General Awareness

April 04, 2017 @ 01:15 PM

Genesis of Coal Block Scam in India

General awareness on current topics is essential as not only you will be getting questions on   GK in various MBA entrance exams but it will be useful for   Essay writing test and WAT.  

Today, you will read General Awareness Topic : Genesis of Coal Block Scam in India
 
Energy security is the most important prerequisite for any country to assure a sustainable growth of a country. In India, more than 60percent of the energy is derived from coal. 
India has largest deposits of recoverable coal after United States, Russia and China. The utility of coal along with its rising prices led to the Coalgate scam.
 
The Comptroller and Auditor General (CAG) report calculates the loss due to loopholes in the allocation of coal blocks to the tune of Rs.1, 86 lakh crores. According to CAG, government, instead of acting as custodian of this national resource, has gone out of its way to ensure profit for private enterprises - exactly as in the 2G case. 
 
More than 80 percent of the coal is produced by public sector enterprise Coal India Limited (CIL). However, its production was much less than the demand faced by the energy starved economy.
 
Therefore, government allowed the companies in Iron and Steel, power and cement sector to have captive coal blocks. Captive coal blocks refer to the blocks allocated to the industries in which coal is an important input.
 
Instead of allocating by competitive bidding, these blocks were allocated for free in a non-transparent manner. These allocations were made on the basis of recommendations by Screening Committees, in the absence of any criteria. The process lacked transparency; it was arbitrary and gave space for corruption. It was contested internally within the coal ministry. A fairer auction policy was suggested. 
 
Between 1993 to 2011, as many as 206 coal blocks were given to the private companies for free. Estimates suggest that only 41 out of the 206 blocks given away for free were allocated before the end of 2003. This means that 165 blocks were allocated between 2004 and 2011. 
The UPA government has been in power since May 2004 and hence a major number of coal blocks were given away free during the UPA rule. The opposition is asking the resignation of Prime Minister since Prime Minister happened to be coal minister as well between 2006-09 during which as many as 134 coal blocks were allocated for free.
 
The international coal prices started shooting up after 2003 as demand from developing economies, particularly China, increased. 
 
The upward trend continued and prices touched a high of $190 per tonne in 2008 when the global meltdown led to a crash in coal prices. Consider the benchmark price for thermal coal exports from Newscastle in Australia, the world’s biggest coal export harbor. 
 
The Newcastle prices increased from $25 per tonne in 2003 to a high of $185 per tonne in early 2008. The number of blocks allotted annually in India also jumped from 5 in 2004 to 52 in 2007. After 2008, the prices came tumbling down from $185 per tonne to $80 per tonne currently. The number of blocks allotted also came down from 52 in 2007 to 24 in 2008, 16 in 2009 and finally 2 blocks allotted in 2011. Overall, the government had allotted a total of 206 coal blocks with reserves of a whopping 43 billion tonne to 289 companies between 1993 and 2011.
 
Thus, while the spurt in global coal prices gave the economic backing for the mad rush for grabbing blocks, the loopholes in allocation method provided the enabling administrative environment for the scam to flourish. The United Progressive Alliance government that came to power in 2004, had floated the idea of competitive bidding for captive block allocations. However, a Bill to introduce auctioning could be tabled in Parliament only in October 2008. 
 
The rules for competitive bidding in coal allocation were notified on 2 February 2012. The government attributed the delay to conflicting pieces of opinion given by the law ministry to formalize the legislation and the opposition from the sates which feared they would lose control over allocations. 
 
In order to control the damage already done, at the end of June 2012, coal ministry decided to form an Inter-Ministerial Group (IMG), to decide on either de-allocation or forfeiting the Bank Guarantees (BG) of the companies that did not develop allotted coal blocks. Zohra Chatterji, additional secretary, coal ministry was named as Chairman of the IMG. Other IMG members include representatives from power, steel, departments of economic affairs, industrial policy and promotion, and law and justice.
 
As of now, as many as 24 coal blocks have been de-allocated, including those from private companies including Binani Cement, Bhatia International Ltd and Lloyds Metal & Engineers Ltd. 
 
The threat of further de-allocation of mines by the Ministry of Coal is expected to induce other mine owners to be more proactive with project development.
 
There are significant financial implications for companies who have secured financing and have begun to develop plants dependent on captive coal blocks. Opposition from the business community is fervent as many coal-consuming plants are ready or partly ready, financing has been secured and industrial equipment has been ordered.
 
If coal blocks are de-allocated, billions of dollars loaned to finance these projects would come under threat. Thus, the future strategy must be devised after keeping the business growth implications in mind. 
 
The culprits of the scam must not be left, but the future decisions must be taken by keeping economics rather than politics in mind. With low growth, decreasing FDI and business sentiments at its nadir, energy sector reforms should be initiated on an urgent basis. 
 
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