India: At the coalface

A large, colourfully painted sign hangs above the entrance to the depths of Jhanjra, the largest underground mine in West Bengal’s Raniganj coal belt. The left side shows Indian mining as it once was, with roughly drawn cartoon figures wielding basic shovels and carrying woven baskets of coal, balanced on their heads. The right paints a more modern scene, featuring large yellow mining machines, operated by skilled technicians.

Take the cage-like lift down hundreds of metres into the darkness below, and walk for nearly an hour through narrow tunnels in stifling heat, and that second image suddenly becomes real as a cutting vehicle with fierce rotating metal teeth, known as a continuous miner and built by US manufacturer Caterpillar, rips tonnes of black rock from the coal face.

Mining technologies such as these can help India stave off a looming energy crisis, argues Sutirtha Bhattacharya, chairman of state-backed miner Coal India, which runs Jhanjra, and produces roughly 80 per cent of the country’s coal. Energy demand in India is set to soar over the next two decades. But domestic supplies of coal, its dominant energy source, are barely increasing and India faces a future dogged by power cuts and reliant on expensive fuel imports.

“The fundamental objective of our country is that coal availability goes up, and there is 24/7 power for everyone,” says Mr Bhattacharya, describing his task in patriotic terms. It is a view his workers share. Deep underground, one miner says he isn’t worried about missing out on India’s cricket team, who at that moment are midway through a crucial contest in the sport’s World Cup. “If we don’t come down here, none of our countrymen will have power to watch the cricket [the national sporting obsession],” he says, wiping sweat off his forehead. “For us, coal mining is a mission for the nation.”

A ‘tall order’

Narendra Modi, prime minister, would surely agree. Coal provides more than half of his country’s energy and is set to remain its most important fuel source for decades, despite efforts to boost alternative power sources such as nuclear and renewables.

India will overtake the US to become the world’s second-largest coal consumer by 2025, going on to replace China as the dominant source of new global coal demand shortly afterwards. But without more coal, Mr Modi’s hopes of propelling his country towards economic superpower status are in jeopardy.

Yet India’s mining record is miserable, leaving power stations idling for lack of fuel and citizens plagued by blackouts. Its coal industry is marred by corruption too: the Supreme Court in September cancelled hundreds of licences given to private companies over the past two decades, in a scandal widely known as “coal gate”.

Dozens of these have been re-auctioned over recent months, and this week marked the deadline for many to be handed over to new owners, heralding something of a fresh start for the nation’s battered resources sector.

Yet these auctions are only the first of many larger challenges facing Mr Modi as he tries to ramp up coal production and reshape India’s energy sector, beginning with an ambitious target to double Coal India’s production to 1bn tonnes by 2020. If that target is missed, many of the prime minister’s cherished political goals, from providing power to hundreds of millions of his countrymen, to transforming the country into a manufacturing powerhouse, will be trashed with it. If he succeeds, however, India could face further deterioration it its air quality.

Mr Modi’s progress will have significant implications for global energy markets. Global resource companies such as Rio Tinto and BHP Billiton hope India will open up its state-dominated mining sector and pick up some of the slack as China attempts to wean itself off coal amid a wider fight against pollution. But it is even more important for India, where a gradual economic recovery under Mr Modi is set to see the country overtake China next year to become the world’s fastest-growing major economy — but only if it can find sufficient energy to sustain its growth.

“It is a considerably tall order, there is no doubt about it,” says Tom Albanese, chief executive at India’s Vedanta Resources, and former head of Rio Tinto. “Getting this right is one of his [Modi’s] and India’s biggest challenges . . . The stakes are very high, because every economy around the world has seen that the cost of energy is critical for growth.”

India does not lack for coal: its soil hides 67bn tonnes of the stuff, the world’s fifth-largest reserves, and more than enough to provide plentiful, cheap fuel for decades to come. Rather, its problem is digging it up fast enough.

Here Coal India has an especially bad reputation. Production has barely budged in five years. The company cites problems finding new land for mines, winning environmental clearances, and poor rail capacity to deliver coal to customers. But many blame the company, which is 80 per cent government-owned and run by cautious bureaucrats, for failing to improve productivity.

Growing dependence

Getting this right is one of Modi’s biggest challenges. [Lowering] the cost of energy is critical for growth

Such problems are hardly new. Coal India’s lacklustre record prompted the government to hand mining licences to many well-known industrial tycoons around two decades ago. As today, purely commercial mining was banned, but the thinking went that these businesses could use these mines to supply their own power stations and steel mills — lessening reliance on Coal India. However good the theory it triggered an allocation process that led to last year’s Supreme Court cancellations.

Despite this, Coal India remains the country’s dominant fuel provider, and its inefficiencies present an increasingly grave problem. Energy demand is set to double by 2040, according to the International Energy Agency. Most of this will be met by coal. Unless domestic production increases drastically, imports will rise threefold over the same period, helping to make India the world’s most energy-import dependent large economy.

“Whichever way you cut it, coal is going to be front and centre of India’s future energy mix, so supplies have to go up,” says Arunabha Ghosh, head of the Council on Energy, Environment and Water think-tank in New Delhi.

Higher coal use need not lead to horrendous pollution if India also invests heavily in renewable energy, Mr Ghosh suggests, while recent alarm over air-quality problems in cities like New Delhi can be tackled by curbing other factors, such as the burning of agricultural waste and reducing construction dust.

