GREAT LAKES INSTITUTE OF MANAGEMENT, GURGAON

D MONETARY POLICY MEASURES

SUBMITTED BY GROUP 5
PGPM 2016-2017| TERM II
Contents
Acknowledgment......................................................................................................... 2
Executive Summary..................................................................................................... 3
Introduction................................................................................................................. 4
Evolution of Indian Coal Industry...............................................................................4
Current Scenario........................................................................................................... 7
Challenges................................................................................................................ 10
Fiscal Policies and Regulation.................................................................................... 11
Changes in Tax Policies.......................................................................................... 11
Carbon Tax on Coal................................................................................................ 11
Coal Royalty and entry tax was out of GST...............................................................12
Mines and Minerals (Development and Regulation) Amendment Act, 2015.................12
Underground Coal Gasification...............................................................................13
Other Initiatives by the government.........................................................................13
Commercial Mining................................................................................................. 13
Conclusion................................................................................................................ 15
References:................................................................................................................ 17

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Acknowledgment

We would like to thank Prof. Vikas Prakash Singh for his mentorship and support during
our project Impact of Economic policies on Coal Industry, which was part of our
curriculum in Term II of PGPM program.

With the help of knowledge gained through his mentorship and his lectures on key
macroeconomics concepts helped us study Indian economy.

Group Contributors
Afzal Anwar- P162005
Ankit Makhija P162011
Naman P162046
Prachi Gupta P162051
Ravi Teja P162058
Shruti Mishra P162078

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Executive Summary

The Indian coal industry has history of 220 years. India is the third largest country
having the coal mine natural resources. The energy derived from coal in India is about
twice that of energy derived from oil, whereas worldwide, energy derived from coal is
about 30% less than energy derived from oil. The coal reserves are hold by states
Jharkhand, Odisha and West Bengal. The nationalization of coal mines occurred in year
1972. Coal in produced by both government and private companies. 80% to 90% of the
coal produced by Coal India Limited and remaining coal is produced by private
companies.

Coal India recorded growth of 10 percent in coal production when compared with
previous year 2015. But fall short of expected amount of coal production. As the coal
production improved in India in recent years the imports are reduced compared to 2015.

The government of India decided to increase the tax from 200 to 400 rupees per ton
which will increase the production cost. Mines and Minerals act was amended in 2015
to overcome the corruptions happing in the coal industry over a period of time. Coal
royalty and entry tax was excluded from GST bill.

Lack of Transportation facilities and delays in government proceedings to acquire the

coal mines, corruption in allocating the coal mines and strict rules and regulations in
allocating the land became the hurdles and obstacles in the coal industrys growth.
Indian railways decided to build new railway stations nearby coal mines for better
transpiration facilities.

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Introduction
Coal India has the history of nearly 220 years starting in 1774. However, for about a
century the growth of Indian coal mining remained sluggish for want of demand but the
introduction of steam locomotives in 1853 gave a fillip to it. The global resources of coal
is expected to be 861 billion tons. While India alone holding major chunk of resource
with 286 billion tons. India has the 5th largest coal reserves in the world. India ranked
3rd in the world in coal production. The power sector is the largest coal consumer
followed by iron, steel and cement segments. The top producing states are Odisha,
Chhattisgarh and Jharkhand.

Government of India Undertaking in 1956 with the collieries owned by the railways as its
nucleus was the first major step towards planned development of Indian Coal Industry.
Along with the Singareni Collieries Company Ltd. (SCCL) which was already in
operation since 1945 and which became a Government company under the control of
Government of Andhra Pradesh in 1956, India thus had two Government coal
companies in the fifties. SCCL is now a joint undertaking of Government of Andhra
Pradesh and Government of India sharing its equity in 51:49 ratio.

Evolution of Indian Coal Industry

In October, 1971, the Coking Coal Mines (Emergency Provisions) Act, 1971 provided for
taking over in public interest of the management of coking coal mines and coke oven
plants pending nationalization. This was followed by the Coking Coal Mines
(Nationalization) Act, 1972 under which the coking coal mines and the coke oven plants
other than those with the Tata Iron & Steel Company Limited and Indian Iron & Steel
Company Limited, were nationalized on 1.5.1972 and brought under the Bharat Coking
Coal Limited (BCCL), a new Central Government Undertaking. Another enactment,

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namely the Coal Mines (Taking over of Management) Act, 1973, extended the right of
the Government of India to take over the management
of the
coking
and non- coking coal mines in seven States including the
coking coal mines taken over in 1971.

