Coal Block Cancellation Could Impact GDP Growth Adversely - India Ratings

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New Delhi, September 25, 2014: India Ratings & Research (Ind-Ra) believes that the coal block cancellation by the Supreme Court (SC) could adversely impact India’s nascent economic recovery.
On 24 September, the Supreme Court (SC) cancelled 214 coal blocks allocated since 1993. However, it has allowed four coal blocks to continue operations, one belonging to The National Thermal Power Corporation and Steel Authority of India, each and the two allotted to Ultra-Mega Power Projects (UMPP). The SC has allowed these cancelled blocks to continue extracting coal till 31 March 2015. The central government and Coal India Limited (CIL) are expected to come out with a policy for the new situation.
At the same time, the SC has imposed a levy of INR295/metric ton of coal extracted till now by all cancelled block holders and this has to be paid by 31 December 2014. The coal extracted between 1 January 2015 and 31 March 2015 will also attract a levy of INR295/metric ton.
The SC ruling on coal blocks is similar to its earlier ruling of cancellation of 2G licences in February 2012. While the SC ruling may help in cleaning the rot and could pave the way forward for a transparent system of selling natural resources; it will have an immediate effect on a number of stakeholders and also the overall economy. The impact of this ruling will be felt across various channels and lead to a rise in non-performing assets of the banking sector, an increase in the cost of coal and in turn a rise in power tariffs, pressure on current account/currency and finally on overall inflation in the economy. Besides impacting economic recovery this could also pose challenges for the macroeconomic stability of the economy. While the ruling will have a direct impact on corporates with allocated coal blocks, the tremors will be felt on state governments as well.
Here’s a detailed analysis of the impact:
Fiscal Impact: While there may be some windfall gain for the central government this fiscal from the additional levy imposed. However, six states’ finances would be affected by this ruling. West Bengal is likely to be the worst affected, as six operating coal blocks allocated to various state government companies have been cancelled. One operating coal block allotted to each state government company from Arunachal Pradesh, Karnataka, Madhya Pradesh, Punjab and Rajasthan has been cancelled. These state government companies now have to pay an additional levy on coal extracted by them. These companies’ accounts are not consolidated with the state’s balance sheet; however, in case of stress on the individual balance sheet of these companies, the state governments have to support them for their operations.
Impact on the Banking Sector: According to the counsel of Coal Producers Associations, investment of INR2.87trn has already been made in 157 coal blocks (as at end-December 2012). At the same time the investments in plants (which use coal from these mines) is estimated at around INR4trn. The banking and financial institution’s exposure to these coal blocks is around INR2.5trn. The banking sector is already under stress, apart from commercial banks, rural electrification corporation and power finance corporation will also be impacted by the cancellation of coal blocks.
Production Disruption: The Attorney General in his submission to the SC has submitted that the central government and the CIL would need some time to adjust to the changed situation. It is highly unlikely that the allocation process (through competitive bidding or any other process) will be complete by FYE15. In this situation, the CIL would take things forward. The CIL itself is struggling to achieve its own coal production targets, in FY14; the CIL achieved 95.96% of its production target and achieved 2.3% growth over FY13 production. To achieve the captive coal mines’ FY14 coal production target, CIL will have to improve its production performance by 8.41%, which does not look too feasible.
Increasing Import Dependence: The demand supply mismatch has increased India’s dependence on import for coal supplies. In FY14, India imported 171 million tonnes (mt) of coal at USD16.41bn (FY13: 145mt at USD17.01bn). A halt in domestic production of coal would increase our import dependence further. In a scenario where CIL is not able to extract coal from captive coal mines of cancelled coal blocks, India’s dependence on imported coal would increase significantly in FY16. Factoring in the increase in coal production in FY14 as compared to FY13 and FY14 and the average imported coal prices, the FY16 coal import bill is likely to widen by USD6.22bn. This would exert pressure on currency and affect macroeconomic stability.
Impact on Inflation: The Indian power sector is under stress, both from the viewpoint of raw material (coal and gas linkage) availability, and infrequent and insufficient power tariff hikes. The renewed coal scenario most likely would lead to an increase in coal prices; this along with the revised gas pricing formula (under discussion) would increase fuel cost and thus electricity prices. Financial health of state power distribution companies (discoms) is already very fragile. In the scenario of insufficient fuel cost pass through to end users, the financial health of the discoms would deteriorate further. If insufficient pass through is compensated through budgetary subsidies, it will affect every state. In case the fuel price hike is passed through completely it will stoke inflation. With RBI pushing to bring down CPI inflation to 6% by January 2016 the time line for monetary easing under the emerging scenario becomes even more remote in the foreseeable future.
(Source: Manager - Corporate Communications and Investor Relations, India Ratings & Research A Fitch Group Company.)
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Date: 
Thursday, September 25, 2014