India’s coal production deficit is an area of serious concern. Our production is inadequate to meet the rising demand of our growing nation, and we have few reliable alternative sources of energy. Hence it is vital that this challenge is understood and resolved. Unless this is done, either growth will be stymied due to shortage of power, or our import bills will cause a balance of payments crisis. Hence not finding a solution is not an option.

Besides, since 70% of India’s coal is produced in eastern India, and Coal India is based in Kolkata, the problem also affects our state and city.

Already, our coal import bills have increased 80% from last year to $17.6B, contributing significantly to our worsening current account deficit. The problem will exacerbate, as India will likely become the largest coal importer in the world by 2015.

But the solution suggested by the central government – inviting private involvement in mining – is ironic. The same grounds were noted in 1973 for coal nationalization, in the backdrop of the OPEC oil shock, which led to the formation of Coal India Limited as a government monopoly.  The goal stated then was “to modernize the industry through scientific methods in mining and through adequate investment for optimal utilization”. It was then rightly felt that the private sector did not have the resources to undertake and Coal India would mitigate the problems.

And as expected, resources haven’t constrained Coal India. The world’s largest coal miner, in April 2011 it was conferred the status of a Maharatna company. On August 2011, within a week of its IPO, Coal India became India’s most valuable company with the largest cash reserves among non-banking companies. Despite this, the goals of higher production and greater self-reliance have not been achieved.

Our energy requirement is relatively modest compared to major economies, but at projected growth rates, we will double our energy consumption in the next two decades – as we drive more cars, light up more homes in 400 million rural residents, and generally lead a better life. When that happens how will we procure enough energy resources – whether petroleum or electricity? For example only about 20 out of 1000 Indians own cars today. As India grows and approaches China’s level (60/1000), or Brazil’s levels (150/1000) how will we afford the import bill of energy? If the government continues to subsidize energy consumption, what will happen to our financial state?

In West Bengal, our per capita energy consumption is just over 500 KWh. In India as a whole the figure is around 750 KWh. To develop our economy, these numbers will have to rise. If West Bengal hopes to develop to the level of Gujarat, or India develops to the level of other BRIC countries such as China or Brazil, our energy demand will rise.

If energy becomes a bottleneck, growth will slow – in services and in manufacturing. And given that most of the agricultural fertilizers are based on hydrocarbon, and irrigation requires electricity – even agricultural performance is a function of energy consumption.

Most of India’s energy is based on our huge coal reserves, which is the third highest in the world after the United States and China. However, compared to the other two nations, India has been complacent in developing of energy sources.

United States has made energy self-reliance a key objective. By 2020, nearly half of the crude oil America consumes will be produced at home. By 2035, oil from the Middle East could completely stop, OPEC recently predicted, partly because more efficient car engines and a growing supply of renewable fuel. Major scientific progress in hydraulic fracturing have unlocked large reserves of shale gas, while improvements in tight oil production technology is expected to double its production by 2020, according to EIA.

Already the world’s biggest energy consumer, while still rapidly growing, China’s faces acute energy challenges. However, improved efficiency of production and consumption has been recent successes. China has rapidly increased its coal mining, the mainstay of their energy while also becoming the world’s largest manufacturers of renewable energy equipment, overtaking Germany and the US and expects that wind, solar and biomass energy will represent 8 percent of its electricity generation capacity by 2020.

In India, alternatives to coal remain unattractive.

Petroleum needs to be imported and is the biggest contributor to our current account deficit. State-run oil companies are under-recovering Rs 36 Crores per day but are unable to pass on price rises due to political opposition. Diesel, India’s most consumed fuel, is sold at a loss of Rs 10 a liter, while cooking gas is subsidized by Rs 319 per cylinder. India’s domestic oil production is barely increasing, partly because of new laws. Cairn India Ltd., India’s largest private oil producer, said in March it will scrap a $6 billion spending plan after the government proposed an 80% increase in taxes on its production.

Solar and wind are not options as a primary power source, and nuclear energy never got off the ground due to political factors exacerbated by safety concerns since the Fukushima Daiichi disaster in Japan. Other emerging energy sources, such as natural gas from the Krishna Godavari basin, have unfortunately not yet provided the kind of boost that was expected.

Thus coal industry will – to a large extent – determine whether both the Indian economy has the energy support to grow into a twenty-first century power. Hence the role of Coal India in our nation’s energy solution is vital.

Given our dependence on Coal India, the sluggish growth in coal production needs to be enhanced. What are the problems?

Part of the problem is locational: some of India’s coal reserves are in tribal areas, or under forest cover, and mining faces environmental and legal challenges. However, much of the problem is man-made – in the way the supply chain of the industry is structured.

Coal is dug up by Coal India, a state-monopolist, and is then transported by another state monopolist, the Railways, to power plants, which may be government owned or in the private sector. Not having enough coal, many of these plants have resorted to importing. However, once power is generated, it once again is handed over for distribution by a local monopolist, mostly government run, such as the West Bengal State Electricity Board, or by a private sector monopoly, such as CESC in Calcutta. Many of these distribution companies are bankrupt because they are unable to charge market rates for power due to politisation of tarriffs. Hence they can’t pay many of the power plants, causing them to default on bank loans. Indeed, much of the NPAs in India’s bank loans are due to defaults from power companies.

It is not so much that most of the supply chain is government run that is the problem. Indeed, over time many of these companies are publicly traded in the BSE and are professionally managed by talented staff. The problem is that monopolies control the value chain and thus there is no incentive to improve performance – low capacity will be rewarded with higher price if there is no competition.

For comparison, let us look at the same industry in China where dependence on coal is even higher than India. Coal production has increased almost fivefold in the last 30 years to more than 3B tonnes. In China several government and private companies compete for coal resources. China Shenhua Energy Company is the largest coal miner, but it competes with China Coal, Shandong Energy, Fushun Mining – all government entities listed in the Hong Kong Stock Exchange, and with private companies such as China Kingho Group. These companies have been mining aggressively in China and also buying mines in countries far afield such as Mozambique and Australia. They also purchase companies in US to own the R&D on the latest drilling techniques. The same can be said in the oil sector – where CNOOC, PetroChina and Sinopec have been acquiring energy sources and improving production efficiency despite state ownership as these are professionally managed and subject to the rigors of international financial reporting standards of the New York and Hong Kong stock exchanges. Hence, China – despite its unprecedented energy consumption – is able to keep up supply.

The solution to India’s energy problems too needs to start by converting monopolies into several units that compete for the same market. China took advantage of a historic opportunity to grow rapidly: sustaining 7% growth for three decades and delivering its citizens from poverty to the cusp of middle income. India too cannot afford to fail in this quest and must ensure that the energy sector is redesigned to effectively support the nation’s growth.

The author is faculty at IMI, Kolkata and can be reached at r.chatterjee@imi-k.edu.in