This
was
followed by the
nationalization of all these mines on
1.5.1973 with the

enactment of the Coal Mines (Nationalization) Act, 1973 which now is the piece of
Central legislation determining the eligibility of coal mining in India.

The government enjoying 90 % of the production from government controlled mines.

The policy for captive mining was introduced in 1993. This opened the coal sector to
private investment, although no promising progress has been made in the captive coal
blocks allotted by the government.

In October, 1971, the Coking Coal Mines (Emergency Provisions) Act, 1971 provided for
taking over in public interest of the management of coking coal mines and coke oven
plants pending nationalization. This was followed by the Coking Coal Mines
(Nationalization) Act, 1972 under which the coking coal mines and the coke oven plants
other than those with the Tata Iron & Steel Company Limited and

Indian Iron & Steel Company Limited, were nationalized on 1.5.1972 and brought under
the Bharat Coking Coal Limited (BCCL), a new Central Government Undertaking.
Another enactment, namely the Coal Mines (Taking over of Management) Act, 1973,
extended the right of the Government of India to take over the management of the
coking and non-coking coal mines in seven States including the coking coal mines
taken over in 1971.

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This was followed by the nationalization of all these mines on 1.5.1973 with the
enactment of the Coal Mines (Nationalization) Act, 1973 which now is the piece of
Central legislation determining the eligibility of coal mining in India.

The government enjoying 90 % of the production from government controlled mines

.The policy for captive mining was introduced in 1993. This opened the coal sector to
private investment, although no promising progress has been made in the captive coal
blocks allotted by the government.

Current Scenario

India is the third largest coal producer in the world after China and the US. The total
coal production in India was around 612 million tons (MT) in FY 2015, which has
increased to 626 MT in FY 2016. 90% of its production came from public sector only 10
% from private sector.

Coal India recorded a 10 % growth rate in July 2016

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Coal India Ltd (CIL) produced 536 million tons (MT) in 2015-16, but missed the output
target of 550 MT for the just-concluded financial year. Coal India recorded a 10 %
growth rate in production during June 2016 at 42.72 million tonne. Coal India Limited
has a whole produced 125.65 million tonne of coal during April-June 2016.This is an
absolute increase of 4.3 million tons when compared with the previous year.

An important performance criterion in exposing coal seam for future mining, registered
a 13.3 per cent growth during the quarter ending June 2016. The record coal production
and offtake has resulted in unprecedented 28-day average inventory of coal at power
plants. CIL, which accounts for over 80% of the domestic production, is aiming to
double the output to one billion tons in next four years.

India Coal import Drop in 2016

Record coal production by the world's largest coal miner CIL, helped India reduce its
import bill of the dry fuel by more than Rs 28,000 crore in the last fiscal. The global coal
industry is in pressure because of excessive financial leverage, tightening the global

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climate policy and a technology driven transformation that is increasingly transferring
pricing power from global fossil fuel conglomerates to energy consumers.

India imported a total of 212 MT of coal in FY 2015 and 193 MT in FY 2016, which is
equivalent to one-fourth of the domestic coal consumption in the country based on
tonnage. Indian reports showing that coal imports has declined by 24 % in Year on year.
Coal imports might further reduce to 160 MT in financial year 2017. CIL has planned for
construction of three major railway infrastructure projects to be executed by Indian
Railways in growing coalfields of Jharkhand, Odisha and Chhattisgarh. Positivity of such
steps have already manifested themselves in decline in imports in 2015-16 (since 2014-
15).

In value terms, Indian coal imports declined 32% Year on year from Rs 8,942 Cr
(US$1,355m) to Rs 6,023 Cr (US$913m) in April 2016. The reports are showing that
India is far from growth. Having doubled the coal cess in the latest budget, in May 2016
India announced plans to close 37 GW of coal fired power capacity that has reached the
end of its useful life and where upgrades are not commercially viable.

