India: coal block allocations since 1993 declared illegal
Published 15 September 2014
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0.1 This publication was archived on 5 August 2016.
This article is no longer current. Please refer to Overseas Business Risk – India
0.2 Summary
The Supreme Court in August 2014this year declared all coal block allocations between 1993 and 2010 illegal. Hearings on the coal block allocations case have come to a close, but the Supreme Court has not taken a decision on whether all the allocations should be cancelled, casting a shadow of uncertainty over investments in the sector. The already struggling power and metals sectors now face potential coal shortages; the first of these is a real concern blow given the importance of a reliable power supply for the revival of the Indian economy. Higher reliance on coal imports may also put pressure on the current account deficit, undoing recent progress to improve India’s trade balance.
0.3 Detail
The Supreme Court has declared all 194 allocations of coal mining rights made between 1993 and 2011 illegal and arbitrary. Although it has not yet cancelled the allocations, it has created a sense of uncertainty in the minds of both policy planners and investors.
The government has agreed to abide by the final decision taken by the Supreme Court. However, it has appealed against the cancellation of 46 blocks which are in operation or about to commence operations; to reduce supply disruption it has asked that these instead face a financial penalty. Commenting on the judgment Finance Minister Jaitley said it will move the system towards a fairer allocation of resources. The industry bodies on the other hand have pleaded for a committee to go through each individual allocation and exempt those which it deems were awarded fairly. The government is against setting up a committee to hear individual complaints as this would delay the process.
The decision has raised concerns in the metals, mining and power sectors, and also in banks that have loaned money for mining and power projects. Two-thirds of India’s power plants are coal-powered, and the disputed coal blocks account for a tenth of India’s annual coal output. Cancellation of these blocks will create real problems for India’s power sector. It is also likely to lead to greater imports of coal, with estimates suggesting these additional imports could cost the country up to $3bn. This will also stoke inflation by raising prices of steel, cement and electricity.
It will take time for clarity to emerge on the fate of these coal blocks. However, given the significant investments made in these coal blocks and the linkages provided to end-use plants, de-allocation of coal blocks which are functioning and near commencement seems unlikely but uncertainty remains.
UK firms who have expertise in mining and material handling for thermal power plants are in process of bidding for and commencing operations at some of these coal blocks. If these coal block licenses are cancelled and a new bidding process is initiated, these companies are likely to see a delay in the award of contracts.
0.4 Comment
This is a blow to the government. The move by the Supreme Court will damage business confidence and harm economic growth. But it also shows the need for reform in the process of awarding mining rights, and improving transparency in government processes. These are part of the new government’s agenda, and will be in greater focus in the wake of this decision.
0.5 Disclaimer
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