10/03/2015 6:53 PM IST | Updated 15/07/2016 8:25 AM IST

The Coal Auction Bonanza To The Government Has A Serious Downside

Kuni Takahashi via Getty Images
MEGHALAYA, INDIA- APRIL 30: A coal miner walks out of a mine in Jaintia Hills, Meghalaya in India on April 30, 2014. Indian government announced in September that it would double the coal production to one billion tons over the next four years to ease the ongoing power shortages. (Photo by Kuni Takahashi/Getty Images)

Coal auctions have raised more than what even former Comptroller and Auditor General Vinod Rai had expected. But winning bidders are spending so much that they might not have enough resources to actually mine sustainably.

"At these high prices, I'm worried that mining won’t be sustainable or environment friendly. Once someone buys a mine, there are more costs that pile up to begin mining – wages of workers, equipment and so on. The corporations who are buying these mines might just think its not worth it, given that the price of coal has also fallen globally," said Partha Bhattacharya, former Chairman, Coal India in an interview with HuffPost.

The government's proceeds has already exceeded the estimated losses computed by former CAG Vinod Rai at Rs 1,86,000 crore. Rai had said the massive loss to the exchequer happened because the previous UPA government's policy of arbitrary and free granting of coal mining licenses to public and private companies. The UPA government had disputed that claim but it turns out now that Rai had actually underestimated the loss. "The former CAG has now been totally validated," Bhattacharya said.

The government has already made Rs 2.07 lakh crore from auctions on the fifth day, and this involves eighteen operational blocks and thirteen that are about to open. Some of the remaining blocks will be allocated for free to Coal India itself, but even then the final revenue might exceed Rs 15 lakh crore. That's a huge bonanza for the government.

"Why would a corporation want to mine when the price the coal will fetch might be lower than the costs involved? That is what will happen after these bids," Bhattacharya said.

Indian companies, mainly from the metal and cement sectors, have bid aggressively in the first auctions to sell mines so that they can cut imports and reduce their dependence on Coal India's inefficient production.

The process began after the Supreme Court cancelled all previous licences granted under the UPA government, and asked for an auction. Companies have bid to mine, and sell coal, and also to secure raw material supplies for expanding their industries. Companies are allowed to bid for enough coal to fuel a 50 percent expansion of their current metal or cement capacity.

If winning bidders do not choose to mine, that would defeat the purpose of auctions. India needs 1,550 million tonnes of coal production in the next five years to meet its energy needs, but has only 550 million tonnes of capacity right now. "These winners are expected to play a major role in helping raise production. But I'm afraid that sustained mining might not happen under the current bidding policy," said Bhattacharya.

India's growth is largely powered by coal, and India is the largest consumer of coal after China and the United States as it builds more thermal power plants and industries use it for their expanding operations. Coal India has failed to meet the growing demand, leading to power shortages. While coal power capacity grew 73 percent in last five years, coal production grew at just 8 percent with Coal India weighed down by environmental and administrative constraints.

The current bids are for the next 30 years, and global coal prices might rise in the interim, making sustained mining possible even after high bids. "With their own mines, companies will have control over costs, while for imports you can forecast just for a year," said Dipesh Dipu, a partner with Jenissi Management Consultants in this interview.

But Bhattacharya said that if companies wait for long for prices to rise, that will also impede India's progress. Instead, he suggests that the government should make it mandatory that winning bidders should still have enough funds left to start mining. "If 80 percent of the normative cost of mining is still available to the company after bidding, they can mine. If that condition is not met, then the bid should be cancelled and a re-bidding will need to be done."

His other alternative is to auction large blocks together and invite global majors for bidding. "That would ensure top companies get to mine, and they would do mining that is both socially and environmentally sustainable," he said.