Verdict on coal blocks to setback development: CARE

CARE Ratings has come out with its report on recent development in coal blocks case.

Monday’s ruling by the Apex Court declaring allocation of about 200 coal blocks in India since 1993 as illegal lends turbulence to the coal sector in the short-term, but may be positive for the healthy development of the sector in the long-term. As the Hon’ble Supreme Court stopped short of de-allocating these blocks, the series of hearings starting next week shall bring out the likely consequences for the coal sector. A blanket de-allocation shall be a big setback to the development of the coal sector which is already grappling with problems of transparency, inadequate and irregular supply, coal grading issues and land acquisition etc. The companies in the private sector, deriving direct operational benefits of these allocated coal blocks for power generation and manufacturing goods, are expected to be impacted the most. Coal blocks have also been allocated during the period for projects which are yet to come up. In such cases, the viability of these projects may be affected in case of any unfavorable ruling next week. India is still dependent on coal as a primary fuel source with about 60% of power generating capacity in the country dependent on coal. De-allocation, although not favored, would in general have unfavourable consequences for Asia’s third largest economy which is embarking on a path of economic recovery. The move may lead to coal shortages at cement, metal and power plants and other power intensive manufacturing units. Disputed coal blocks account for almost a tenth of the annual coal output in the country. During the period of disruption of supplies, the coal consumers may have to resort to imports to meet this shortfall in the short to medium term. An unwarranted spike in the price of coal due to the ensuing demand-supply mismatch would hurt the industry’s operating margins and may trigger inflationary trends in the economy. International coal traders are already delaying supply contract renewals, awaiting the Supreme Court verdict on the issue, seeking better pricing terms. A balanced view is called for by the industry on this matter, and taking inputs from various stakeholders would be a better approach to tackling the issue. The irregularities, as cited by the Apex Court, needs to be regularized in a smooth manner, keeping in mind the overall development of the coal sector and the impact on the industry. Also policy and framework needs to be put in place for future awarding of the blocks. Being a natural resource which is explored at public cost, auctioning system is best suited for awarding coal blocks for commercial exploitation. The sector calls for stable and consistent policies for short-term and long-term which will attract investments for the efficient development of this crucial sector and benefit the nation as well as the consumers.