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Challenges

India's coal industry is choking under a heap of problems, including inefficiency,

corruption and environmental concerns.
Indias population may shoot up in the coming years, energy demands are
expected to surge in the coming years.
The accumulated losses of power distribution companies in India were estimated
to have reached more than 2.4 trillion rupees (Dh162.1 billion).
Although India has the world's fifth-largest coal reserves, it is importing coal at
great expense because of the mounting challenges holding back the supply of its
domestic resources.
Lengthy Approval Processes, Transport Infrastructure and Corruption while
allocating the coal blocks also some of the challenges in the Indian coal industry.
The quality of coal is poor with high ash and moisture content. Poor technology is
causing excessive wastage. Coking coal is very scare . Increase in carbon cess
increased the cost.
Majority of the coal projects have been halted and delayed due to issues in
acquiring land and strict rules and regulations (R&R).

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 Bottlenecks in domestic coal transportation and lack of proper road connectivity
further increase the challenge. Also, availability of railway wagons and mismatch
of demand and supply of wagons and coal offtake affect production capacity.
50 million tons of coal were stranded at mines because of rail limitations,
including line congestion and a shortage of railcars. Several coal-rail projects
have stalled over the past decade, including the 93-kilometer Tori-Shivpur-
Kathautia line to connect coal mines in Jharkhand in eastern India.

Fiscal Policies and Regulation

Fiscal policy is the means by which a government adjusts its spending levels and tax
rates to monitor and influence a nation's economy.

Changes in Tax Policies

India is to double a tax on a tonne of coal from 200 to 400 Rupees (around US
$6)1under new plans to boost investment for clean energy and the environment. The
move likely to raise the power cost across the country. Clean energy tariffs will be raised
by 15 to 20 percent.

The tax has now renamed as the Clean Environment Cess. The fund that collects the
revenue has also been renamed from the National Clean Energy Fund to the National
Clean Environment Fund. The Government intends to use the revenue not just for
renewable energy projects but also for environmental projects such as wildlife
conservation and, very likely, afforestation and river cleaning projects.

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It will create a direct impact to hike the generation cost by 0.30 per unit. It will build
business confidence in nonfuel in through gradual narrow gap which will eventually
bring parity with fuel industry. The revenue which collected through the CESS will be
around 2.53 billion fund which will be allocated to R&D in energy sector.

In addition, the revenues will be used on projects Ganga Rejuvenation Plan, green
infrastructure, project tiger and wildlife conservation, meeting Indias dual priorities of
environmental conservation and development.

Carbon Tax on Coal

A carbon tax is a tax levied on the carbon content of fuels. It is a form of carbon pricing.
Carbon is present in every hydrocarbon fuel (coal, petroleum, and natural gas). Carbon
taxes offer a potentially cost-effective means of reducing greenhouse gas emissions.

Coal Royalty and entry tax was out of GST

The Odisha government on Monday demanded compensation for the loss of Central
Sales Tax, which was phased out keeping in mind the implementation of the Goods and
Services Tax (GST).The Empowered Committee of State Finance Ministers committee
had earlier proposed to subsume coal royalty and entry tax under GST which was
opposed by Orissa. Since natural gas which was included in the VAT (Value Added Tax)
list, has been kept out of GST on the ground that it is used for generation of power,
Orissa had argued that coal also must be kept out of GST. Currently four per cent VAT is
levied on coal. If it is included in the GST list, the effective rate would be 12 per cent as
both state GST and central GST would levy 6 per cent each on coal. The state had
pointed out that GST on coal would have a direct effect on power cost.

Mines and Minerals (Development and Regulation) Amendment Act,

2015

The Mines and Minerals (Development and Regulation) Amendment Act, 2015 is
a legislation in India. It amended the Mines and Minerals (Regulation and

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 Development) Act, 1957 and replaced the ordinance promulgated in
January 2015.
Supreme Court canceled licenses of 26 mines in ODISHA. To avoid corruption in
coal mines government amended, Mines and Minerals act. The bill seeks to bring
transparency to the allocation of mining license process by auctions.
Under this act the revenue of mine will be allocated to the development of the
place around it.
A National Mineral Exploration Trust will be set up to explore and promote non-
coal minerals.
It will have a starting fund of 500 crore and will be funded by a 2% levy from
mining license holders.
Initial years the license valid up to 30 years under this act the validity extended to
50 years. There will be no Renewal of licenses and re auction has to be done.
The bill contains a new license for prospecting-cum-mining, replacing a two-
stage process.
The mining and prospecting-cum-mining licenses may be transferred to another
party by notifying the state government.

