Is De-allocation of Coal Blocks the Right Solution?

The Supreme Court in its ruling on 25 Aug, 2014 declared 218 Coal mine allocated between 1993 and 2009 are illegal. The government is in the process of filing an affidavit providing details of 46 mines, requesting the Supreme Court not to cancel their licenses. Later, the government requested the Supreme Court to exempt 40 operational mines and 6 soon to be commenced blocks from cancellation and instead impose penalties on the operators.

These mines if functional would contribute

1. Benefit accrued to the government INR 16.78 Lakh Crore
2. Benefit accrued to the citizens INR 12.27 Lakh Crore
3. Turnover generated in end use industry INR 132.6 Lakh Crore
4. Expected turnover per year 441979 Crore
5. Total Contribution to GDP 3.7%

On the other hand, there’re high chances that Supreme Court may de-allocate coal blocks but then doing so will certainly not in the favor of industry. The total impact of the decision will affect a transaction of about INR 5.7 lakh crore per year for one financial year. However, as the coal mines have life of about 30 years, the de-allocation might cost INR 215.7 lakh crore over the years.

As Indian industrial set ups are coal based, it’s not hard to imagine that the shock will be felt across whole array of products, which are dependent on Coal as fuel. Apart from the estimated loss of about INR 4.4 lakh crore, which will be due to reduced turnover of mining, nation will have to bear huge losses on all those industries, which are highly dependent on coal. Loss will not just be on employment, taxes and revenue generated from various duties.

With the closure, one would see experience coal imports in very large quantity which would add to the deficit, thereby weakening Indian currency further and adding on to the inflation. So we hope the decision will be in interest of the nation.

Assumptions

1. Avg. selling price assumed at INR 36,000/MT for steel, INR 4 Per unit for Power, INR 4,000/MT for Cement
2. Royalty and Cess on coal at current rates
3. Direct Taxes calculated on the basis of Corporate Income Tax paid by Companies and Income Tax payments of Employees.
4. Indirect Taxes calculated based on applicable Excise duty rates.
5. Salaries assumed at CIL levels for Coal Mines, and as per industry benchmark for Steel, Power, Sponge Iron and Cement
6. The above calculations are without considering any escalation in salaries, royalties and output prices. When the same is considered, the impact will be much higher.