Opening up of commercial coal mining to 100% FDI unlikely to boost sector

The opening up of commercial coal mining in India to 100 per cent Foreign Direct Investment (FDI) is unlikely to bring happy tidings for the sector.

At a time when global capital is fleeing thermal coal, it is not a good idea to attract foreign investments in the sector. Future investments in coal are fraught with risk as leading global investors are gravitating towards renewable energy, a study notes.

The findings of New Delhi-based Centre for Financial Accountability (CFA) throw up unsettling statistics for coal-fired projects. The study analysed 54 energy projects for coal and renewable energy in calendar 2018 and deduced that 80 per cent of the total credit of Rs 30,534 crore was parked in renewable energy projects. Coal-based generation projects received only 20 per cent of the lending. Moreover, primary finance to coal power tanked by 93 per cent in value terms compared with calendar 2017.

In 2018, most of the credit for coal-fired generation projects was made available by government-owned or institutions where government had a majority stake. In contrast, 75 per cent of the finance for renewable energy projects came from privately controlled commercial banks.

Global trends also indicate that foreign capital is getting disillusioned with coal. Over 100 globally significant financial institutions have divested from thermal coal - the figure includes 40 per cent of the top 40 global banks and 20 leading global insurers.

“In this context, it could be challenging to attract foreign investment to a declining sector when India’s economic growth is slowing, and global investors are shying away from the dirtiest fossil fuel”, said Vibhuti Garg, energy economist with US-based think-tank Institute for Energy Economics & Financial Analysis (IEEFA).

“The government should channel its resources to a greater offtake of renewable energy in India. This would in turn require grid strengthening, improved inter-state transmission capacity and ideally a stronger price signal to incentivise peaking power supply to reward fast ramping and on-demand peak supply”, she suggested.

The country’s power sector is beset by huge stress as it grapples with issues across the value chain. The thermal generation sector is exposed to a colossal non-performing asset (NPA) burden of $144 billion (as of FY18), a deficient transmission network leading to grid congestion and curtailment and rising debt pile, resulting in the deterioration of financial health of distribution companies (discoms).

In particular, the thermal power plants are under huge strain - their capacity utilisation has stayed below 60 per cent for over two years. Some of the stressed coal-based generation units are highly leveraged as well, making debt servicing profoundly difficult. Moreover, late payments by loss accumulating discoms and renegotiation of tariffs over power purchase agreements (PPAs) have added to the woes of thermal power producers.

Govt may end ban on foreign investment in coal mining; decision likely soon

India’s government moved a step closer to scrapping a cap on foreign investment in commercial coal mining, a person with direct knowledge of the matter said, as part of efforts to boost economic growth.

The proposal is being discussed at a Wednesday meeting of the cabinet, led by Prime Minister Narendra Modi, and a decision may come within hours, the person said, asking not to be identified because the discussions are private. The change would allow overseas miners such as BHP Group Ltd and Glencore Plc to own 100% of mining companies. Other proposals under consideration include raising investment limits in digital media and easing rules for retailers selling a single brand, the person said, without giving details. 

A spokeswoman at Commerce and Industry Ministry was not immediately available for a comment. The ministry is piloting the proposals at the cabinet meeting.

The proposal to ease foreign investment rules in coal mining has been discussed for more than a year. A decision to finally approve the plan comes as Modi tries to lure overseas investors to an economy that’s growing at the slowest pace in five years. Last week Finance Minister Nirmala Sitharaman announced several measures to kick start an economy that recently lost its spot as the world’s fastest growing.

While most developed nations are turning away from the fossil fuel, demand is rising in India. Opening up coal mining could tackle fuel shortages and revive growth in Asia’s third-largest economy which expanded at 5.8% in the March quarter, the slowest pace since 2014. Data due Friday will probably show India’s gross domestic product slowed further, expanding 5.7% in quarter ended June 30.

As part of a plan to reverse the slowdown, Sitharaman exempted foreign portfolio investors from super-rich tax, lifted a ban on the government from purchasing new vehicles and announced front loading fund infusion in state-run banks.

The easing of rules on retailers could prompt Apple Inc to set up stores in the country. The sourcing stipulation has been a sore point for many companies including Apple which are eager to enter India, the fastest-growing smartphone market in the world, and tap a larger share as China stagnates.

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