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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 government’s 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 country’s 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.
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