Coalmine permits

On September 23, the Indian Supreme Court cancelled 214 of the 218 government licenses for coal mines allocated to private companies between 1993 and 2010 for use in power plants and factories. The court ordered the firms to relinquish the coal blocks, or areas of unmined reserves, by March 2015. India has one of the world's biggest proven reserves of coal.

The ruling comes a month after the judges declared that the government-run procedure for awarding the blocks to private firms had been illegal as they were assigned in an arbitrary manner in the absence of a competitive bidding system. It is estimated that the scandal has cost the country tens of billions of US dollars.

Rajiv Biswas, Asia-Pacific Chief Economist at the analytics firm IHS, says in a DW interview the court ruling increases concerns about how to ensure continuity of coal production in the country as the Indian power industry is already operating on very thin stocks of thermal coal.

DW: How important is the coal industry for India?

The Indian coal mining industry is very large by global standards, with domestic coal production reaching 562 million tons in 2013. The bulk of India's domestic coal production comes from state-owned coal company Coal India. However, due to considerable problems with the expansion of domestic thermal coal production despite large coal reserves, Indian coal imports have risen rapidly in the recent past, as coal remains the most important feedstock for Indian power generation.

Total coal imports reached 170 million tons in 2013-14, up around 18 percent compared to the previous financial year, with around 75 percent of imports being thermal coal and the remaining 25 percent coking coal for the steel industry.

What lies at the core of the recent coal scandal?

India, like many other developing countries, ranks low globally in terms of its anti-corruption standards, and the Indian mining industry has had its share of corruption scandals. However, in this case, the decision of the Indian Supreme Court was that the process for awarding coal leases to private companies by the responsible Indian Government's Screening Committee lacked transparency and objectivity and leases were granted in an arbitrary manner.

Corruption was not specifically identified as a factor in the Supreme Court ruling that the coal leases were allocated in an illegal manner.

How were the coal blocks allocated?

The Indian Supreme Court judgment stated that the decisions made by the committee responsible for allotting leases lacked transparency and consistency. The ruling also found that the committee had made arbitrary decisions in awarding the coal leases. The top court hence declared that this resulted in an unfair distribution of national wealth, which was against the common good and public interest.

What impact will this court's decision have on India's power sector and businesses?

A total of 214 of the 218 coal leases awarded between 1993 and 2010 have been canceled by the Supreme Court decision, of which 42 leases - which had been developed and are producing coal - will be given six months to wind down operations to minimize disruptions to coal production.

These 42 leases are estimated to be producing 46 million tons per annum of coal. Companies will have to pay fines on every ton of coal already mined and future coal mined until their leases end in six months time. The other 172 remaining leases were not yet developed.

A key concern will be to ensure the continuity of coal production at these 42 leases, as the Indian power industry is already operating on very thin stocks of thermal coal. Given India's chronic power shortages, further disruption to coal output could create more severe problems for the power industry.

The combination of very thin coal inventories at power plants and the Supreme Court preliminary ruling in August signaling that the coal leases could be canceled has resulted in Indian coal and steel companies ramping up coal imports, creating bottlenecks in Indian ports. There are also likely to be financial transmission effects to balance sheets of coal mining companies as well as potentially resulting in increased non-performing loans for banks that have provided credit to fund coal mining operations on the canceled leases.

Now that the top court has scrapped almost all permits, what does the government plan to do?

The Supreme Court decision gives an opportunity for India's new BJP-led government to implement a fair and transparent system to grant coal mining leases to the private sector. Based on international best practice, one likely approach is that the government will institute a new competitive tender process that will need to be scrupulously fair and transparent. It will also allow the Indian government to raise revenue, with the lost government revenue through the previous process of granting leases estimated by government auditors at around 33 billion USD.

What can those involved learn from this scandal?

One of the key concerns of Indian industry is that the decision by the Supreme Court to cancel almost all the leases under investigation creates investor uncertainty about investing in the Indian mining industry. However, there has been a great deal of public mistrust and lack of confidence in the mining lease allocation process for many years, which also undermines investor confidence.

Therefore, if the BJP government seizes this opportunity to create a fair and transparent tender process for the award of coal leases, it may actually help restore investor confidence in the government tender process for mining leases. A key priority for the government will be to implement a new tender process rapidly, to avoid any production disruptions in the coal industry.

Rajiv Biswas is Asia-Pacific Chief Economist at IHS, a global information and analytics firm. He is responsible for coordination of economic analyses and forecasts for the Asia-Pacific region.