India caught in a coal trap

While the energy crisis continues to wreak havoc on Western economies, it is also felt keenly in the East. By comparing the situation in China, which we discussed earlier this month, with what’s happening in India, it’s obvious that the latter fares much worse. As its eastern neighbor, India is heavily dependent on coal, with its share in the country’s power generation mix growing stubbornly, from 73.7% in 2021 to 76.8%[1] in January-May 2022 (see Fig. 1). Amid weather extremes, coupled with a rebound in industrial activity, coal stockpiles in India fell below the critical mark in April (<25% of the required stock at more than 100 thermal power plants and <10% at more than 50 plants), prompting an acute power crunch.[2]

Up against the shortage, the Indian government this May allowed coal mining companies to raise production by a further 10% from the previously granted output increase of 40% over the next six months without a need for public consultation or a revised environmental impact assessment.[3] This move has given a major boost to the domestic coal sector, with total output rising from 29% y-o-y in April to 34% and 33% in the following two months, respectively.[4] In the first half of 2022, India produced 460.4 million tonnes of coal, up 15% from a year earlier (see Fig. 2).

India paid a total of $14.5 billion for imported thermal and coking coal in January-May 2022. This is more than twice the amount it paid in the same period last year, which is unsurprising considering a sizable jump in prices[5] (see Fig. 3). Local coal-fired power plants running on imported fuel had to operate below capacity before being ordered to run flat out to address the power crisis.[6] To support domestic producers, the Ministry of Finance reduced import tariffs on coking coal and anthracite from 2.5% to zero.[7]

A potential solution to address the current shortage could be buying more coal from Russia, which is offered at a discount to global prices (up to 30% in June).[8] From official statistics it appears that this opportunity is already being realized: in just the first four months of 2022, India purchased $0.95 billion worth of Russian coal, almost as much as in the whole of 2021 ($1.1 billion).

Though in his recent statement the Minister of Coal has said that India is determined to minimize its dependence on coal imports, this goal is hardly achievable in the short term while power demand is on the rise.