In the past week, the Cabinet Committee on Economic Affairs approved a methodology to auction coal blocks for commercial mining. In the aftermath of the 2014 Supreme Court rulings that declared as illegal and cancelled 214 coal block allocations made between 1993 and 2010, the Coal Mines (Special Provisions) Act, 2015, had set the legal groundwork for the allocation of coal mines to private coal companies. However, because of depressed demand and lukewarm interest from the private sector, the Ministry of Coal delayed the auction of commercial coal blocks until recently. In a welcome departure from the previous rounds of auctions, coal secretary Sushil Kumar clarified that “revenue maximisation is not the objective” of the government’s commercial mining policy, rather it is “efficient and sustainable coal mining”.

Ideally, these auctions are supposed to attract domestic and international mining companies to bid on the blocks made available. While the specifics have not been released yet, the blocks are supposed to be a mix of small (less than 1 million tonnes per annum), medium (between 1 million tonnes per annum and 10 million tonnes per annum) and large (over 10 million tonnes per annum) mines. International majors are likely only to be interested in larger mines where mechanisation and economies of scale will give them attractive margins. Mining at such a scale is only possible in a limited number of locations where both the geology and ability to acquire land are suitable. Consequently, it is likely that the majority of the interest in commercial coal mines will come from domestic mining companies.

Following the announcement, there has been a triumphalist narrative of the government finally liberating the industry from the clutches of the state-owned Coal India Limited. While this may be true symbolically, with Coal India now facing direct competition in coal sales, it is unlikely that private coal production will displace Coal India’s market share any time soon. Large mines take years to develop and bring into production. Simply winning a mine at an auction does not obviate the need for land acquisition, local political settlements, environmental and forest clearances, and managing transport logistics among others. Coal India still accounts for over 80% of India’s domestic coal production (640 million tonnes). Even if commercial coal mining manages to bring an additional 50 million tonnes per annum to 100 million tonnes per annum into production over the next five years, it will have to work very hard to displace Coal India’s long-term consumers.

Quality slippage, delivery uncertainty

The main complaints of Coal India’s consumers are not the price of coal but the variation of its quality and the uncertainty of delivery. Except for higher value coking coals, which are benchmarked to global prices, India has some of the cheapest coal prices in the world on a Rs/calorie basis. Consumers using coal for power generation are extremely sensitive to changes in coal quality, and Coal India has a track record of sporadic quality slippage that has led to major disputes with generators. India’s railway freight infrastructure has consistently lagged far behind Coal India’s ability to produce coal, which is one of the main reasons almost 30% of all coal is transported to end users via road. Until India’s dedicated freight corridors are functional, it is not clear how commercial mining companies will bypass this logistical problem.

Given the fractured nature of India’s coal market, consumers have faced a variety of prices over the last decade. Early consumers who passed the Ministry of Coal’s screening committees benefited from Coal India’s low prices with the accompanying quality variance and delivery uncertainty. Consumers entering the market from the early 2000s onwards had fewer choices; Coal India refused to grant additional linkages at the time. This forced many private power producers to opt for imported coal, which was logistically more reliable but also subject to unexpected policy changes in exporting countries (for example, Indonesia’s regulatory changes in 2011). Other end users were allotted coal blocks by the Ministry of Coal, but very few of them managed to bring their captive blocks into production because of their lack of specialisation in mining (these were the coal blocks cancelled by the Supreme Court in 2014).

In the late 2000s, Coal India introduced periodic e-auctions of coal, which sold regional excesses in coal stocks at much higher prices. Given the uncertain schedule of e-auctions, no end user could rely exclusively on this source, but it was useful as a stopgap supply for desperate consumers (of which there were many at this point). Under the proposed commercial mining policy, mining companies will have the ability to set their own sale price for coal. When this finally happens, India will have legitimate price discovery for coal for the first time since the 1940s, as a range of prices emerge out of different coal mines. If nothing else, these prices will set a benchmark for Coal India and force it to be more competitive.

Learning from past mistakes

Mining at scale is a specialised activity, and as the failure of the captive coal block policy has shown (well before the Supreme Court rulings), simply handing out coal mining rights to end users did not manage to increase India’s private coal production significantly. Rather than viewing commercial coal mining as a competition to Coal India’s production, it may be more appropriate to see it as the successor to India’s failed attempts at captive coal mining policies. Once commercial coal mines actually come into production, owners of new cement plants, steel mills and power plants will not have to worry about forming joint ventures to try to develop mines, something well outside of their expertise. Instead, they will be able to compete in a national market to access a resource that had long been allocated exclusively through administrative means. This in itself is cause for optimism, at least from the end users’ perspective.

For all its inefficiencies, one thing Coal India has been historically competent at is some amount of economic development around its coal mines. As a public sector company thoroughly embedded in both local and state politics, various forms of redistribution and welfare spending were a requisite part of the company’s social contract in the coal belt. The rise of outsourcing has eroded some of this welfare provision since liberalisation, but Coal India is still among the 100 top corporate social responsibility spenders in the country, most of it concentrated within 25 km of the mines it operates. With commercial coal mining on the horizon, it is unlikely that private mining companies will adhere to such established social contracts in the industry. We can only hope these mines will not gravitate towards some of the more extractive and heavy-handed tendencies that have been observed in iron ore and bauxite.

Rohit Chandra is a doctoral student at the Harvard Kennedy School working on the economic and political history of the Indian coal industry.