Recently, the Kelkar Committee published a roadmap for fiscal consolidation.  The report stresses the need and urgency to address India’s fiscal deficit.  A high fiscal deficit – the excess of government expenditure over receipts – can be problematic for many reasons.  The fiscal deficit is financed by government borrowing; increased borrowing can crowd out funds available for private investment. High government spending can also lead to a rise in price levels.  A full PRS summary of the report can be found here. Recent fiscal trends Last year (2011-12), the central government posted a fiscal deficit of 5.8% (of GDP), significantly higher than the targeted 4.6%.  This is in stark contrast to five years ago in 2007-08, when after embarking on a path of fiscal consolidation the government’s fiscal deficit had shrunk to a 30 year low of 2.5%. In 2008-09, a combination of the Sixth Pay Commission, farmers’ debt waiver and a crisis-driven stimulus led to the deficit rising to 6% and it has not returned to those levels since.  As of August this year, government accounts reveal a fiscal deficit of Rs 3,37,538 crore which is 65.7% of the targeted deficit with seven months to go in the fiscal year.   With growth slowing this year, the committee expects tax receipts to fall short of expectations significantly and expenditure to overshoot budget estimates, leaving the economy on the edge of a “fiscal precipice”.

Figure 1 (source: RBI)

 

  Committee recommendations - expenditure To tackle the deficit on the expenditure side, the committee wants to ease the subsidy burden.  Subsidy expenditure, as a percentage of GDP, has crept up in the last two years (see Figure 2) and the committee expects it to reach 2.6% of GDP in 2012-13.  In response, the committee calls for an immediate increase in the price of diesel, kerosene and LPG.  The committee also recommends phasing out the subsidy on diesel and LPG by 2014-15.   Initial reports suggest that the government may not support this phasing out of subsidies.

Figure 2 (source: RBI, Union Budget documents, PRS)

 

  For the fertiliser subsidy, the committee recommends implementing the Department of Fertilisers proposal of a 10% price increase on urea.  Last week , the government raised the price of urea by Rs 50 per tonne (a 0.9% increase). Finally, the committee explains the rising food subsidy expenditure as a mismatch between the issue price and the minimum support price and wants this to be addressed. Committee recommendations - receipts Rising subsidies have not been matched by a significant increase in receipts through taxation: gross tax revenue as a percentage of GDP has remained around 10% of GDP (see Figure 3). The committee seeks to improve collections in both direct and indirect taxes via better tax administration.  Over the last decade, income from direct taxes – the tax on income – has emerged as the biggest contributor to the Indian exchequer.  The committee feels that the pending Direct Tax Code Bill would result in significant losses and should be reviewed. To boost income from indirect taxes – the tax on goods and services – the committee wants the proposed Goods and Service Tax regime to be implemented as soon as possible.

Figure 3 (source: RBI)

 

  Increasing disinvestment, the process of selling government stake in public enterprises, is another proposal to boost receipts. India has failed to meet the disinvestment estimate set out in the Budget in the last two years (Figure 4).  The committee believes introducing new channels [1.  The committee suggests introducing a ‘call option model’. This is a mechanism allowing  the government to offer for sale multiple securities over a period of time till disinvestment targets are achieved.  Investors would have the option to purchase securities at the cost of a premium.  They also propose introducing ‘exchange traded funds’ which would comprise all listed securities of Central Public Sector Enterprises and would provide investors with the benefits of diversification, low cost access and flexibility.] for disinvestment would ensure that disinvestment receipts would meet this year’s target of Rs 30,000 crore.

Figure 4 (source: Union Budget documents, PRS)

 

  Taken together, these policy changes, the committee believe would significantly improve India’s fiscal health and boost growth.  Their final projections for 2012-13, in both a reform and no reform scenario, and the medium term (2013-14 and 2014-15) are presented in the table below: [table id=2 /]  


Earlier this week, Lok Sabha passed the Bill that provides for the allocation of coal mines that were cancelled by the Supreme Court last year.  In light of this development, this post looks at the issues surrounding coal block allocations and what the 2015 Bill seeks to achieve.

