Control on coal prices to discourage investment into sector

The government's reluctance to increase coal prices might help it rein in inflation in the short-term, but it will discourage fresh investment into the sector, says a report by advisory firm Ernst & Young.

"Due to soaring inflation, the government is unlikely to increase coal prices, so coal miners may need to bear the brunt of rising mining costs.

"Fixing prices at artificially low levels may help it combat inflation in the short-term, but is likely to harm the long-term growth prospects of the industry, as it could deter new entrants and incumbents from investing in expansion," E&Y said in the report prepared along with industry body Assocham.

Driven by high prices of fruits, milk, meat, eggs, food food inflation crossed 17% for the week ended January 22. Headline inflation shot up to 8.43% in December from 7.48% a month ago.

Pricing of coal in India is controlled by the government since state-owned Coal India(CIL) contributes about 82% to the country's total production. The coal output in 2011-12 is projected at 696 million tonnes.

The current price of coal is not in tandem with the international level. In most cases, coal price in India is almost half of the international price.

The report said that the coal industry requires an independent regulator to be empowered to provide all necessary clearances to speed up investment and commercial production. The demand-supply gap is likely to be 142 million tonnes, which need to be plugged through imports.

India could emulate the Australian system, where the state government is responsible for building and upgrading infrastructure and where the user pays for infrastructure services by guaranteeing a regulated rate of return to the government on an undertake-or-pay-basis, it added.

"Furthermore, the introduction of open competitive bidding for unexplored blocks (especially underground mining blocks) has the potential to significantly boost domestic production," it said.

The mechanism for competitive bidding can be similar to New Exploration Licensing Policy in the oil and gas industry.

"Introducing private sector investment is also likely to result in the deployment of new exploration and production technologies, which may improve employee productivity and reduce operating costs," E&Y said.