No early end to India's love for coal despite climatic commitments

While home minister Amit Shah sees it as critical to India's goal of becoming a $5-trn economy, coal plays a crucial role in the politics of the Centre and eastern states too

Was home minister Amit Shah on hyperbole when he said coal will be the largest contributor to India’s ambition of being a $5 trillion economy? The setting was appropriate. The government was handing out the allotment letters to successful bidders of the country's first commercial auction of coal mining blocks. Tellingly, the event was held just months ahead of the elections to West Bengal assembly. The state accounts for 11 per cent of India’s coal reserves. Kolkata is the headquarters of Coal India Limited, with hitherto monopoly on extraction of the fuel in the country. 

On the global stage too, the assertion is significant as the minister’s statement makes emphatic the central government’s position on coal. In the recovery from the pandemic, the emphasis at the global scale is on green recovery, which is interpreted to mean shuttering of coal-based power plants. 

The press release issued by home ministry later in the evening, however, slightly qualified the minister’s statement to say the coal sector would play a “very important role” instead of the “largest role” in achieving the target of a five-trillion-dollar economy by 2022. Either way, it is a huge assertion. It essentially commits the centre to keep financing the sector from its own resources for the envisaged expansion, a very large call, since global financing for coal is rapidly closing down.  

The BJP was definitely making it clear to the voters of the state they could expect the present level of support for the sector to continue if they swung in its favour. In June last year, state Chief Minister Mamata Banerjee had sent a letter to Prime Minister Narendra Modi, protesting against the decision to allow 100 per cent FDI in coal mining. Her protest was also based on the same premise as Shah. 

Coal matters quite a lot in West Bengal politics, as it does also in neighbouring Jharkhand and Odisha. Both BJP and Banerjee’s Trinamool Congress are united in keeping the interests of the coal economy paramount. Kolkata is the economic hub for all the mineral rich eastern states of Jharkhand, Chhattisgarh and Odisha. West Bengal ranks the third largest in India in terms of mineral production. It is also the gateway for the import of coal from Australia and even Indonesia. Taken together, coal has the most substantial industrial footprint in the state.

But maintaining this momentum for coal business will put the Centre in a challenging position of securing finance to do so. These pressures will continue even with India’s aggressive plans for promoting carbon capture and sequestration technology. The Niti Aaayog estimates that only this path can help India keep burning coal yet retain its commitment to reduce carbon intensity by 35 per cent over the 2005 levels. 

How much does coal contribute to the GDP of India and will do so, going ahead? In his edited book, Future of Coal, Rahul Tongia, energy sector lead at Centre for Social and Economic Progress, notes “it can be safely concluded that the question of peaking year for coal consumption in the country does not arise anytime in the foreseeable future.” He estimates that even in 2030 India shall be consuming over 1,500 million tonnes, even on a conservative basis. 

The two options to make this possible are finance from domestic banks and the cash reserves of CIL. But the centre is dipping into CIL reserves prodigiously to shore up its deficit. In calendar year 2020, the sum extracted was Rs 7,946.7 crore. In 2018, it was Rs 9,678.7 crore, making it the highest dividend-paying public sector unit in the country. These are big numbers that progressively leave the company’s total cash reserves depleted. It was Rs 10,650.57 crore as of March 2020, having dipped to just Rs 6,487.3 crore two years ago. The climb back last year was fortuitous due mainly to higher coal prices. As production has remained curtailed in FY21 the reserves have again moved southward. 

Yet this is the largest source of financing to develop new coal blocks and generally keep the coal economy going in the eastern states. The companies that have got the mining lease shall take more than three years at the very least to be able to sell their first shovels of coal. 

The domestic banking sector has had a large exposure to the thermal power projects. Of their total exposure, close to Rs 2 trillion has soured. To keep the coal economy going at the pace, the home minister asked for the banks shall need to lend again to the sector. Despite the centre opening coal mining to 100 per cent FDI, no foreign miner has entered the first round of auctions. The second one due in this quarter shall also draw a blank on foreign participation. 

Their diffidence is because of lack of financial support. Globally, even the multilateral banks have sworn off investments in coal. The Shanghai based Asian Infrastructure and Investment Bank was the latest to join the list in September 2020. Bank President Jin Liqun said at the annual meeting of the Climate Bonds Initiative he shall not sign on any coal-fired power plants. “More than that, AIIB will not finance any projects that are functionally related to coal, for instance roads leading to the plant or transmission lines serving coal power”. Carbon capture based coal usage can however get financial support from West Asia based sovereign wealth funds. Even India’s National Investment and Infrastructure Fund has been under pressure to keep away from the coal sector from its foreign investors. 

Indian banks shall thus be under increasing pressure to finance the coal economy, and to give them a level of comfort it is necessary that CIL’s money is kept reserved for the sector.