In September 2014, the Supreme Court cancelled the allocations of 204 coal blocks.  Following the Supreme Court judgement, in October 2014, the government promulgated the Coal Mines (Special Provisions) Ordinance, 2014 for the allocation of the cancelled coal mines.  The Ordinance, which was replaced by the Coal Mines (Special Provisions) Bill, 2014, could not be passed by Parliament in the last winter session, and lapsed. The government then promulgated the Coal Mines (Special Provisions) Second Ordinance, 2014 on December 26, 2014.  The Coal Mines (Special Provisions) Bill, 2015 replaces the second Ordinance and was passed by Lok Sabha on March 4, 2015. Why is coal considered relevant? Coal mining in India has primarily been driven by the need for energy domestically.  About 55% of the current commercial energy use is met by coal.  The power sector is the major consumer of coal, using about 80% of domestically produced coal. As of April 1, 2014, India is estimated to have a cumulative total of 301.56 billion tonnes of coal reserves up to a depth of 1200 meters.  Coal deposits are mainly located in Jharkhand, Odisha, Chhattisgarh, West Bengal, Madhya Pradesh, Andhra Pradesh and Maharashtra. How is coal regulated? The Ministry of Coal has the overall responsibility of managing coal reserves in the country.  Coal India Limited, established in 1975, is a public sector undertaking, which looks at the production and marketing of coal in India.  Currently, the sector is regulated by the ministry’s Coal Controller’s Organization. The Coal Mines (Nationalisation) Act, 1973 (CMN Act) is the primary legislation determining the eligibility for coal mining in India.  The CMN Act allows private Indian companies to mine coal only for captive use.  Captive mining is the coal mined for a specific end-use by the mine owner, but not for open sale in the market.  End-uses currently allowed under the CMN Act include iron and steel production, generation of power, cement production and coal washing.  The central government may notify additional end-uses. How were coal blocks allocated so far? Till 1993, there were no specific criteria for the allocation of captive coal blocks.  Captive mining for coal was allowed in 1993 by amendments to the CMN Act.  In 1993, a Screening Committee was set up by the Ministry of Coal to provide recommendations on allocations for captive coal mines.  All allocations to private companies were made through the Screening Committee.  For government companies, allocations for captive mining were made directly by the ministry.  Certain coal blocks were allocated by the Ministry of Power for Ultra Mega Power Projects (UMPP) through tariff based competitive bidding (bidding for coal based on the tariff at which power is sold).  Between 1993 and 2011, 218 coal blocks were allocated to both public and private companies under the CMN Act. What did the 2014 Supreme Court judgement do? In August 2012, the Comptroller and Auditor General of India released a report on the coal block allocations. CAG recommended that the allocation process should be made more transparent and objective, and done through competitive bidding. Following this report, in September 2012, a Public Interest Litigation matter was filed in the Supreme Court against the coal block allocations.  The petition sought to cancel the allotment of the coal blocks in public interest on grounds that it was arbitrary, illegal and unconstitutional. In September 2014, the Supreme Court declared all allocations of coal blocks, made through the Screening Committee and through Government Dispensation route since 1993, as illegal.  It cancelled the allocation of 204 out of 218 coal blocks.  The allocations were deemed illegal on the grounds that: (i) the allocation procedure followed by the Screening Committee was arbitrary, and (ii) no objective criterion was used to determine the selection of companies.  Further, the allocation procedure was held to be impermissible under the CMN Act. Among the 218 coal blocks, 40 were under production and six were ready to start production.  Of the 40 blocks under production, 37 were cancelled and of the six ready to produce blocks, five were cancelled.  However, the allocation to Ultra Mega Power Projects, which was done via competitive bidding for lowest tariffs, was not declared illegal. What does the 2015 Bill seek to do? Following the cancellation of the coal blocks, concerns were raised about further shortage in the supply of coal, resulting in more power supply disruptions.  The 2015 Bill primarily seeks to allocate the coal mines that were declared illegal by the Supreme Court.  It provides details for the auction process, compensation for the prior allottees, the process for transfer of mines and details of authorities that would conduct the auction.  In December 2014, the ministry notified the Coal Mines (Special Provisions) Rules, 2014.  The Rules provide further guidelines in relation to the eligibility and compensation for prior allottees. How is the allocation of coal blocks to be carried out through the 2015 Bill? The Bill creates three categories of mines, Schedule I, II and III.  Schedule I consists of all the 204 mines that were cancelled by the Supreme Court.  Of these mines, Schedule II consists of all the 42 mines that are under production and Schedule III consists of 32 mines that have a specified end-use such as power, iron and steel, cement and coal washing. Schedule I mines can be allocated by way of either public auction or allocation.  For the public auction route any government, private or joint venture company can bid for the coal blocks.  They can use the coal mined from these blocks for their own consumption, sale or for any other purpose as specified in their mining lease.  The government may also choose to allot Schedule I mines to any government company or any company that was awarded a power plant project through competitive bidding.  In such a case, a government company can use the coal mined for own consumption or sale.  However, the Bill does not provide clarity on the purpose for which private companies can use the coal. Schedule II and III mines are to be allocated by way of public auction, and the auctions have to be completed by March 31, 2015.  Any government company, private company or a joint venture with a specified end-use is eligible to bid for these mines. In addition, the Bill also provides details on authorities that would conduct the auction and allotment and the compensation for prior allottees.  Prior allottees are not eligible to participate in the auction process if: (i) they have not paid the additional levy imposed by the Supreme Court; or (ii) if they are convicted of an offence related to coal block allocation and sentenced to imprisonment of more than three years. What are some of the issues to consider in the 2015 Bill? One of the major policy shifts the 2015 Bill seeks to achieve is to enable private companies to mine coal in the future, in order to improve the supply of coal in the market.  Currently, the coal sector is regulated by the Coal Controller’s Organization, which is under the Ministry of Coal.  The Bill does not establish an independent regulator to ensure a level playing field for both private and government companies bidding for auction of mines to conduct coal mining operations.   In the past, when other sectors have opened up to the private sector, an independent regulatory body has been established beforehand.  For example, the Telecom Regulatory Authority of India, an independent regulatory body, was established when the telecom sector was opened up for private service providers.  The Bill also does not specify any guidelines on the monitoring of mining activities by the new allottees. While the Bill provides broad details of the process of auction and allotment, the actual results with regards to money coming in to the states, will depend more on specific details, such as the tender documents and floor price.  It is also to be seen whether the new allotment process ensures equitable distribution of coal blocks among the companies and creates a fair, level-playing field for them.  In the past, the functioning of coal mines has been delayed due to delays in land acquisition and environmental clearances.  This Bill does not address these issues.  The auctioning of coal blocks resulting in improving the supply of coal, and in turn addressing the problem of power shortage in the country, will also depend on the efficient functioning of the mines,  in addition to factors such as transparent allocations.