Even so, the idiosyncrasies of India’s coal system make it difficult to increase production. Most reserves lie in the east of the country, in areas often covered by dense forests, or affected by a long-running Marxist insurgency. Many of the power stations and factories that need fuel are in the industrialised west, however, meaning the average tonne of coal travels roughly 650km before it can be turned into electricity.

Mr Modi cannot do much about these geographical problems. Instead, his hopes for boosting production rest in reforming Coal India, which has been in public hands since Prime Minister Indira Gandhi nationalised mining in the 1970s. Her creation is now the world’s largest miner by output, with more than 350,000 staff and a market capitalisation of $38bn.

Coal India is not a single company at all. Rather, it is an unwieldy conglomerate, comprising eight mostly autonomous regional divisions, whose output per worker is around a tenth of comparable Chinese firms. Most of its nearly 500 mines are underground and tend to be lossmaking. Its strip mines are more profitable, providing more than 90 per cent of output. But these are also more environmentally destructive, guzzling up land. Relocating villagers to clear space to expand them “is our first-, second- and third-biggest challenge”, says A K Sengupta, deputy head of the Sonepur Bazari open cast operation in West Bengal.

Coal India’s chairman says production can rise quickly despite this, from 490m tonnes this year to 908m tonnes by 2020, not far shy of Mr Modi’s target. He is also at pains to dismiss images of India’s medieval mining conditions. “This is a myth, we are a modern operation,” he says, pointing to investment of nearly $2bn next year in equipment and infrastructure. The Jhanjra underground mine is one example: production will double over the next two years with the introduction of a “longwall” mining machine, due to arrive on a ship from China.

Even so, Mr Bhattacharya admits many things are outside his control. Government permission to expand mines needs to happen faster. India’s state-owned railways must raise capacity, notably by finishing three new rail lines to transport fuel out of coal producing areas. And that is just the start: IEA figures suggest $41bn worth of energy-related transport investment is needed by 2035, alongside $53bn in mining more generally.

Modi’s radical options

Many are sceptical. “It [Coal India] is a pretty hopeless company,” says Sanjeev Prasad, head of research at Kotak Institutional Equities in Mumbai. “There is very little chance it can do what needs to be done.”

Instead, he predicts the state-backed miner will increase production marginally, leaving India facing a supply gap of 252m tonnes by 2020, or a fifth of its total coal needs. The result will be a hefty increase in expensive imports, hitting the finances of major industrial companies, with damaging knock-on effects for a banking system already struggling under the weight of bad debts.

Not everything comes down to Coal India, of course. Mr Modi now plans to auction more “captive” coal licences, allowing further private companies to supply their own industrial facilities, helping to increase production overall.

India this month passed legislation that could allow purely commercial mining. “The door is slowly opening,” says Mr Albanese, arguing that only foreign for-profit miners can bring the new technologies and capital the Indian resource sector needs.

Mr Modi’s predicament may push him to consider more radical options, especially for Coal India. The miner could be broken up, letting its various divisions compete against one another, or gradually privatised by selling down the government’s majority stake.

So far, his government — in power for less than one year — has shown little enthusiasm for such measures, especially given the battle they would entail with powerful, strike-prone trade unions. But many think they cannot be avoided forever.

“It should be turned over to the private sector, no matter how difficult that proves,” Mr Prasad says. “India’s energy system is in a mess. The economy isn’t going to grow at 9 or 10 per cent again until this is fixed . . . so big steps need to be considered.”

The lessons of the ‘coal scam’

India’s recent coal auctions raised hefty sums in a process generally viewed as both fair and transparent, a sharp contrast to the allegedly corrupt process that forced them to be held in the first place.

Coal India is a pretty hopeless company. There is very little chance it can do what needs to be done

In 2012, India’s government auditor issued a damning report claiming that a policy of handing out free coal mines to private companies had led to $33bn in potential lost revenues. Last year, the supreme court seemed to agree and cancelled more than 200 licenses, whose allocation it described as “arbitrary and illegal”, throwing the mining sector into chaos.

These problems date back to the early 1990s, when rules were changed to allow private companies to run mines, as long as they used the coal only to fuel their own industrial facilities. At first, few businesses applied. But as global coal prices jumped in the early 2000s, competition for domestic coal licenses ramped up — and with it worries about corruption.

“There was jockeying, there was lobbying, and obviously people were willing to pay a price to get these coal blocks under the table,” recalls Vinod Rai, India’s former auditor general, whose report first brought the so-called “coal scam” to light.

“Technically these mines were being given out free, but demand was huge, and the process for handing them out was opaque,” he adds.

Last year’s cancellations hit many of India’s most powerful industrial tycoons. The resulting scandal has touched other prominent public figures too, even Manmohan Singh, former prime minister, who this month was instructed to appear before a special court investigating one particular coal mine allocation in 2005. Mr Rai dismisses the notion that Mr Singh was involved in wrongdoing, but says the auctions have justified his earlier decision to highlight faults in India’s coal system.

The scandal has had positive side effects too: India is set to auction minerals such as iron ore and bauxite, raising as much as $300bn over 30 years, according to Barclays. “We have learnt a lesson as a country,” Mr Rai says.