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A plan for coal

Sensible principles have become a casualty in the noisy pricing debate.

Written by Yoginder K. Alagh | Published: October 6, 2014 12:04 am
Cournot showed that a market-based profit-maximising solution would be neither welfare enhancing nor efficient in terms of optimising output in the case of a monopoly. Cournot showed that a market-based profit-maximising solution would be neither welfare enhancing nor efficient in terms of optimising output in the case of a monopoly.

There is a fascinating ongoing debate on how to price coal. But in the noise, sensible principles on pricing non-renewable resources like coal have become casualties. India is short of metallurgical coal but has an almost unlimited stock of power-grade coal. Oversight agencies and public sector companies are sternly told to work out the cost of production and accordingly price the coal. There is a comical aspect to all of this.

Is the price of coal the cost of mining it? This question was raised at the golden jubilee celebration of the Central Bureau of Investigation during a special session on coal prices. I was asked to participate in this session by the CBI director and, out of curiosity, accepted the invitation.

The other member on the panel, an Australian lawyer, demolished the notion that auctions are always fair or even efficient. To make life more difficult, I started by citing Augustin Cournot, who had worked out the principles for monopolist pricing, applicable to both privately owned and government-owned companies, a century and a half ago. With a little algebra, Cournot elegantly showed that a market-based profit-maximising solution would be neither welfare enhancing nor efficient in terms of optimising output. The profit-maximising market price would be double the efficient price. So what should the price be and what is the cost of mining?

I tried to answer this question in a series of reports on coal prices in the mid-1980s, with the help of commissioned work from some of the country’s top economists, who were young then but have since become superstars. They had to make some reasonable assumptions, such as what the output of coal over the next four to five years would be. There were technical issues that had to be factored in, too, like shift lengths, gaseousness, ore strength and so on. These were measured and helped determine the long-term marginal cost and, consequently, coal prices. It would be unwise, both from the environmental angle and also from the point of view of inter-generational equity, to only mine open fields of coal and leave the reserves underneath untouched.

These days, planning is out of fashion in government. But in an expert meeting called by the Planning Commission before it was abolished, experienced hands argued that in areas like demographics, energy, water, land and non-renewable resources, long-term considerations are important. If for no other reason than the future welfare of our children.

I remember working out estimates and projections for what the coal sector would look like by 2020 at the beginning of this century. Kirit Parikh kept this work up in the Planning Commission and updated it after correcting for slippages in the base in his fuel policy report. So, there are ways of developing long-term coal prices. It is not impossible.

There was a time that such exercises were taken seriously by the government. I have set prices for agricultural products in my capacity as chairman of the Agriculture Price Commission in 1982 (the body was later renamed the Commission for Agricultural Costs and Prices) and as chairman, Bureau of Industrial Costs and Pricing. If the courts ever wanted an explanation, they would send somebody over and we would be very happy to spell out the details of our work. Usually, they were of the view that if an expert panel had taken a particular position, that would not be questioned.

Nowadays, the market dictates the terms. But can we ignore the long-term costs to society from exploiting our natural resource endowment? Transparency is an all-time essential and facts should always be made public. In any case, our understanding of environmental costs is also much improved. But to ignore the basic factors at play would imperil our inheritance of natural resources and the welfare of future generations. I hope somebody out there is listening.

The writer is chancellor, Central University of Gujarat

express@expressindia.com

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    AN
    Oct 6, 2014 at 4:22 am
    This is a very weak article - what is the alternative pricing mechanism that the writer proposes, except to say that some very smart people (including himself) will arrive at the long term price after rigorous "planning"? Such rigorous planning, by the Planning Commission, has contributed to government inaction leading to the current terrible state in the coal sector - hardly any coal mining, lots of reserves, a badly run state owned enterprise and a power sector depending on buying coal from the overseas market (such as Indonesia) at international spot rates. What you need is to set up a market for buyers and sellers to be able to negotiate long term contracts with indexed pricing, based on the quality of coal. Government oversight should be focused on the operations and safety of the mine, environmental and community sauards, and pricing for taxation purposes. The government oversight should not be the overbearing planning commission (as with the APC) way of interfering in the market, but for the governance of the sector (mininum government, maximum governance).
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      Marko Mamic
      Oct 11, 2014 at 2:25 pm
      Learn how to become more efficient, with this greatmicro-course: s:coursmos/course/th...
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        Akhara Sant
        Oct 6, 2014 at 5:50 am
        The fact that the author does not mention climate change even once is shocking. India and Gujarat are doomed and perhaps already in . Have you any idea what role coal burning by India currently plays in climate change? Utter rubbish of an article and if people who have held such high positions as the author has, I think I must just go and kill myself right now given the total incompetence found in this country.
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        1. Vibhu Gaur
          Oct 6, 2014 at 8:10 am
          Maybe the author should write another article mentioning the alternative price policy and why auctioning is harmful for Indian non-renewable sources, Doesn't it allow the coal to be priced compeively, making us to use it more cautiously. I am naive in this field therefore expects author to dwell more in this topic
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