in the context of the Coalgate scam.

However, the moot issue here is whether the Indian government isexceeding its Constitutional mandate in drawing up coal mining strategies to befollowed by mineral-rich States?

The Cabinet Committee on Economic Affairs (CCEA) has grantedin-principle approval to the proposal of pooling the prices of domestic andimported coal.

The stage may, therefore, finally have been set for a heateddebate on Indias federal structure the role of mineral-rich States infuelling Indias growth, and how they are compensated (or deprived ofcompensation) for the same.


The proposal in question requires the buyers of domestic coal topay extra to subsidise the use of imported coal in coastal power stations mostly promoted by the private sector commissioned after March 2009.

Apparently, the planners intend to address the looming fuelshortage that has impacted the viability of 35,000 MW worth of private sectorcapacities, entailing an estimated investment of Rs 2,00,000 crore.

The projects are in trouble partly due to a flawed Central policythat encourages private investors to enter into aggressively priced powerpurchase agreements (PPA) with State utilities, without much room to pass onthe volatility in fuel costs.

To add to the problem, the Central government-owned monopoly Coal India Ltd failed to reach the projected level of production. CIL is nowoffering 65 per cent of the required fuel required for new projects down froma guaranteed supply of 90 per cent in the past.

The investors thought they would mint money through highercapacity utilisation and open market sale of power.

Now, they are lobbying with the Union government to arrange forcheaper fuel and allow for a tariff revision in the long-term (up to 25 years)PPAs (and cheaper fuel). Pleas in this regard from Tata Power and Adani Powerare already under the CCEAs consideration.

While the constitutional validity of such post-facto change intender norms (based on which such projects were established) is debatable,expectation is rife that the private players pleas will receive a favourable response.This will open the floodgates for private sector investors to seek tariffrevision.

Till then, pooling of imported fuel will offer some cushion toprivate sector investors.


Clearly, the coal-bearing States have had nothing to do with thecrisis in the power sector.

In fact, barring some exceptions, the large coal-bearing Stateshave never had a stake in Indias growth story.

For four decades till 1991, India continued with the freightequalisation policy, which ensured growth of industries and swelling taxrevenues of Mumbai or Delhi, at the cost of major coal-bearing States such asOdisha, Chhattisgarh, Jharkhand, West Bengal and Andhra Pradesh.

It is only in the last two decades (more so the last decade) thatcoal-bearing States started utilising their natural resources to attractinvestment, but not without constraints.

First, though the States attracted pit-head generation capacities,most of this power was wheeled away (due to lack of a local consumption base)to Delhi, Mumbai, Chennai or Bangalore.

And, since electricity generation does not generate tax revenues,coal bearing States were only left with the pollution.

Second, beginning 1993, the Centre stepped up domestic coalproduction, leading to aggressive mining activity in Odisha and Chhattisgarh.This accentuated the negative effects political, social and environmental.

All that these States have been left with are: Uprooted forests,dug-up hills and millions of displaced people spitting venom against thepolitical leadership either through mobilisation of ultra-left forces, orthrough increasingly violent protests against land acquisition initiativesthat, in turn, block the scope of future development.

In sum, mineral-rich States were not allowed to utilise theirnatural advantage even in a liberalised environment.

As the Court rightly asked, the existing policies hardly leave achance for Chhattisgarh, Odisha or Jharkhand to be active and equal partners inensuring growth of the mining sector.

But, that is not enough the country now wants them to pay forthe industrial growth of a Gujarat or Karnataka.


Speaking purely in market economy terms, coal-bearing Statesshould enjoy the right to optimise utilisation of their mineral resources unless, of course, the rest of the country decides to share the revenue,generated at each and every stage of value creation, with coal-producingStates.

If the Centre can ask all users of domestic coal to bear the extraburden, so as to encourage imports, there is no reason why a Jharkhand cannotbe offered an incentive to tighten its law and order, and step up coalproduction.

Given the rising neo-nationalism in coal-producing destinationssuch as Indonesia and Africa, this approach seems like a viable solution.

But, that would require our policymakers in Delhi to think beyondthe colonial mindset of exporting development from resource-rich regions.


The Centre is targeting implementation of the price poolingmechanism as early as in June 2013. It is, however, a million dollar questionas to whether it will be successful in pushing it through.

The objections have come not merely from the non-Congress-ruledStates such as West Bengal, Odisha and Chhattisgarh but also from theCongress-ruled coastal state of Andhra Pradesh.

A policy of pooling resources may finally end up risking thegrowth agenda of the country.



Delhi Gujarat Jharkhand Odisha West Bengal Andhra Pradesh Karnataka Adani Power Ltd Chennai Coal Coal India Limited Indonesia Coalgate Central Electricity Authority Bangalore Cabinet Committee on Economic Affairs CIL Mumbai Power Tata Power coal mining India

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