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FDI in the Coal Sector

2019-09-09

Prabhat Patnaik

JOAN Robinson, the well-known economist, had drawn attention to a fundamental difference between foreign direct investment in the manufacturing sector and foreign direct investment in a sector that extracted an exhaustible resource, such as a mineral product. This difference can be illustrated with an example.

Suppose in both sectors profits worth Rs 100 are earned and repatriated abroad each year by the foreign company; and suppose the life of the mine is 10 years. Then at the end of 10 years, during each of which Rs 100 would have been repatriated abroad, there would still be the manufacturing unit left intact in the host country; but at the end of 10 years, each of which would witness profit repatriation worth Rs 100, there would be no more of the mineral resource left in the country.

This is not to say that foreign direct investment in manufacturing should always be welcomed; not at all. This is just to say that while there may be situations where it could be allowed in manufacturing (when for instance it is a net foreign exchange earner), there is never a situation where a country should choose to allow foreign direct investment into a sector producing a mineral resource.

This is also an argument for keeping the extraction of all exhaustible resources within the public sector. Precisely because these resources are exhaustible, not only is there a question of ensuring an optimum rate of extraction of such resources, but every ounce of such resources, or the money obtained against the sale of such resources, must be used for purposes which are considered socially desirable.This requires social control over these resources, a necessary condition which is keeping them within the public sector.

This is an idea which had for quite some time informed India’s policy with regard to foreign direct investment into the coal sector. True, there had been relaxations in this policy with regard to captive coal production for power plants and for units producing iron and steel and cement, but such captive collieries could not sell coal in the open market. But this has now changed, with the Modi government announcing that henceforth, not just private investment but 100 per cent foreign direct investment through the automatic route will be allowed in the coal sector, which means that the virtual monopoly of the public sector unit, Coal India Limited, which accounts for about 83 per cent of the total coal production of the country, will end.

All kinds of specious arguments are being advanced to justify this move. There are first of all ludicrous arguments like “it will help us reach the goal of being a $5 trillion economy”: to set oneself a goal and then to set about achieving it by hook or by crook can hardly be adduced as a justification for the “hook or crook” measures. Then there is the argument that it will increase “competitiveness” within the coal sector. How exactly the absence of “competitiveness” has impacted adversely on the people of the country is never explained by those who advance this argument. Coal India after all is a public sector company: it does not resort to any exorbitant pricing because of its monopoly position; so what does increasing “competitiveness” mean?

A third argument linked to this is that it would bring about greater “efficiency”. No index of “efficiency”, in terms, for instance, of any physical indicators such as inputs per unit of coal output, is provided on the basis of which this claim can be judged. Only some vague reference is made to the cost of production per unit of coal; but a lower cost of production per unit of coal is not indicative of greater efficiency. In fact in the coal sector where wage costs are a major part of the total unit cost, any observed lower cost in private production is on account of two main factors: lower wages, sometimes estimated to be as low as a third of the wages paid by CIL for similar work, and less concern for miners’ safety.

In fact, CIL has a safety record, which no doubt can and must be improved, but which is far better than what one observes in other countries which have gone into private coal-mining, including even China. In fact the average fatality rate per million tonnes of coal production is much lower in India than in China and Indonesia, two other large producers which allow private mining. Achieving “cost reduction” at the expense of human lives is hardly something we should be aiming at.

This basically brings us to the two most cited arguments. One is that FDI will bring in better technology into India’s coal mining sector. Even if this argument is accepted, we have to ask why technological up-gradation of coal production by CIL itself cannot be effected by simply acquiring better technology, and why it becomes necessary to actually open up the sector to 100 per cent FDI. In fact there is no evidence of the government ever having made serious efforts to acquire technology through other means than by opening up to 100 per cent FDI.

The second oft-repeated argument is that India has been importing coal of late, with the magnitude of imports going up over time because domestic production is insufficient to meet the domestic consumption requirements. Domestic production therefore has to be augmented rapidly, for which we need to involve private players, including foreign ones. The problem with this argument is that it never explains why CIL should not be able to increase production to the extent required. CIL, it is recognised performed very well in 2018-19 by adding 40 million tonnes of incremental output. Why it should not be asked to keep doing so in the next few years so that imports could be eliminated altogether, is never explained.

The suggestion is often made that CIL is “over-stretched”. What exactly this means is again not clear. It is a characteristic feature of large companies that they have the wherewithal to grow even larger whenever there is sufficient demand for their output; why this should not be the case for CIL defies reason. And if perchance there is some constraint on CIL’s growth, then the government could easily set up another public sector company to increase the country’s coal producing capacity, instead of inviting foreign multinationals into our coal sector.

Much is made in this context of the fact that “precious foreign exchange” will be saved if we augment domestic production by inviting foreign multinationals. But there is never any recognition of the fact that such invitation will also lead to a substantial outgo of “precious foreign exchange” on account of profit repatriation by these multinationals.

Ironically the same sources which argue that foreign multinationals should be invited because CIL is “over-stretched”, immediately add that foreign multinationals will not come, given the difficulties that currently exist on land acquisition, on the pricing of coal and on having to bid for coal blocks. The suggestion therefore is that all these restrictions must go in order to facilitate the entry of foreign multinationals. In other words, not only must foreign multinationals be allowed into coal production but they must be provided with a red carpet and the country’s entire policy regime must be made subservient to their demands; and all because of some unspecified “over-stretching” on the part of the CIL.

The conclusion is inescapable that there is no pressing objective reason for this policy of opening up the coal sector to foreign multinationals; this policy is not dictated by any necessity but entirely because having foreign capital per se is considered desirable, even if, in the process, the price of coal goes up, and even if rampant primitive accumulation of capital at the expense of the tribal population of the country is carried out (which after all is the meaning of “easing” land acquisition).

It is ironical that a government which proclaims its “nationalism” so vociferously, and which locks up people for being “anti-national” at the slightest excuse, is so keen to hand over control over the nation’s resources to foreign multinationals by reversing all previous policy.

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