India’s current account deficit (CAD) hitting a record high of 4.8% in July and the continuous simultaneous steady plunging of the rupee, which has not bottomed out yet, has become a major source of worry for the country.

The depreciation of the rupee (15% against the dollar since January) will result in the cost of future import of goods such as petroleum, coal, and non-essential items such as gold shooting up. The situation has been created by a complex set of factors and the solution will, as a result, need to be multilayered.

It is clear that one part of the solution lies in the curbing of imports. Curbing of gold import has been widely discussed as a means to reduce this deficit, but there are other, equally important, measures that merit scrutiny, such as the tackling of the country’s energy import bill.

Coal’s contribution: imports and capital outflow
Energy imports (oil + coal) account for close to 40% of India’s total imports, with the country importing over 80% of its petroleum requirements at high international prices. Massive expansion of coal based power infrastructure and severe constraints on domestic production, have seen India’s coal imports rise sharply over the last few years. The coal import bill touched nearly $18 billion in 2012-13, more than double the 2010-11 figures. Coal imports jumped 33% in the quarter ending on 30th June, this is was up 44% up against last year ago. According to rough calculations the coal import bill by 2017 could account for 23% of the CAD.
 

Year         Import Quantity (in MT)    Import Cost (in billion.USD)
2009-10    73.2                                7.06
2010-11    68.91                              7.49
2011-12    102.8                             14.21
2012-13    204                                 18

Indian companies have invested significant amounts in Australian, Indonesian and other coal mines and power plants contributing to substantial capital outflow and a weakening of the rupee. For example, Adani Power and GVK are investing $21 billion in the Australian Galilee coal basin and related coal infrastructure. Lanco is also focusing on investments in Australia. Tata and Reliance is investing in Indonesia and even CIL is scouting for mines overseas. These international buys also require a large outflow of forex which contributes to the increasing CAD.

Finally, beyond these two factors - coal imports and coal related Indian investments abroad -  there are other ways in which coal contributes to weakening of the rupee and increasing CAD, like importing coal mining and coal power plant equipment and Indian coal miners/IPPs drawing on foreign currency loans.

Local coal is no solution
These figures have grave implications for the country’s energy security. There are at least two obvious solutions to the problem of energy import dependence:
I. Ramp up domestic production to meet entire demand, or
II. Shift away from coal dependent power infrastructure so as to wean off coal

The first solution is premised on the assumption that domestic production can, in fact, be ramped up to meet current and future demand. This assumes vast cheaply extractable coal reserves; local communities that can be easily displaced with no opposition; environmental regulations that can be flouted and offer no protection for forests, tigers and elephants that inhabit coal-rich areas.

Each of these assumptions is either false or misplaced or questionable:

• Coal India Limited (CIL) has recently downwardly revised its extractable reserve figures by 16% when it shifted from an archaic classification system to the internationally recognized UNFC system. There is reason to believe that the actual reserves may be even smaller. Recent developments have shown that communities in coal bearing areas have begun to exercise the rights given to them under the constitution, making land acquisition more difficult.

• Environment laws are being tightened to ensure that densely forested areas that support biodiversity and forest dependent communities will become off limits to mining.

CIL has not been able to meet local coal demand even when facing less opposition. The company has been consistently missing its own production targets. Recently, an inter-ministerial group reviewing coal supply to the power sector has recommended that the government stop accepting fresh applications for coal for the next two years in view of the acute coal shortage.

The only real solution left is a shift away from the current massive coal dependence. This would entail aggressively pursuing efficiency measures and investing in renewable energy solutions, both decentralized as well as large scale installations.

Arundhati Muthu is a corporate campaigner with Greenpeace India.