Court Ruling Makes a Mess of India’s Coal Industry, Scares Off Foreign Investment

by on

There’s an old Hindi proverb in India that alludes to corruption which, roughly translated, means “those dealing in coal get their hands black.”

FREE Download: The Monthly MMI® Report – covering Steel/Iron Ore markets.

A verdict on a on coal mining licenses case by the Supreme Court of India earlier this week was half-expected, yet it sent shockwaves across the steel, cement and power sectors, and it caused the government to spin in circles. Share prices of leading steel companies such as Tata Steel fell because of it.

The court ruled that 218 licenses for coal mines given to private companies between 1993 and 2010 were illegal. Now, everyone is waiting for September 1, the day when the court will decide whether to ask the government to cancel those invalidated licenses or not. If it does, it will lead to utter chaos, likely to affect much of India’s economy, at least in the short term. It is no secret that if India has to accelerate its economic growth. It needs to boost its steel, cement and power sectors and it  requires an abundant and cheap supply of coal to do so.

India has been facing a coal shortage for some years now, which some of the private companies have tried to overcome by striking deals with foreign mines. This is ironic because India has abundant coal reserves in its own ground, but an artificial shortage was created when the Coal Nationalization Act was passed in 1972. That law gave the government-owned Coal India Ltd, and only CIL,  the right to mine coal and sell it in the open market, thus creating a monopoly. That public sector unit has long been accused of production lethargy, and not keeping up with market demand.

So, even though the country sits on coal deposits, some 250 billion tons, it runs short of coal by about 100 million tons annually. This was why previous governments had started allocating “captive” mines to private companies with the condition that the coal that was mined would not be sold on the open market.

And as is to be often found in such “closed systems”, the process of allocating these captive mines was alleged to be discretionary. No open bids were called for, the companies were just selected from within the bureaucracy, all of which led to charges of corruption being leveled, though not proven. If the Supreme Court does decide to cancel the licenses, it will be reminiscent of a similar episode in the telecommunications industry when the court had revoked the licenses of 122 telecom companies in 2012. As happened in that case, foreign investors may be left wondering just how viable it is to do any kind of business in India, striking a blow to the plans of the new Indian Government led by Prime Minister Narendra Modi to go all out and attract foreign investors.

 

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.