Coal India’s Breakup: Modi’s Trump Card?

July 23, 2014 Posted by India Briefing Reading Time: 3 minutes

DELHI – According to government sources, Narendra Modi’s administration is currently on track to sell a 10 percent stake of Coal India Ltd. (CIL) in a landmark public offering later this year.

While CIL’s public offering was first announced by the BJP as part of a US$10.5 billion package of asset sales to check the fiscal deficit, ending CIL’s monopoly on coal production has recently made its way to the forefront of Modi’s economic and policy agenda as persistent power shortages continue to impede India’s economic growth and development.

Coal is the cheapest form of energy available in India and generates more than half of the country’s power supply. However, despite controlling the world’s fifth-largest coal reserves, India currently ranks as the third largest importer of coal as power outages continue to plague both rural and developed areas of the country.

Suffering its largest recorded electrical blackout in July 2012, parts of the National Capital Region including Delhi, Gurgaon, Ghaziabad and Noida were recently estimated to experience between two and four hours of power outages daily.

According to the Modi administration, CIL’s failure to meet its coal output targets for several consecutive years is partly to blame for these shortages.

Responsible for more than 80 percent of India’s total coal output, CIL holds a state-sanctioned monopoly on domestic coal mining. Although private firms such as Tata Group, Adani, Anil Ambani Group and others have in the past received permission to mine coal, legal restrictions require them to use the coal to power their own facilities and prohibit its sale on the market.

Ending CIL’s monopoly and allowing private companies to commercially mine coal is increasingly being touted by the Modi administration as the solution to the current demand-supply gap in addition to India’s persistent energy shortages.

“The new government is keen to allow private firms into commercial coal mining to increase [the] supply of the fuel in the country. But we are not opening too many fronts as this moment. We will start discussions with stakeholders on commercial mining only after Coal India’s public offer,” a coal ministry official told the Economic Times yesterday.

“The Mines and Minerals (Development and Regulation) Act was amended only recently to auction coal blocks. Now, we have a challenge in opening the coal sector as the amended act doesn’t provide for bidding blocks to commercial purposes. We have approached the law ministry for comments,” the official added.

However, legal barriers and opposition from trade unions will be among several obstacles the Modi government must address before it can proceed with CIL’s public offering and the restructuring of India’s coal sector.

In recent years, labor unions have successfully blocked government’s attempt to sell a 10 percent stake of CIL. Initially proposing a bill to amend the Coal Mines (Nationalization) act and allow commercial coal mining in 2000, government panels to garner trade union support for the initiative were formed in both 2001 and 2009 to no avail.

In the meantime, only around 40 government allocated mines have begun producing coal of the more than 200 approved as CIL struggles to keep pace with demand. Despite this, CIL continues to blame environmental and forest clearances for its slow production growth.

According to BJP sources, the government plans to explore international private-sector partnerships in a significant way as it endeavors to boost efficiency and convert “challenging mines into modern mines.”

According to one official, “India is a coal superpower, both in terms of production and consumption – foreign interest is natural.”

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