14 JUN, 2012, 05.20AM IST, TK ARUN,ET BUREAU ( Collected from The Economic Times)

Despite having one of the world's largest reserves of coal, India is unable to dig it up fast enough

The biggest scam in coal is that despite having one of the world's largest reserves of coal, India is unable to dig it up fast enough. This results in lost production and jobs, imports of expensive coal and petroleum, depreciation of the rupee that could have been avoided, leading to higher inflation.

All discussion of coal scams and auctions would be so much babble without bearing this basic fact in mind. At the root of this scam is the Coal Mines (Nationalisation) Act of 1973. It made coal mining a public sector monopoly.

The law was amended in 1976 to allow captive coal mining for production of iron and steel in the private sector. The law was amended again in 1993 to allow more captive private mining, for power plants and for other notified uses. Under this amendment, in 1996, captive mining was extended to cement plants as well.

Coal India lords over mining coal. The mining is pretty crude: dig large pits and scoop out the coal. No underground mining deploying sophisticated technology and safety measures.

This inefficient monopoly just cannot meet the domestic demand for coal. The country, in the recent past, has had to import coal to fuel power plants built right at the pithead of coal mines, far away from the coast from where coal has to be moved at high cost.

Despite sitting on nearly 100 billion tonnes of coal reserves, waiting to be mined, India today imports more than 70 million tonnes a year. These avoidable imports add to the current account deficit and the rupee's weakness. The weaker the rupee, the more expensive all imported inputs. So, Coal India's inability to mine coal fast enough is a contributory factor to unrelenting inflation in the country as well.

But this is not Coal India's only crime. Indian coal is up to 45% shale and rock, noncombustible material that turns into fly ash in power plants. The sensible thing to do is to remove this non-combustible material before coal is loaded on to trains and sent across the country.

But Coal India does virtually no beneficiation of coal before it is despatched. This means that railway wagons careen around the country carrying useless shale and rock, wasting precious diesel and power in the process.

Roughly 40% of the Railways' earnings come from coal. At least 50% of the energy spent on haulage will be on coal. Since 40% of the so-called coal is shale and rock, 16% of the Railways revenues come from and 20% of its fuel cost is spent on hauling future flyash all over the place.

The most urgent reform required in coal is to scrap state monopoly, open up mining, beneficiation and trading to private enterprise and break up Coal India into half a dozen companies so as to preempt a market-distorting behemoth.

The Indian economy should not be starved of power or burdened with avoidable import bills because of public sector inefficiency and corruption (sometime in the mid-1990s, Coal India suddenly wrote down its stocks by 6 million tonnes - all that coal just vanished!).

No government has had the political will to scrap state monopoly in coal. The Left's ideological opposition came in handy for UPA-I. UPA-II probably relies on Mamata's Left-colonised opposition. Once coal mining is freed up, captive mining, a field where inefficiency and moral hazard run riot, can also be scrapped. Mining should be done by professional miners who dig up coal, pay royalty on the mined coal and pay corporate tax on profits.