Restructuring India's coal industry

India’s coal industry has seemingly avoided restructuring after paying a special dividend earlier this year that has helped the government to meet its divestment target.

Coal India had been slated to perform “national service” — a euphemism for the government’s use of state-owned enterprises to manage fiscal and monetary policy targets — at the end of last year through the sale of a 5% stake. The government, which owns 90% of Coal India, had also asked Deloitte to study the feasibility of splitting up the company, and the consulting firm submitted its report in January.

Both plans have since been shelved.

Manmohan Singh, the country’s prime minister, abandoned the stake sale after trade union members went on strike in protest, leaving the government Rs60 billion ($1 billion) short of its divestment target of Rs540 billion (which will keep the fiscal deficit down to 4.8% of gross domestic product).

But Coal India managed to fill the government’s funding gap anyway, thanks to a one-off dividend of Rs200 billion in January.

“Meeting the disinvestment target will at least allow the government to go for a less severe capital expenditure cut,” according to Taimur Baig, chief economist for India, Indonesia and the Philippines at Deutsche Bank.

The government is so grateful, in fact, that it no longer sees any need to split up the industry.

“We might not restructure CIL,” Sriprakash Jaiswal, India’s coal minister, told reporters in early February. “It has announced a dividend of 290%. Our requirement is fulfilled, so why do we need it?”

The answer is that ramping up production at Coal India has long been a goal. The company sells roughly 80% of its coal to regional power and distribution companies at discounts to the international price, and generates all of its profit from the other 20%.

Somewhat unsurprisingly, Indian consumers cannot get their hands on enough of this cheap energy, which has resulted in shortages and bottlenecks despite India being the world’s third-biggest coal producer.

The scale of India’s production ought to present an opportunity, according to Saurabh Handa, an energy analyst at Citibank. “Coal India can be a price maker given its ability to impact global trade balances by significantly scaling up production. However, government policy would have a pivotal role to play.”

Any improvement would be welcome. Less than 10% of Coal India’s production comes from underground mines, compared to more than 70% in China — even though both countries started to experiment with underground mining at the same time.

Developing the knowhow to get coal out of deep seams efficiently and safely is a long-term project that India has barely started.

In the short term, one big step could be the development of three new rail lines to help move coal from the mines to where it is needed, potentially adding 300 million tonnes of new production a year and eliminating some of the bottlenecks.

Having been on the sidelines for 15 years, that project looked even more likely to happen in February, when China offered to fund $300 billion of India’s infrastructure development costs during the next three years, with a particular focus on rail.

Getting the coal to market is one thing but India might be better off asking China for help in getting the coal out in the first place.