How did the Indian rupee got burnt by the wrath of coal?

The Indian rupee has seen one of its worst times in the recent days. It climbed to Rs. 65 per USD during the month of August 2013, up from around Rs. 50/dollar in November 2012. It had created a chaotic situation in the country’s economy as the government and common man struggled to keep up with the expenses which just keeps rising everyday. As India is heavily dependent on the US Dollar for purchasing oil the Indian rupee trend matters a lot. A weaker Indian rupee means the government will have to pay more for every gallon of oil purchased.

For the common man a weak Indian rupee means more expenses.

These expenses are then passed on to the end consumer in various forms. For the common man a weak Indian rupee means more expenses. Many things like overseas travelling, overseas education, cost of food, consumer durable, cars, transportation (air and road) and interest for borrowing become expensive. So whether or not you follow the news every day, falling Indian rupee is going to pinch your pocket.

In the wake of the falling Indian rupee

  • Why is the Indian rupee depreciating?
  • How does it affect us?
  • Who or what is responsible for a weak Indian rupee?
  • How can it be corrected, and who is correcting it?

If a negative balance is created in the Forex reserves then the credit worthiness will be affected, thereby resulting in a weaker Indian rupee.

The American dollar has been a dominant currency since the early 1900’s. It implicitly replaced the Pound Sterling during the World Wars as a “world currency”. Since then many other currencies like the Japanese Yen, the Euro, and more recently the Chinese Yuan have tried to dethrone the US Dollar. But none have been successful so far. By “dominant currency” or “world currency” I mean, any currency that is widely used for international financial agreements and transactions. India too uses the USD for most of its foreign trade. It is the most commonly used currency in cross-border payments and receipts for imports and exports respectively. Therefore, it is important for India that at any point of time its imports value should not exceed exports value. If a negative balance is created in the Forex reserves then the credit worthiness will be affected, thereby resulting in a weaker Indian rupee. Few questions that needs to be addressed are:

  • What is the cause for such a rapid depreciation of the rupee in recent months?
  • How could a thriving economy like India face such a severe crisis without so much as a warning?

Indian rupee at its prime during independence

Not many are aware that when the British left India, Indian rupee was valued at par with the dollar, i.e. Re 1= USD 1[1]. This ensured that India had an equal opportunity as any other country to flourish economically. It also ensured India to make macro-level financial decisions that will not be hampered by a weak Indian rupee. During Independence India did not have any foreign borrowings. But with the introduction of the Five Year Plans, large scale foreign borrowings started. It resulted in the devaluation of the Indian rupee. The chart below clearly shows how rapidly we have descended in the value scale since then:

Indian rupee to USD Currency Exchange Rate since 1947(Source: The Economic Times, 2013)
Indian rupee to USD Currency Exchange Rate since 1947 (Source: The Economic Times, 2013)

Who is responsible?

Today the Indian rupee is at its worst ever since independence at nearly Rs. 70 per dollar. Many reasons have been speculated, many factors blamed for it. But the biggest reason for the near-impairment the Indian rupee is the recent Rs. 1.86 lakh crore Coal Scam.

NCDC along with another establishment called Singareni Collieries Company Ltd. (SCCL) was unable to keep up with the government’s expectations.

India is blessed with abundant coal reserves across the East, nearly akin to the oil reserves in Saudi Arabia. India has an interesting history of coal mining since the mid-18th century. The English had first chanced upon the coal reserves in Bengal and took the initiative to establish mines in this region. Soon after, the worldwide Industrial revolution led to an increase in demand for coal. With the help of imported machinery, equipment and British engineers the coal mines were modernized and output increased substantially by 19th century[2]. In 1947 when the British left India, they also took with them the liberty and ability to exploit these reserves to their fullest output. The first Five-Year Plan took place in early 1950’s in which the Indian government decided that they had to borrow substantial amounts of foreign money in order to fund new technology needed for increasing efficiency of the mines. A number of strategic changes took place. It symbolized the country’s first step towards planned development of Coal Mining in India. The National Coal Development Corporation (NCDC) was established in 1956 as a public-sector enterprise to oversee all coal mining, distribution and operations in the country[3]. However NCDC along with another establishment called Singareni Collieries Company Ltd. (SCCL) was unable to keep up with the government’s expectations. It failed to improve the coal industry’s production efficiency through the next decade. The woes and incompetence of coal mining remained same even after such extensive planning. It prompted the government to take another round of actions in 1970s.

A major turnaround

In the post-independence era, many industries were booming in India. The Indian Railways expanded its network with more trains. Iron and steel production shot up. Construction industry demanded more cement and more and more villages were connected with electricity. All these things required coal for ignition. Coal emerged as the new life line of India. However, coal mining industry was still plagued with productivity issues so supply was scarce. India had no choice but to step up its coal imports to meet the domestic demand.

During this period, the Indira Gandhi government was in power. As the coal supply problem intensified, the government decided that it was time to bring all small scale coal companies under common regulatory body to quickly address all mining issues on a large scale. Private coal companies were dissolved. Large coal companies were brought under Coal India Limited (CIL) which became a governing body overseeing all mining and distribution activities in Indian coal industry. Productivity increased manifold, but it was still not sufficient to meet the country’s ever-growing demand. Scarcity became a huge problem because import of coal was costly; the import duty was 85% on coal[4]. However, with the liberalization of the Indian economy in 1993, the import duty was brought down to 10%. Private companies were allowed captive mining (i.e. mining only for its own production and not for selling) and foreign participation was now being allowed. Still, coal was scarce for India’s jumbo-sized appetite.

