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India’s Coal Crisis Can Further Elevate Inflation ⚡

We wrote about a looming global food crisis last week. This week, we talk about another crisis, coal!

In short

India has massive energy needs, as a fast-growing country.

  • 70% of India’s energy production is dependent on coal-fired plants

  • India is the second largest importer of coal in the world

In this scenario, India is running short on coal, causing power outages across the country.

Why are we running short on coal?

Several reasons, both demand and supply side have resulted in the current coal shortage. The shortage is so grave that coal inventory has fallen to 9 days, against government guidelines of 24 days.

  1. The economy has picked up post COVID, and the demand for energy has increased

  2. India is experiencing the hottest summer in the last 122 years, increasing the demand for electricity to irrigate farms and cool homes

  3. Prices of imported coal have risen drastically post the Russia-Ukraine conflict, resulting in many power plants which depended on imported coal to reduce production

  4. The decreased reliance on imported call has resulted in an increased pressure on domestic coal. Domestic coal production has been low this year anyway because heavy monsoons in major coal producing states

  5. Global shipments have been delayed because of the supply chain disruptions caused by the pandemic and geopolitical tensions

  6. In India, a shortage of railway wagons has been further exacerbating the timely supply of coal where necessary

What’s the damage?

The coal shortage has resulted in power generation being lower than the demand. The most obvious and first-hand impact is in the form of power outages.

Power shortage also heavily impacts industries that require heat generation, and that depend on coal for their operations. Output for these industries has naturally been affected.

With states running a deficit, there is more energy being traded on exchanges. The price of electricity on exchanges has gone up by as much as 85% making the CEA cap energy exchange prices.

What’s the solution?

There are several measures being taken to not let this crisis further extend. Some of them include:

  1. India will start importing more coal. However, it being the second largest importer in the world already, and with Russian coal supply disrupted, global coal prices will further shoot up.

  2. The government has allowed generation companies to start blending imported coal by up to 10%. However, blending results in an increase in generation costs.

  3. The government in 2020 opened up the coal sector to end Coal India’s monopoly. Any one can now bid for 50 coal blocks that it opened up. The government would also incentivise commercial producers with investments and rebates. However, this has run into opposition from states, and the matter is pending with the Supreme Court.

  4. The government has decided to evoke an emergency clause in the country’s electricity law to allow currently idled power plants designed to run on imported coal to pass on higher costs to distribution companies.

What next?

One way or the other, India’s coal imports are likely to increase, that too, in a scenario where global coal prices are up. This will result in higher energy costs in India, which will further fuel inflation.

Other than food and price of crude, India will now also have to deal with increases in the cost of electricity.

Rising energy costs usually has a staggered impact, since input costs for manufacturing increase, and these are then passed on to consumers through price hikes of end goods.

India’s coal problem feeds back into our current worry of high inflation, reversal of RBI’s pro-growth policy, and subsequent cooling off of the economy.

In short, further risk of the markets not performing well.

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