Largesse that wasn’t: the story of coal shortages in India

India is beset with a huge coal shortage that is affecting its power production, necessitating coal imports and increasing its trade deficit. This report analyzes the causes leading to the shortage and the Government's response to it. It concludes that the primary causes for the shortage are four-fold: one, the standing linkage committee granted coal linkages indiscriminately without considering and clarifying issues such as likely domestic coal production, allocation and pricing of imported coal, and infrastructure for importing coal; two, private power producers bid aggressively low tariffs assuming sufficient domestic coal availability though various policy and legal documents clearly indicated the possibility of imported coal; three, financiers and lenders to such power producers chose to ignore the obvious risks of assuming domestic coal availability; and four, CIL could have ameliorated the problem somewhat if only it were more efficient. In this light, ad-hoc solutions such as forcing CIL to sign FSAs and permitting power producers to pass through increased fuel costs are not likely to solve the problem. Instead, the increased costs of power due to imported coal should be shared by all those responsible for the shortage, rather than power consumers who are just victims of the shortage. A serious reform of the entire coal sector is also required to fix many systemic problems with the sector.