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A step backwards

Cutting coal e-auctions to help power producers is misguided

Business Standard Editorial Comment  |  New Delhi 

After meeting a series of major power producers, Power Minister Piyush Goyal - who also holds the coal portfolio - announced on Friday a series of instructions for the monopoly coal miner, Coal India Limited. Mr Goyal said that the priority was to increase the supply of coal and to get it to coal-fired power plants - an aim that can hardly be disagreed with. To this end, he said that, first, the environment ministry had been requested to allow "additional mining from coal mines that are already operational". Second, he ordered a reduction in the quantity of coal open to electronically enabled auctions - or e-auctions, as they are generally known. This reduction in quantity, he argued, "would enable additional supplies to the power sector". The environment ministry must take a call on Mr Goyal's first request; it will no doubt note that damage to the environment can increase disproportionately as a mine is exploited more intensively.

The move to force Coal India to cut e-auctions is deplorable. The only imaginable reason for this is that e-auctions allow it to get a market-determined price - which is, no doubt, higher than the non-market alternatives. Of course, the government is the majority shareholder in Coal India. It is, therefore, capable of ordering the mammoth public sector undertaking (PSU) to do whatever it wishes. But it is unfortunate that the first step of a supposedly reform-friendly government is to force a PSU to become less profitable in order to ensure private producers get prices they prefer. At the very least, this is not good stewardship of the nation's resources or of its public sector. It is also a violation of the principles of corporate good governance. Does this decision not undermine the minority shareholders' interests? Some of those minority, activist shareholders have already been justifiably upset by government decisions regarding Coal India - The Children's Investment Fund Management, in particular.

In general, the idea that coal prices need to be cut to help power producers, especially from the private sector, is a misguided and retrograde notion. It suffers from the flaws of an old-style licence raj attitude, that guided or controlled prices are best. Indeed, it is worse than freeing producer-end prices without freeing consumer-end prices. Here, in the name of keeping power producers satisfied, the government has expanded the scope of distortionary and unremunerative pricing policies. It is clear from India's economic history that such policies are not just inefficient, but they are also counterproductive. India's power producers must manage to produce what they are contractually obliged to without any special dispensation from the government. If they fail to do so, then end-users should pay the correct price for the power they use, which reflects the correct opportunity cost of the coal that goes into that power. This is basic economics - something the new government seems to already have forgotten. Any system that ignores the true costs of inputs would be dangerous, and worse, self-sustaining. It would create constituencies and interest groups that object to any future pricing reform. The power and coal ministries must walk back on what appears to be a problematic policy direction.

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First Published: Sun, June 22 2014. 22:38 IST