Crunch time

Court order adds urgency to India's coal crunch

India's Supreme Court has added urgency to the country's coal crunch. That may force the government to take steps to end the debilitating shortage which is holding back a much-needed manufacturing revival.

The two-decades-old practice of selectively allocating mines to metal, cement and power producers is illegal, the court ruled on August 25. The order comes two years after an audit report slammed the government for losing $33 billion by not holding competitive auctions. The "Coalgate" scandal played a large role in the landslide defeat suffered by Manmohan Singh's government in May.

The judges have not yet decided what punishment to hand out. If they insist the mines be returned to the state, producers risk losing the billions of dollars they have invested to extract and use coal. The court also has the option of imposing a penalty. But investors in Indian steel and aluminium companies are prepared for the worst, and for good reason: two years ago, the court cancelled the underpriced sale of telecom spectrum, quashing all 122 licences in one go.

The threat of an encore will cast a shadow over coal production, adding to the country's already serious shortage. At the root of that scarcity is the dominant but highly inefficient state-run producer Coal India. A decision to break up the behemoth and force "Baby Coals" to compete with global miners is long overdue.

A near-term option is for India to boost imports. Waning Chinese demand is keeping a lid on thermal coal prices, so buying more from South Africa and Indonesia is an option. Even then, losing control of the trade deficit could be risky for the Indian currency if US interest rates start to rise next year.

The government could allow domestic gas producers to raise their prices, so they increase production and help lessen the economy's reliance on coal. But any such decision will be controversial. Besides, power plants won't buy more expensive fuel if they can't pass on the cost increase to consumers.

A more transparent competitive bidding process for coal mines will curb cronyism and corruption. But the consequences of trying to undo a past wrong could also be damaging if production, investment and job creation stall. Hopefully, the court's punishment won't be shared by the innocent.