The Coalgate Scandal: A Free-Market Take

The present policy of coalmine allocation was adopted way back in 1993, when the government of the day decided to allocate coal blocks, deemed as “national resources,” to private industries according to the discretion of the Coal Screening Committee. The aim of the policy change was to aid cheap production of power by allowing private industries to mine their own coal from the government-owned coal blocks allotted to them, rather than having to buy coal at a much higher price in the open market. The policy was implemented with special vigour ever since the UPA took over power, with a record 155 coal blocks allocated in a matter of five years from 2004 to 2009 to boost energy production in the country, and more importantly to provide cheap energy to consumers.

The outcome of the government’s new coal policy turned out to be similar to irregularities that marked the 2G spectrum allocation scam: coal blocks were allotted to crony interests (mostly businesses with close links to various State governments ruled by political parties across the spectrum) who diverted the coal mined from the allotted blocks to the open market, thus making windfall profits.

The criticism emanating from various quarters, be it voices from the media or opposition parties, has been predictable: lack of strict regulations and poor accountability led to crony interests hijacking national interests. While it makes political sense to eject loud decibels to cash in on the popular mood of anti-corruption by vouching for honesty and political accountability, the fact remains that governments, irrespective of their political affiliations, fall prey to group interests. The fact that States ruled by the BJP too were involved in the scam, and resisted moves from the Prime Minister’s Office to have a competitive bidding process to allocate coalmines provides enough evidence that corruption is an attribute that unites political parties across the spectrum.

Public accountability?

What seems to miss the view of critiques is the fact that the scams that bombard us on an almost daily basis are nothing but an inseparable feature of the economic system that we live in: a system of economic interventionism in which private property is recognized only as long as it helps attain public interests. This, despite overwhelming evidence to the contrary that protecting individual economic freedom leads to huge improvements in the overall standard of living.

This idea of economic interventionism is blatantly obvious in the Indian government’s stubborn attitude to protect coal mines as “national resources” which, apparently, ought not to be controlled by private individuals at any cost. The root of the scam, then, lies not just in the moral fallibility of men but in the incentives that drive men in our economic system. It is in this context that the criticism of the lack of strict procedures and political accountability leading to the coal scam sounds totally redundant.

Public resources, unlike private resources, are bound to be misused to favour crony interests that may not lead to the much-hyped ideal of promoting national interests. Both the spectrum and coal scam, two of the biggest scams to hit the country, show the foolish belief of the intelligentsia in eradicating corruption by concentrating the ownership of resources into the hands of the biggest monopoly in the country: the government. Private ownership of coal resources would lead to coal being extracted for profits, supposedly the biggest evil of all, but handing over the monopoly control of coal to the government would make the entire system accountable. British Historian Lord Acton’s words could fit better no better context:

“Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men.”

Cheap energy?

Apart from the misuse of power that characterizes monopoly ownership of resources, the logic behind the government allocation of coalmines to private industries is fallacious on various counts, but the most obvious is with respect to the argument that it would lead to lower energy prices. The fallacy is so old that it takes us back to the period of the Classical economists, at least.

While it feels intuitive to believe that lower costs lead to lower prices, that’s not actually how prices are determined. The cost-of-production theory of value of the Classical school, which tried to explain prices on the basis of the cost of the various factors of production that go into the production of the final product, was decisively refuted by the Marginal revolution of the 1870s. Prices of goods are not determined by their cost of production, but by the marginal utility that these goods provide to consumers. In fact, it is the price of the final goods that determines the prices of the various factors of production that are used in the production process. This is not to say that increasing costs would have no effect on energy prices. Only that the primary determinant of prices is not cost, but consumer demand.

The same applies to the energy market: the price of energy is determined by demand in the market, and all government measures to reduce the cost of production of energy for private industries would be of no use when supply and demand reflect a different reality. This is clear with the case of a total of 9 private industries that have started producing “cheap power” since 1993. All of them sell power to consumers at the going rate, and rightly so.

As with any good that is in low supply compared to the size of demand, the price of energy would be high till supply increases to catch up with demand. The way forward, then, is clear: privatize coalmines and allow private industries to profit from the supply-demand mismatch till increased production leads to lower prices and lower margins.