People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 35

September 02, 2012




The Allocation of Coal Blocks


Prabhat Patnaik


THE allocation of captive coal blocks to private parties raises a number of issues, of which only one, namely the loss to the exchequer, because the allocation was not determined through auctions, has received attention. Let us first discuss this issue itself, before coming to others that have been ignored.


The fact that there has been such a loss is so obvious that the Congress Party’s denial of it can only be construed as an insult to the people’s intelligence. The idea behind allocating captive coal blocks to private parties is to assure them of coal supplies. They would otherwise have had to buy the coal they need from, say, Coal India Limited, at the latter’s sale price; instead they now produce their own coal from the captive blocks given to them. If the cost of production per unit of coal is less than this sale price at which they would have got the coal otherwise, then the profits that would have accrued to Coal India, if they had been buying from it, now accrues to them. There is, in short, a shift of resources from the public sector to a bunch of favoured private parties who have the privilege of holding captive coal blocks.


Since the estimate of the loss can only be made with reference to a hypothetical alternative scenario, with which the actual scenario must be compared (in the above example, buying coal from CIL in the absence of having captive blocks), there will always be some difference of opinion on the exact magnitude of loss. But this does not mean an absence of loss. Just as the fact that there could be a difference of opinion about the magnitude of the “drain of wealth” in colonial times from India to Britain, does not negate the reality of the “drain”, likewise quibbles over the estimated magnitude of loss cannot obscure the reality of the loss to the exchequer.




Manmohan Singh’s statement to the parliament, while careful not to claim “zero loss”, simply introduced a lot of red herrings: its aim was to obfuscate the issue and throw mud at the CAG’s report. But his arguments were utterly specious. He claimed, for instance, that the CAG had not taken into account the 26 per cent tax on profits that the captive coal block owners would be paying on mining profits, for local area development, under the Mining and Minerals Development and Regulation Bill, that is currently with the parliament. But this argument is flawed for many reasons: one, the MMDR bill is still a pie in the sky and the CAG cannot be faulted for not taking it into account; two, even if 26 per cent of mining profits are taxed away, the logic behind making captive coal blocks available to private parties makes sense only in the absence of any profit-making whatsoever on their part. If private firms make any profits at all on the captive blocks, then that is an unwarranted bonanza for them, and hence ipso facto a loss to the exchequer. Put differently, all profits on mining on captive blocks should be taxed away and not just 26 per cent of profits, and if they are not, then that is a loss to the exchequer. Three, in the case of captive coal blocks, identifying the profits on coal production per se becomes difficult, because the possibility of resorting to something akin to “transfer pricing” opens up: because of intra-firm sales, profits made on coal can be shown under some other operation. Obtaining 26 per cent of coal profits for the exchequer, therefore, becomes that much more difficult. And, four, the fact that Manmohan Singh at all mentioned the 26 per cent proposed taxation, implies that he was objecting to the magnitude of the estimated loss, not to the fact of loss itself. But he was not straight enough to admit the fact of loss.


Not only has there been a loss to the exchequer from the allocation of coal blocks, but this loss, it is equally obvious, could have been brought down if the allocation had been based on auctions. The price of any asset depends upon the expected stream of earnings from it that its possession is supposed to yield. In fact, in the absence of speculation, the price of an asset equals the sum of this stream of earnings discounted at an appropriate rate of interest. If there are any profits at all that the possession of captive coal blocks ensures (and we know that it does), then the auction price must be positive, which means that the revenue loss entailed in giving away the captive blocks free would have been recouped if the blocks had been auctioned.




But it is a mistake to think that the loss to the exchequer would have been fully recouped if the blocks had been auctioned. The auction price depends upon the expectations of those participating in the auction about the future stream of earnings. Up to 2004, coal prices were in the range of $25-30 per tonne while the CIL’s cost of production was around $30 per tonne. CIL was, in fact, making huge losses in this period. But after 2004, there was an upsurge in coal prices, because inter alia of the surge in China’s demand, and the price reached $180 per tonne in July 2008, before coming down to the current level of $100-105 per tonne. Since the extent of future increase in price would have been underestimated by those participating in an auction held in 2004 when the idea was mooted, even the auction price would not have fully captured the discounted value of the future stream of profits, and hence the actual loss to the exchequer arising from the fact that private parties possess their own captive blocks instead of having to buy coal from CIL.


