COAL BLOCK CANCELLATION WILL AFFECT GDP GROWTH ADVERSELY, INDIA RATINGS SAYS

COIMBATORE (TIP): The Supreme Court‘s (SC) decision to cancel all but four coal blocks allocated since 1993 could adversely affect the nascent economic recovery, India Ratings and Research has said. The impact of this ruling will be felt across various channels and lead to a rise in nonperforming assets of the banking sector, an increase in the cost of coal and in turn a rise in power tariffs, the agency said.

This would also put pressure on current account/currency as coal would have to be imported at higher costs. “Besides impacting economic recovery, this could also pose challenges for macroeconomic stability. While the ruling will have a direct impact on corporates with allocated coal blocks, the tremors will be felt on state governments as well,” India Ratings said.

The SC ruling on coal blocks is similar to its earlier ruling of cancellation of 2G licences in February 2012, the agency said. “While the SC ruling may help in cleaning the rot and could pave the way forward for a transparent system of selling natural resources, it will have an immediate effect on a number of stakeholders and also the overall economy,” it said. Though there would be some windfall gain for the Central Government in the current fiscal from the additional levy imposed, the finances of six state governments would be affected by this ruling. “West Bengal is likely to be the worst affected, as six operating coal blocks allocated to various state government companies have been cancelled,” India Ratings stated.

“These companies’ accounts are not consolidated with the state’s balance sheet,” it said. However, in case of stress on the individual balance sheet of these companies, the state governments have to support them for their operations, the agency said. The demand-supply mismatch has increased India’s dependence on import for coal supplies. India imported 171 million tonnes (mt) of coal valued at $16.41 billion in 2013-14 and 145 mt valued at $17.01 billion in the previous fiscal.

“A halt in domestic production of coal would increase import dependence further,” India Ratings, which is part of the Fitch Group, said. In a situation where Coal India is not able to extract coal from captive coal mines of cancelled coal blocks, India’s dependence on imported coal would increase significantly. The coal import bill is likely to widen by $6.22 billion for 2015-16 exerting pressure on currency and affecting macroeconomic stability, India Ratings stated. Banking and financial institutions’ exposure to these coal blocks is pegged at around Rs. 2.5 lakh crore.

“The banking sector is already under stress. Apart from commercial banks, Rural Electrification Corporation and Power Finance Corporation will also be impacted by the cancellation of coal blocks,” India Ratings said.

Be the first to comment

Leave a Reply

Your email address will not be published.