Policy | 100 percent FDI in coal doesn’t threaten Coal India’s monopoly. For now.

A frisson of anxiety is running through the corridors of Coal India after the Union cabinet late last month allowed 100 per cent foreign direct investment (FDI) under the automatic route in coal mining and associated infrastructure.

While the top echelons of the public sector behemoth are apprehensive about losing near-monopoly, five trade unions, representing the workers of the state-owned miner, have called a strike on September 24 protesting the move.

The August 28 step of the government is a follow-up to its decision in February last year when it allowed auction of coal-bearing blocks to private parties for commercial mining. So far, 100 per cent FDI via the automatic route was allowed in coal and lignite mining for captive consumption by power, steel and cement units. Also, 100 per cent FDI was permitted via the automatic route for setting up coal washery, but the FDI firms could sell washed coal only to those units that supply raw coal for processing, and not in the open market. Under the latest decision, 100 per cent FDI will now be allowed in not only mining for sale in the open market but also for associated infrastructure such as washery, crushing, coal handling and separation.

The government’s move last year to open up the coal sector, however, has not borne fruit so far as local players such as the Adanis, the Tatas and the GMR group have evinced little interest. The absence of a facility to tie up with global players is cited as a reason for the tepid response.

And this is perhaps exactly the worrying point for Coal India. With 100 per cent FDI now allowed under the automatic route, there is a feeling local players would tap global mining giants such as BHP, Rio Tinto and Glencore, who have deep pockets and high-end technology, to foray into coal mining. The government-owned coal miner is apprehensive that such a move will lead to its losing consumers and pricing power.

Coal India’s concern perhaps stems from the fact that despite being a near-monopoly it has missed production target for the thirteenth consecutive year in 2018-19. The world’s largest coal miner has been forced to delay the production target of 1 billion tons by two years till financial year 2024-25.

Though India is estimated to have coal reserves of up to 300 billion tons, the country mined only 730 million tons of coal in 2018-19 — 607 million tons by Coal India, 64 million tons by Singareni Collieries and the balance by captive coal producers.

Even with such a huge reserve, Coal India has not been able to meet the rising demand for the fossil fuel in the country. This has led to a surge in coal import — in 2018-19 coal import stood at 235 million tons.

There are various reasons why the coal miner has not been able to jack up output over the past few years. According to the company’s 2018-19 report, of the total 120 projects it signed, 54 are delayed because of pending environmental and forest clearances and possession of land. Besides, hurdles related to resettlement and rehabilitation, contractual issues and shortage of rakes are also to be blamed for underperformance, it said.

Now that 100 per cent FDI has been allowed via the automatic route, will foreign mining majors —may be in tie-up with local players — rush to fill up the gap left by Coal India and ultimately throw a challenge to the public sector monolith’s supremacy? Given the whole administrative process that governs the coal sector, the answer doesn’t seem to be in the affirmative.

According to several brokerages, the move fails to address some of the key regulatory issues such as delay in environmental clearances and land acquisition and lack of availability of coal rakes.

Moreover, recent media reports suggest that investment in coal has been drying up as both global mining corporations and international banks are waking up to environmental issues. A Bloomberg report said Rio Tinto is planning to exit thermal coal business—that is, coal used in power plants. It is also learnt that both Anglo American and BHP are said to have begun the process of divesting their thermal coal assets. Earlier this year, Switzerland-based miner Glencore, the world’s biggest exporter of coal, announced capping production roughly at the current levels of 150 million tons due to investor pressure.

However, the key disincentive for private players — foreign or local — to invest in a big way in India could be the pricing issue. With its huge scale of operation, Coal India dictates prices and the newbies may not get the flexibility to price the fossil fuel to suit their profitability. It will be near impossible for private players to match the production volume of Coal India. Higher volume play allows the public sector coal miner to lower production costs and set prices.

So, for now, Coal India doesn’t need to worry much as its monopoly is likely to remain intact. However, the public sector monolith will do well to pull its socks up so that it can stand up to future competition.

Abhijit Kumar Dutta is a freelance writer. Views expressed are personal.