Underground Coal Gasification

In December 2015, Government of India approved development of coal and lignite

fields using UCG technology. Under this policy, coal and lignite blocks will be
auctioned on a revenue sharing basis via a competitive bidding process. The Central
Mine Planning and Design Institute (CMPDI) has been designated as the nodal agency
for allocating the coal and lignite blocks.

Other Initiatives by the government

Initiatives taken by the Ministry for expediting production from captive blocks were as
follows: - (i) Frequent and regular meetings of Screening Committee. (ii) Allowing
disposal of coal produced during development phase through CIL subsidiaries. (c)
Taking bank guarantee for adhering to the schedule as per the specified milestones. (d)

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Laying bench mark time lines for achieving various milestones from allocation to coal
production, advance submission of development schedule by the allocate and
cancellation of allocation for non-adherence.(e)Sector-wise allocation of coal blocks.
(f)Identification of new coal blocks.(g)Ultra Mega Power Projects.

Commercial Mining

The global economic slump has delayed the government's plan of opening the coal
sector to private commercial mining, but to have transparency the ministry has prepared
the draft methodology for allowing private companies to mine and sell coal and will seek
public comments once the government decides to open the coal sector. Taking forward
its decision to open up the coal sector for commercial mining, the government will allot
16 blocks to PSUs for carrying out production and sale of the dry fuel. Of the 16 blocks
"earmarked for State Public sector Undertakings for sale of coal", five mines are in
Madhya Pradesh, three in Telangana, two blocks each in Chhattisgarh, Jharkhand and
Maharashtra, and one each in Odisha and West Bengal, according to an order of Coal
Ministry.

Changes in Monetary Policies

The RBI reduced the statutory liquidity ratio by 0.50 per cent to 21.50 per cent in
February 2015.
Eased the policy repo rate during the year to 6.75 per cent, in all making a substantial
cut of 125 basis points (bps) between January 2015 and September 2015.

In the banks latest monetary policy review held on 2 February 2016, the policy repo
rate remains unchanged. As of April 2016, reduce the policy repo rate under the liquidity
adjustment facility (LAF) by 25 basis points from 6.75 per cent to 6.5 per cent;

Reduction in the minimum daily maintenance of the cash reserve ratio (CRR) from 95
per cent of the requirement to 90 per cent with effect from the fortnight beginning April

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16, 2016, While keeping the CRR unchanged at 4.0 per cent of net demand and time
liabilities (NDTL)

Narrow the policy rate corridor from +/100 basis points (bps) to +/ 50 bps by reducing
the MSF rate by 75 basis points and increasing the reverse repo rate by 25 basis points,
thus reverse repo rate under the LAF stands adjusted to 6.0 per cent, and the marginal
standing facility (MSF) rate to 7.0 per cent.

Conclusion

Coal has been mined in India for about two centuries. Although past achievement levels
were undoubtedly low, developments in the post-independence period have been
significant and strides made since nationalization of the coal industry have been even
more impressive. Coal will continue to be India's prime source of energy for power
generation, steel-making, powering of locomotives, and production of cement, fertilizer
and domestic fuel.

Coal Industry is dominated by one important metric is to get the production by 1.5 billion
tons by 2020.The production should meet the countrys power generation requirements.
The power generation companies using 70% of Indias coal produced. Cement is
another big industry which uses the production of coal. After cement industry steel using
the production of coal.

India has large reserves of coal, the fifth-largest in the world, according to one estimate.
Its also the worlds third-biggest producer of thermal coal. Another main aim of Indias
coal production is dependency of the imports from other countries. India is importing 15
% of its from Indonesia. Coal import has shrunk by 5%.

