Coalgate costs

Updated: Jan 10 2014, 02:34am hrs
A vital condition for economic growth is energy usage. The energy imperative is critical in industrialisation, because of the change from usage of animate to inanimate energy. This inanimate energy has been based on coal-driven steam power and coal-based thermal energy generating electricity. Though wind and water sources have been around for ages, their energy yield is low. A lack of adequate energy resources condemned life in the past to semi-immobility and low productivity. Steam power changed that.

The use of electric power has been a major source of change in the last two centuries. Electric power removed constraints on enjoying efficiencies in manufacturing processes and made possible the redesign of entire manufacturing systems. Because of electricity usage, made possible by Thomas Edisons creation of a coal-based electricity generating and distributing system, per capita energy consumption doubled in the last quarter of the 19th century, and led to enormous wealth increases in the US. This is when the US became the worlds economic powerhouse.

The late economist, Professor Vernon Ruttan, had documented that per capita energy consumption and gross national product (GNP) growth was highly correlated on a one-to-one basis. More per capita energy consumption led to GNP growth. More power produced led to greater growth. With greater wealth, there was enhanced power consumption. This set in motion a dynamic process leading to the emergence of the worlds largest industrial sector and the evolution of the US as the worlds richest nation.

Where does India figure

The ratio of per capita energy consumption to GNP is an important development indicator. On that metric, India fails miserably. In fact, data for the 1990s and 2000s highlights that Indias per capita energy consumption was 12.7 British thermal units (Btu) compared with 340.8 Btu for the US and 34.5 Btu for China. China consumes three times the energy that India does. South Koreas consumption is 154.6 Btu, 12 times Indias rate. Brazil consumes 45.4 Btu, more than three times Indias rate.

When development is analysed, South Korea and China lead the pack, and rising energy consumption has played a role. China has historically consumed more energy than India. Indias consumption has grown, but Chinas consumption growth has been double Indias rate. In fact, a great leap forward has been seen in Chinese energy consumption. The dragon has acquired more and more fire. Comparatively, Indias energy consumption growth has been at the pace of an elephant.

Why Coalgate has shattered Indian dream

Energy consumption is related to progress, significantly and positively. So, what is the economic outcome of Indias low energy consumption The National Manufacturing Competitiveness Council states that firms lose 8% in sales value because of lack of power. Also, annual production losses due to power shortages amount to over 1% of GDP. This waste is criminal!

Indias electricity is mainly generated by thermal energy. Coal-fired power stations provide 55% of generating capacity. Inefficiently-produced hydroelectric power accounts for 25% of generating capacity. In the first decade of the 2000s, power production has increased between 3% and 8%. The average, for all years and categories, is 5%. This is utterly trivial, given Indias problems and ambitions.

India relies on coal- and lignite-based power. India has the worlds largest coal reserves. It is unusual to note the low production growth rates. The overall growth of coal and lignite production has been 6% in the decade. India is highly deficient in petroleum and natural gas reserves. Thus, coal production matters greatly. What is, therefore, stunningly shocking is the current malaise. The Coalgate scam has major consequences for Indias economic future and her masses well-being.

The essence of the Coalgate scam is that the government, acting via the coal ministry, a portfolio directly held by the head of the government, had allocated coal blocks not by a competitive bidding process but by a non-transparent process of beauty contest decisions, for minuscule royalty payments.

Since very substantial coal mining rights were given away, virtually free, for long periods of time, the companies benefited and saw substantial windfall gains. For the private companies benefited, the amounts of windfall gains have been estimated to be around R5 lakh crore or around $80 billion.

It is not the windfall gains size, or the allocation process that the coal minister had agreed to, which matters. What matters is that much of the 14 billion metric tonnes of the coal allocations to private firms has been hoarded, rather than being developed for fuel supply for thermal power generation. This hoarding of coal reserves, rather than developing the vast tracts for production, has resulted in severe fuel shortages such that 25 to 30 thermal power projects are stalled, holding hostage capital investments of R1.5 lakh crore or $25 billion.

Estimates place the megawatts of held up thermal projects at 32,000. Since the 12th Plan anticipated additions of about 78,000 megawatts of capacity, almost 40% of the planned capacity is held up. India needs not just 78,000 megawatts of capacity but, to have a remote chance of catching-up in per capita energy consumption to developed country standards, Indias power generating capacity additions should be over 5,00,000 megawatts.

Thus, the post-Coalgate capacity addition of 46,000 megawatts will simply scratch the surface and lead to trivial increases in per capita energy consumption. Indias consumption may become 14 Btu, but by then Chinas consumption will have risen to 40-50 Btu. Coalgate has meant that India has lost the development race forever.

The way ahead

First priorities for any new political and administrative dispensation require that the coal blocks be de-allocated and re-allocated quickly, and that held-up projects go online as rapidly as feasible.

Second, other than the availability of fuel, and the additions of generating capacity, constraints in transmission have meant severe blackouts. The collapse of the northern, eastern and north-eastern grids affected over half of Indias population. Hence, equal attention has to be paid to transmission capacity additions.

Third, power projects have been severely delayed by environmental clearances. An estimate puts the capital investments tied up at over R1.8 lakh crore or $30 billion.

Fourth, land issues are estimated to hold up projects with investment of over R1.2 lakh crore, or $20 billion. Fast track environmental and land clearances of these projects is, clearly, a high priority.

Fifth, fast track investigation, prosecution and enforcement of sanctions against those culpable of the Coalgate scam is vital to send signals to investors worldwide that (a) India is a credible country to do business in, (b) that policymakers and administrators brook no nonsense, and (c) laws are applied fairly.

The losses from the Coalgate to the exchequer stand at an estimated R5 lakh crore. Cumulatively, R4.5 lakh crore of projects are held up due to fuel supply, transmission, environmental and land issues. The total loss amounts to R9.5 lakh crore or $155 billion being lost, wasted or misused, a sum no impoverished country like India can afford to lose.

What is the political message Energy issues are crucial. As recent events indicate, issue-based politics is here. The economy and quality of life matter. Social issues, personality-based and emotion-based politics belong in the past. Crucially, voters in India are bothered about livelihood and day-to-day issues, such as naukri, pani and bijli.

Energy is critical for Indias development. The sector needing urgent radical changes on a war-like footing is energy. The gigantic bijli problem has stalled development. The quality of life of Indias teeming population remains compromised. The bijli situation can be viewed as a social, political and economic phenomenon of massive proportions that every party has to attend to. So far, parties are silent and such silence can be deafening.

Sumit K Majumdar

The author is professor of Technology Strategy, University of Texas at Dallas. He has written the book Indias Late, Late Industrial Revolution: Democratizing Entrepreneurship