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Deconstructing the Opening up of Coal Mining in India

1. History

Coal mining was started by the East India Company in India in 1774 at Raniganj coalfield in West Bengal. Coal mines were mainly owned by British firms and government entities like railways until independence. In 1956, the establishment of National Coal Development Corporation (NCDC) allowed for scientific and systematic development of the mining industry. The private sector later dominated the coal sector until the early 1970s. The private sector’s inability to contribute to the growth of the coal and mining sector, exacerbated by the 1973 oil shock, led to the nationalisation of the mining industry. 

In 1973, the Coal Mines (Nationalisation) Act was passed, which eventually led to the establishment of Coal India Limited – the world’s largest coal-producing company. However, as a part of the 1991 economic reforms, the mining sector was thrown open to private players, but only for captive purposes in specific industries. Even now, Coal India Limited (CIL) and its subsidiaries continue to hold a strapping monopoly over the coal sector in India with a massive 80 percent of the total market share. After nearly 45 years of domination by CIL in the Indian mining sector, the Indian government passed the Mineral Laws (Amendment) Act, 2020. This act seeks to liberalise the coal and mining sector and encourage private sector participation.

This article seeks to examine why the Indian government chose to open up coal mining in India even after the staggering performance of Coal India limited – the sixth-highest profit-making Public Sector Undertaking (PSU) of India. The figure below shows the Net profit gained by Coal India Limited from FY 2016 to FY 2020.

Source – coalindia.in

The Indian government opened up the coal sector to private entities because of a variety of reasons. Out of all, one of the foremost reasons was the failure of CIL to meet the growing demands despite the availability of abundant resources at their disposal. As a result, there has been a sharp increase in imports year by year. The figure below explains the growing dependence on imports.

Source – coalindia.in

India has now become the second-largest importer of coal with imports worth 247.1 Million Tonnes (MT) in FY 2020. Ultimately, the common people are bearing the brunt of the increased exports in the name of higher power tariffs. Moreover, this has created downward pressure on the exchange rate.

2. The Social cost of Monopoly

The Monopoly of CIL is another reason for the privatisation of the coal and mining sector. What exactly is a Monopoly? Monopoly refers to a corporation’s exclusive control over a commodity in a particular market. In India, Coal India Limited exercises a monopoly in the coal-mining sector. CIL, which was a 100 percent government-owned PSU until 2010, was publicly listed for the first time in November 2010 to bring in fresh investments and improve corporate governance. Though CIL was essentially established to provide coal at reasonable prices, it soon started losing out its public character. The loss of public character can be attributed to the pressure exerted on CIL to keep the share price high by maximising its profits. Therefore, like every other monopoly, CIL has produced less quantity of goods and sold at high prices.

a) Deadweight Loss

Deadweight loss occurs when the market efficiency is lesser than what would have been in a perfectly competitive market. In a perfectly competitive environment, the price is usually equal to the marginal cost. Whereas, in a monopolistic market, a firm has the power to sell goods at a price higher than the equilibrium price. However, a monopoly can sell goods at higher prices as long as the Marginal Revenue (MR) curve is above the Marginal Cost (MC) curve. When the goods are sold at a price higher than marginal cost, it will lead to a situation where consumers will consume a lesser amount of goods than is economically efficient. This can lead to market inefficiency.

Market inefficiency takes place when a market fails to allocate its resources efficiently, i.e. lesser quantity of a good is produced, or higher prices dissuade the consumer from consuming a good. In a monopoly, due to little or no competition, firms tend to be less efficient. A similar pattern can be seen in the Indian coal sector owing to the monopoly of CIL. This can be further explained by using the deadweight loss graph.

Source – McKenzie, Richard B., and Dwight R. Lee. In Defense of Monopoly: How Market Power Fosters Creative Production

In ideal market conditions, the coal sector would have produced quantity Qc at the price Pc. However, as it is operating in a monopolistic setup, the coal sector is now producing quantity Qm at the price Pm. Now, CIL earns a total revenue of an amount equal to the area of OPmXQm, but loses an amount equal to the area covered by OPcYQm as costs. Hence, the total profit earned by CIL is indicated by the area bounded by the rectangle A (PcPmXY). However, CIL loses an amount equal to the area of triangle C, which it could have earned by selling the goods at the price Pc. Therefore, the producer surplus becomes A – C.

The consumers, who buy goods at a price Pm, lose surplus equivalent to the amount as indicated by the rectangle A due to the high prices. Even those consumers who buy goods at a price Pc also lose an amount equal to the area covered by triangle B. Therefore, the total loss of consumer surplus is equal to A+B. The deadweight loss is calculated by finding the difference between the gain in producer surplus and the loss in consumer surplus. That would result in a deadweight loss of surplus equivalent to the triangle formed by triangles B and C.

3. Conclusion

The Mineral Laws (Amendment) Act, 2020 has ended the 45-year-old monopoly of Coal India Limited. The Indian government’s decision to open up coal mining to private players shall be received with open arms. Despite being among one of the most profitable PSUs, CIL failed to perform efficiently. The absence of competition has allowed complacency to seep into the management. In turn, this complacency resulted in production of low quality coal and augmented the demand-supply gap. CIL has failed miserably in ensuring market efficiency, which led to a deadweight loss. Therefore, in order to prevent a market failure, privatization is the need of the hour.

Written by- Bhukya Kanishka

Edited by- Sohini Roy

The post Deconstructing the Opening up of Coal Mining in India appeared first on The Economic Transcript.

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