India coal imports by year(Source: IndexMundi, 2012)
India coal imports by year (Source: IndexMundi, 2012[5])

Beginning of problems

India had to start importing large quantities of coal. Moreover the blocks should have been sold to these companies at a certain market price. But they were actually given away for free. India’s growing power consumption made matters worse, as it meant more quantities of coal would have to be imported.

CIL’s incompetence and mismanagement led to a series of severe failures before finally crumbling into corrupt pieces in 2013. The problem started with the ban on privatization of coal industry. A promising future for coal in the hands of powerful conglomerates was shifted to a monopolistic government. Competition was instantly killed. All scope for rapid technological innovation perished as a result of a slow-paced governance. Instead of assuming monopoly, what the government should have done is create a set of rules for large-scale coal companies to abide by.

The main reason for downfall of the Indian rupee in 2013 is the Coal Scam. The Congress government sought to modify laws related to coal mining by allowing captive mining. This means that the companies can engage in coal mining but only for its own use. Therefore, steel, power and cement companies could now start coal mining but use the coal only internally, and not engage in trading. They believed that this would result in a “business windfall”[6].

By following this plan the Congress government pushed for speedier allocation of coal blocks in 2004. However what ensued was the biggest proof of lackluster governance. Out of the 142 blocks allotted to government-owned and private companies since 2004, 86 of them should have been producing ore by March 31, 2011. Only 28 of them were actually operating, at least in part because of local opposition and difficulty obtaining environmental clearances[7]. This means that the amount of coal that India could have generated for purposes like power generation was compromised. And instead, India had to start importing large quantities of coal. Moreover the blocks should have been sold to these companies at a certain market price. But they were actually given away for free. India’s growing power consumption made matters worse, as it meant more quantities of coal would have to be imported.

Below is a chart which shows India’s worsening coal import situation:

India coal imports (Source: The Telegraph, 2012)
India coal imports (Source: The Telegraph, 2012[8])
For the first time in history, India’s biggest state-run company Coal India, which has so far produced about 80% of India’s coal, is set to import coal in FY 2013-14[9][10]. India incurred an expense of Rs. 1, 59, 567 crores during 2009-2012 on coal imports. All the billions of dollars which India could have saved had to be spent foolishly. It resulted in a massive hole in Forex reserves. Less dollars in India’s Forex bank thus lead to a rapid depreciation of the Indian rupee. It is highly unlikely that India will ever recover the damage done as a result of past selfish decisions made by government.

References

  1. The Economic Times (24th April 2013). “Rupee’s journey since Independence: Down by 65 times against dollar”. Available at http://articles.economictimes.indiatimes.com/2013-08-24/news/41444029_1_indian-rupee-american-currency-continued-dollar-demand
  2. Gee, E. (1940). “History of Coal Mining in India”. Geological Survey of India, vol. VI, No. 3.
  3. Narayan, S. (n.d.). Coal Industry – Set To Meet Millennium Challenges. Available at  http://pib.nic.in/feature/feyr98/fe0798/PIBF2107982.html
  4. Infraline Energy Report (2008). “Mines and Minerals (Development and Regulation) Amendment Bill, 2008- A Step towards Competitive Bidding for Coal Block allocation”. Available at http://www.infraline.com/coal/freedownload/MMDRFinal.pdf
  5. Index Mundi (2012). “India Coal Imports by Year”. Available at http://www.indexmundi.com/energy.aspx?country=in&product=coal&graph=imports
  6. Deccan Herald (2013). “Myopic coal mining policy pushes India towards darkness”. Available at http://www.deccanherald.com/content/207748/myopic-coal-mining-policy-pushes.html
  7. Global Post (2013). India’s Coalgate: Anatomy of a Scam. Available at http://www.globalpost.com/dispatches/globalpost-blogs/india/india-coalgate-corruption
  8. The Telegraph (21 August 2012). India set to top coal import chart. Available at  http://www.telegraphindia.com/1120821/jsp/business/story_15876904.jsp#.UkFhg9LimoM
  9. Reuters (19 September, 2013). Coal India may issue first import tender in October. Available at http://in.reuters.com/article/2013/09/19/coal-india-import-idINL3N0HF1H620130919
  10. Business Standard (12 September, 2013). Coal India to start imports by Sept-end. Available at http://www.business-standard.com/article/companies/coal-india-to-start-imports-by-sept-end-113091100360_1.html

Priya Chetty

Partner at Project Guru
Priya is a master in business administration with majors in marketing and finance. She is fluent with data modelling, time series analysis, various regression models, forecasting and interpretation of the data. She has assisted data scientists, corporates, scholars in the field of finance, banking, economics and marketing.
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2 thoughts on “How did the Indian rupee got burnt by the wrath of coal?”
  1. Avatar O.NAGARAJ GOUD 6 years ago

    m’m,
    The major reason for dollar/rupee value is corruption–coalgate,2G,Lalu,Jagan A.Petc- in all forms and all sectors.The main culprits are politicians and political parties.Solution is only public revolution against political system. O.NAGARAJ GOUD

    • Avatar rasha 4 years & 6 months ago

      Thanks

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