Almost 80% of the coal produced by Coal India Company. Coal India is the biggest coal
production company in the world. The company has eight subsidiaries including Bharat

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Coking Coal, Central Coalfields, Eastern Coalfields, Western Coalfields, South Eastern
Coalfields, Northern Coalfields, Mahanadi Coalfields, and the Central Mine Planning
and Design Institute.

Coal set a target of 900 million tons by 2020. The investment required for this
achievement is 57000 crores. But Coal India missing its production goals repeatedly
over the years. But in order to achieve the production by 2020 India facing the hurdles
like accessing land, lengthy approval processes, inadequate transportation systems,
and poor productivity largely stemming from the use of outdated production techniques.

To overcome these challenges supreme court canceled 218 coal blocks allocation. The
government moved fast to ensure that these blocks were auctioned in a transparent
manner under the Coal Mines (Special Provisions) Bill 2015. Coal India has decided to
completely automate the process of land acquisition and has proposed a Web GIS-
based Land Information System (LIS) and Land Acquisition Monitoring System (LAMS).
Coal India is the only public sector company in the country that is well versed with
geospatial technology.

Way forward

To achieve the ambitious coal production targets set by the government of India, strong
and focused efforts are required from all stakeholders, especially governments, industry
players, investors, funding agencies, and infrastructure and coal washing. Globally,
there have been some examples, wherein private sector participation has helped boost
these efforts to achieve these targets are discussed below. Government of India has
already started the process of commercializing mines and inviting bids to increase role
of private players. (PWC Report, 2016)

Incentivizing private sector participation and international collaborations

One of the critical success factors for achieving sector is development of technical and
financial capabilities mainly for exploration, mine development, logistics infrastructure

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and coal washing. Globally, there have been examples wherein increasing private
sector participation has helped the cause. The key to this is to develop a framework that
ensures appropriate risk allocation and recovery of investments. The governments
National Mineral Exploration Policy (NMEP) for non-fuel and non-coal minerals is a
welcome step in this direction and such steps may be considered for the coal sector as
well. Several coal block owners and even CIL (for some coal blocks) will be dependent

The government would also need to promote international collaborations for bringing in
technological upgradations in the sector, which in turn would ensure investment in the
sector from various countries. There are a number of possible foreign collaboration
opportunities in clean coal technology, benefaction of coal fines, UCG, CBM,
exploitation of gassy mines and manufacturing of mining equipment which would help in
getting investments in the sector and achieving the targets of production augmentation
to meet the growing demand

Increase exploration spend as well as capacity augmentation

If Indias GDP grows at a rate of 78% per annum after FY 2020, the country would
need to add production of 130150 MT per annum to meet the coal demand. This would
need availability of additional 4.5 BT (considering 30 years mine life) of proved reserves
every year. Presently, the countrys spend on exploration is low compared to major
mining countries, and in order to achieve the exploration demands of the future, focus
on increasing the depth of drilling to greater depths (600 m and beyond) would be
required. Further, to achieve these drilling targets, investment would be required in
machinery, manpower, skill upgradation and resource management.

Increasing funding options

The present fund inflows to the sector are not sufficient and industry players may face
challenges in securing the required funding for the projects. Efforts are required to
attract financing to the sector for which the industry and government should consider
exploring new options, such as structuring of equipment leases, attracting private equity
investors, providing tax incentives, making arrangements with foreign banks with low
financing rates and other non-traditional sources.

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References

1. http://coal.nic.in/content/coal-mining-india

2. http://economictimes.indiatimes.com/industry/indl-goods/svs/metals-mining/coal-india-
records-10-per-cent-production-growth-in-june-2016/articleshow/53010997.cms

3. http://www.livemint.com/Industry/X3fOGm3EMrp7X6vqbjO7OM/Coal-India-achieves-
536-million-tonnes-output-in-fiscal-2016.html

4. http://timesofindia.indiatimes.com/budget-2016/industry/Union-Budget-2016-Govt-
doubles-Clean-Energy-Cess-on-coal-to-Rs-400-per-tonne/articleshow/51191619.cms

5. http://ieefa.org/indias-energy-policy-points-to-less-demand-for-coal-imports/

6. https://cleantechnica.com/2015/03/03/india-doubles-coal-tax-yet/

7. http://www.itroadmap.in/case-study/why-coal-india-completely-automating-its-land-
acquisition-process

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