The auction route, it follows, is of course far preferable to merely handing over captive coal blocks to a few select private parties; but the auction route does not recoup the entire loss to the exchequer on account of handing coal blocks to the private sector. This is because the auction price depends upon the expected stream of profits, while the loss to the exchequer depends upon the actual stream of profits. And in a situation where the latter is greater than the former, the actual loss to the exchequer exceeds what the auction price can recoup.




And this brings us to the crux of the issue. We have to distinguish here between flows and stocks. Coal supplies every year to the various private parties constitute a flow. The private parties that need assured coal supplies really need flows of coal. But by handing over coal blocks to them, the government is not just assuring them of flows; it is additionally giving them command over the entire reserves of coal in those blocks, which constitute stocks. There is no justification whatsoever for handing over stocks to private parties whose needs (and let us assume that these needs are legitimate) are only for flows.


Put differently, if the government was keen that certain key coal users should have assured supplies of coal, and that too, let us say, at assured prices (though any such provision of an input like coal at assured prices would make sense only when there is a corresponding control over the prices of the final goods produced by these key users), then it should have simply allowed these users to enter into supply contracts with Coal India where such assured supply quantities and prices were stipulated. This would have meant that while the key users were assured of coal supplies (and hence the objective that handing over captive coal blocks to them is supposed to serve, would have been served), the control over coal reserves would have remained with Coal India, a public sector company, and hence with the government.


The government’s retaining control over coal reserves would have enabled it to determine how and at what rate these should be used, i.e. the flow of output in any period. Handing over captive coal blocks to key users implies ipso facto that they would at best produce to meet their own requirement, but would not produce in excess of it, even when the country faces a coal shortage, as indeed it has been doing. It amounts, in short, to an arrangement where coal production is institutionally detached from catering to the scale of national needs. In fact, as Manmohan Singh admitted in his statement before parliament, several of the holders of captive coal blocks have not been mining much coal. We have therefore had an absurd situation where the country has been importing coal at exorbitant prices, even as domestic production has been languishing because reserves have been handed over to private parties for captive use.


Handing over reserves, whether they are actually  mined or not in any given period, is also a means of nurturing monopoly. Capturing mineral reserves, as even Lenin had pointed out a century ago, and thereby keeping potential rivals away from access to those reserves, has always been a powerful instrument for buttressing monopoly positions; and monopoly capitalists often spend massive amounts for getting this privilege, even when they do not actually use those reserves for long periods, for it yields them monopoly profits on the final goods they produce(which by the way is an additional reason for the coal block auction price to be positive, i.e. positive even when there are zero profits in coal production as such). In India we have the ironic situation where the government hands over this privilege, of enjoying exclusive monopoly control over coal reserves and thereby edging out rivals, completely gratis and free of charge to a favoured few.




The problem in short began not in 2004; it began in 1993 itself when the whole policy of handing over captive coal blocks to private parties was introduced. It was introduced in the name of assuring them of flows of coal supplies; but it handed over to them stocks, i.e. reserves of coal completely gratis. The idea that coal should be developed within the public sector was enshrined in the second industrial policy resolution of 1956, which in turn had claimed its lineage from the Directive Principles of State Policy of the Indian Constitution. It was an essential component of the Nehruvian policy and in keeping with the elementary principle that control over exhaustible resources, whose social use needs to be planned and carefully calibrated, must vest with the State. The retreat from that principle, the jettisoning of the vision enshrined in the second industrial policy resolution, and the fraud on the constitution that this entailed, whereby the nation’s precious resources were simply handed over  to private parties in violation of the Directive Principles, came with neo-liberalism itself in 1993.


Neo-liberalism however constitutes a fraud not only on the constitution but upon its own claims. It claims legitimacy in the name of ushering in competition, ensuring a “level playing field” among entrepreneurs. But it actually promotes, as we have seen, monopoly of a few to the exclusion of others. In focusing on the loss to the exchequer, we must not lose sight of this larger loss to the nation.