Currency Crisis in India Continues: Coal is Both the Source and the Solution

BRISBANE, Australia - Sept. 10, 2013 - PRLog -- India continues to be buffeted by strong cross winds as the sense of crisis around its currency devaluation deepens. It has become almost impossible to pick out a sense of direction, particularly on coal where imports have continued to remain high, stockpiles are building up rapidly but pressure to trim imports has mounted.

The Indian currency continued its decline hitting an all-time low of Indian Rupees (INR) 68.8 to a US$ on Wednesday before closing the day at INR 66.8 to a dollar. The previous day it had hit a previous low of INR 66.3 to a dollar. There are no immediate signs that the free fall in the currency will be quickly dampened. The driver of the decline in the Indian currency has been the sudden exodus of funds from India and the growing current account deficit.

The free fall in the currency has been combined with sharp losses in the stock market as well. On Wednesday, the Sensex, the country’s most watched stock index, crashed 500 points before gaining some ground to recover 28 points at close. Through the last few weeks, the stock market indices have shadowed the fall in currency.

Many have been pointing to sustained high coal imports as a factor in the growing current account deficits. Since April (the start of the fiscal year), imports have increased approximately 50% relative to the same period last year. This has increased foreign exchange outgoings to about $2b, almost 40% higher than the same time last year.

Part of the acceleration in coal imports was anticipated. Under pressure from power plant producers and with lingering shortages in domestic coal production, the government changed the rules allowing higher imported coal prices to be recovered through a fuel cost pass through in generation costs. For power plants severely hurting due to limited domestic supplies, this brought considerable cheer and opened the flood-gates of imports.

The actual volume of imports, however, has been much higher than would have been anticipated by allowing the pass-through of imported coal costs.

Where exactly the imported coal is going remains unclear – a lot of it seems to be piling up at the ports. Stockpiles at 16 major coal import ports were continuing to climb. At last report in July, stocks at the ports were estimated to be around 11mt, slightly higher than the previous week. Part of this build up may simply have been the intent of traders to lock in weak international prices and expectations that the Indian Rupee would continue to fall, although the sharp drop in the currency had not been anticipated till about a month ago.

The government’s response to the crisis has been to put on a brave face and pull up its socks on economic reforms. In Parliament on Tuesday, the finance minister unveiled a 10 point growth agenda around the refrain that “not less reforms but more reforms, not more restrictions but less restriction” were needed.

The minister’s ten point agenda includes several items around the promise that stalled projects would be revived. He wants to resolve issues on coal supply, deal with the ban on ore imports, provide environment clearances and facilitate land-acquisition for stalled projects.

In a sign the ten point agenda wasn’t just empty rhetoric, the Cabinet Committee on Investment (CCI) cleared 36 projects on energy, power and infrastructure with a projected total investment of approximately $30b. CCI, which is headed by the Prime Minister, is the highest government level body that has been specifically formed to support large projects.

The cleared list included 18 power projects being developed by some of India’s leading developers which have been stuck at different stages of clearances. These projects, largely dependent on domestic coal, are being developed at a cost of approximately $15b. Following these clearances, financial institutions will be in a position to release fund for these projects.

Government has also been prodding Coal India Limited (CIL), India’s largest and near monopoly coal producer, to sign fuel supply agreements (FSA) with new capacity. Of the 78,000 MW of new capacity in line for the FSA, CIL has signed agreements with only 42,000 MW. A few days prior to the release of the minister’s ten point agenda, government directed CIL to sign all of the remaining FSA by 6 September.

The minister made special note of the fact that the impasse over the FSA with CIL would now be broken. That he said would help kick start economic growth. This is all great news for the power sector that has long wanted to push forward on these new capacity additions.

There is just one problem. Where is the coal for all these plants? Domestic supplies won’t be enough. Imports will be required. But that will be a difficult proposition if the pressure on the current account deficit and India’s currency remains.  

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