Gist of EPW September Week 1, 2019

The Economic and Political Weekly (EPW) is an important source of study material for IAS, especially for the current affairs segment. In this section, we give you the gist of the EPW magazine every week. The important topics covered in the weekly are analysed and explained in a simple language, all from a UPSC perspective.

 

1. Foreign Investment in Coal Mining

Context

The Government of India has initiated a policy reform which now allows 100% Foreign Direct Investment (FDI) under the automatic route for the sale of coal and for coal mining activities, including associated processing infrastructure.

Background

  • The 100% foreign direct investment (FDI) under the automatic route are subject to provisions of the Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957, amended over time.
  • Under the earlier policy, 100% FDI was allowed only for captive consumption.
    • Captive Consumption means the consumption of goods manufactured by one division or unit and consumer by another division or unit of the same organization
  • Specifically, 100% FDI via the automatic route was allowed in coal and lignite mining for captive consumption by power, steel and cement units.

The changed policy regime, thus, allows foreign companies to extract coal for commercial purposes for sale in the open market and in “associated infrastructure” that include washeries, crushing, coal handling and separation.

FDI and Routes of FDI

What is Foreign Direct Investment (FDI)?

  • Foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country.
  • Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company.
  • Two routes of FDI in India: Automatic Route and Government Route.

Automatic Route

  1. Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment.

Government Route

  1. Under the Government Route, prior to investment, approval from the Government of India is required. Proposals for foreign investment under Government route, are considered by respective Administrative Ministry/ Department.

Significance of new FDI policy

  1. The Coal industry plays a key role in the growth of the economy.
    • India has one of the largest reserves of coal, amounting to 286 billion tonnes.
    • Coal mining in India, the third largest in the world, is an important industry that supplies the largest commercial source of primary energy.
    • Coal, being a vital raw material, is mainly used by the power plants, and metallurgical and cement industries.
  2. India has been importing coal to meet its growing energy requirements
    • The domestic production by Coal India Ltd (CIL) has been unable to keep up with the demand for coal and also meet its production targets.
    • The imports of coal have been made at a cost higher than the prices of domestic coal.
    • With the implementation of the liberalised policy enabling the entry of foreign coal mining companies, it is expected that domestic production would be augmented.
    • It is also presumed to bring into India newer and efficient exploration technologies and methods for mining coal, especially high-end technology for underground mining used by global miners, which would also help in lowering costs.
  3. The policy would also enable the opening up of the industry to competition, which until now had been the monopoly of CIL, a public sector company.
    • Only CIL could mine and sell coal in the country. Later, along with CIL, private and public sector companies with captive mines were allowed to mine and sell 25% of the coal in the open market.
    • To remain competitive, CIL, which is beset with the problems of low productivity, would therefore need to bring down its escalating operating costs.
  4. The new coal mining policy would also push forward the implementation of related policies such as those for auction and allocation of coal blocks, environment and forest clearances, land allocation, and so on.
    • This is because the changed FDI norms alone may not meet the desired objectives of the policy.
    • The entry of new companies would necessitate fast-tracking of approval processes in a time-bound manner to reduce uncertainties regarding regulations and clearances in order to avoid risks to production.

Other Challenges

  • Private investments in captive coal mines have been minimal due to risks to production. These include risks involved in land acquisitions and other permits, which may prevent the entry of foreign firms.
  • This is because foreign firms usually avoid sectors in which the regulatory risks tend to be high, especially with regard to natural resources.
  • Entrants to the industry would have to acquire and develop new coal mines.
  • This would lead to the need for a certain gestation period before the commencement of commercial operations that would also require large financial outlays.
  • Additionally, bidding and environmental clearances, inadequate infrastructure, and issues regarding land availability would take time before 100% FDI in mining by new firms commences.
  • Constraints on profitability could also discourage new entrants and investments.

Conclusion

  • However, from the perspective of sustainable development of natural resources there is a risk of creating imbalance in the environment and ecology that would be caused due to indiscriminate mining.
  • To moderate such apprehensions and to further the larger objective of sustainable development, regulations and safeguards need to be strictly imposed on the mining firms, so that the firms abide by environmental laws and regulations as well as health and safety norms for workers in mines.

For more EPW articles, read “Gist of EPW”

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