With the Coalgate scam behind it, the government is now all set to allot coal mines under the new auction policy adopted last year. The government hopes the move will root out political favouritism in coal block allotment, help improve domestic coal output, and decrease the cost of power. But the new policy is likely to fail on all counts.
For one, the government still retains the discretionary power to allot coal mines under the new auction policy. This is since the price of coal mines under the new auction policy will be administered by the government; and, as is the case whenever resources are allotted by any means other than competitive bidding in the open market, it eventually leads to cronyism. The result has been, and will be, no different with coal mines.
Two, the new policy does nothing to address the tall entry barriers that still plague the coal mining industry. With entry into the coal sector being a highly regulated affair—probably gamed to favour players with strong political connections—nothing short of complete deregulation would help boost domestic coal production. Cosmetic solutions like the recent institution of a coal regulator to oversee production will change nothing.
Three, providing coal blocks at below-market rates will not stop power companies from bypassing rules to sell power at market price. That is, unless they are compensated for lower prices—which explains the massive power subsidy the government already shells out each year. The new auction policy will not change what is basically a structural problem.