The problem of deteriorating output growth in spite of regulations in the coal sector is casting a huge shadow on the coal market of India. The problem now appears to have escalated to a level that is persuading the government to issue further regulations to ensure increasing and steady supply of coal from the industry.

Coal industry has always been a highly regulated one; however, the policies undertaken by the ministry seem to be proving inadequate even for a sector such as power, which the government has prioritised with regard to the distribution of coal. The CIL said recently that the company can only deliver 41 metric tonnes of coal out of the 306 metric tonnes mentioned in the Letter of Assurances issued to the power sector for producing 65 gigawatts of energy in an expansion scheduled during the year 2011/12. The supply from CIL will ensure production of only 12 gigawatts.

Under the current policy regime of the Indian coal ministry, captive mining is set up for players apart from Central government and other central or state owned companies such as CIL and SCCL and Mineral Development Corporations of the State governments.

Companies engaged in production of iron and steel, power, washing of coal from the mines and other end-uses the government notifies are allowed to produce coal, but only for captive consumption.

The government has also facilitated sub-leasing of isolated small pockets of coal deposits that cannot be developed in a large scale for the benefit of economic development and those which do not require rail transport for other private parties.

Despite this seemingly inclusive regime, coal production is below desired levels in the country, unable to cater to industries.

The Isolated mining pockets leased out to private parties are often under developed and present with insurmountable geological challenges. Mines with infrastructure, on the other hand, is rarely leased out. Since 1993 almost 40 such mines were allocated, and that too on a joint basis, which has lead to problems such as varied economic interests of the recipients and thus time bound development get strained and delayed. Out of these 40 mines allocated, only a few of them have been developed.

The government also reported of 46 delayed projects of CIL earlier during the month of May. The supply shortfall of output has brought the state owned CIL to the verge of dishonouring Letter of Assurances (LoA) that promise delivery of 450 million tonnes.

The Indian power sector was reported of receiving only 303 million tonnes as against the expectation of 335 million, down 10 percent, during 2010-2011. The total coal production on the other hand fell 6 percent during the same time.

In addition, environmental issues, land acquisitions problems and relating snags have lead the CIL to reduce its output target to 447 million tonnes as opposed to the preliminary target set at 520 million tonnes for the 2011/12 fiscal.

The government might free the CIL from such LoAs, in search of alternative amendments to the coal distribution policy to make it more inclusive and assure prompt delivery. However, the coal industry in India is yet to emerge, with possession of 10 percent of the world's total coal reserves.

Impact: Positive for CIL. It will be able to issue the coal that has been mined under LoA to other parties.