The aftermath of Coal Block cancellation

Energy woes have become a characteristic feature of India where except for few
states and metropolitan cities, almost every location faces regular power cuts of long
hours and the situation is much worse in rural areas. Problems of power sector are
likely to aggravate further with the recent cancellation of 214 coal blocks by the
Supreme Court (SC) of India.

On September 24, 2014, it cancelled 214 coal blocks out of 218 blocks which it
considered were arbitrarily allocated. In reply to the governments request to save
40 functional coal blocks and six ready-to-function ones, the court allowed 42 to
continue to till March 31, 2015, so as to give the government time to manage the
emerging situation. The four other functional coal blocks exempted from cancellation
were two ultra-mega power projects and one each operated by National Thermal
Power Corporation (NTPC) and Steel Authority of India Limited (SAIL).


Coal is the most important factor responsible for power generation in India
contributing to nearly 70 percent of total power generation. In such a scenario,
adverse impact on power generation is quite likely.

Court has exempted power blocks sold to the NTPC, but NTPC contributes little over
27% of total power generation. Even if power generation based on hydro and other
sources is factored out, a substantial portion of power generation is at stake due to
the SC decision. With the imminent crisis in sight, not only half of the countrys
population may go without electricity but, it may affect the industrial growth as well
since energy forms the backbone of industries.


The Private miners believed that cancellation of the blocks would hit investors
confidence, cause acute distress in some industries, affect 28,000 MW of power
capacity, and cause an estimated loss of Rs. 4.4 lakh crore in terms of royalty, cess,
direct and indirect taxes, besides raising the cost of coal imports and setting back
the process of extraction and effective utilisation of coal by eight years. Not just the
power sector but the cancellation will have its effect felt on other sectors as well.

The cancelled blocks were allocated as captive power plants to cement, steel,
aluminum and other industries as well. Several finance institution will also feel the
heat as State Bank of India (SBI), Power Finance Corporation Limited and other
banks have together lent $10 billion-$12 billion to the coal, power and steel sectors.

The Supreme Court's decision to cancel coal block allocations may have a "marginal"
impact on Current Account Deficit and the net burden on CAD would be an additional
increase of USD 700 million, says a report.

On the other hand, oil import bill would decline up to USD 7.8 billion this fiscal as oil
price is expected to settle around USD 98 per bbl. Accordingly, the "net burden on
CAD will be an additional increase of USD 0.7 billion," the report said.

On September 24, the Supreme Court dealt a major blow to corporate sector by
quashing the allocation of 214 out of 218 coal blocks that were allotted to various
companies since 1993, in which it was claimed that over Rs 2 lakh crores were
invested.

All these events occurred when country was already facing severe coal shortage
where most of its plants had the coal stock enough for a week only. State behemoth
Coal India Limited is excavating far less coal than what is expected from it.

Policy hassles, various court cases and red tapism further hampered the growth of
sector and the country with third largest coal reserves had to import the coal.

Since there is no magic wand which will accelerate the coal production till the coal
blocks are allocated afresh, to avert the crisis, coal imports are likely to increase in
coming days.

Though the government now wants to auction the blocks, it will be a time consuming
process and it has only six month to come up with the policy on coal block auction.
Even if everything is settled in six months, participation of firms in the auction is not
certain. In February 2014, when first coal block auction was attempted, only two
firms bid for one of the three blocks on offer. However, the best thing happened with
the entire episode is removal of uncertainty regarding the coal blocks.

The worst enemy of growth is uncertainty and now everyone is pretty certain that all
the blocks will be auctioned in a transparent and efficient manner. Now what
government needs to do is to expedite process of reallocating the cancelled coal
producing blocks so that production is not affected in the short term.