Coal and Mining Sector

[op-ed of the day] Let’s not muddle along on how we share natural endowments

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 2- Adoption of policy of auctioning of resources and periodic review of the policy.

Context

Governments regulations and restrictions in the markets, believing that policies could artificially restrict either supply or demand, or both, often results in unrealistic or unworkable prices.

Adoption of the auctioning process to allocate resources

  • Design of process makes the difference: While auctions may be the cleanest way to allot scarce natural resources to private parties, their design makes all the difference.
  • Three things needed to get the desired results from auctions:
    • Clear policy goal: Define clear policy goals for the allotment of the resource whether coal blocks, spectrum or land.
    • The proper process of periodic review: Define a proper process for periodic review of the design itself, since it may not be possible to get everything right in the first instance.
    • Make the process non-partisan: Make the political oversight process as non-partisan as possible, so that regime changes do not keep upending policies.

What went wrong in spectrum allocation case?

  • Arbitrary tweaks in policy: Arbitrary tweaks were made in the telecom licence and spectrum allocation policy.
    • Which is what forced the apex court to intervene and cancel those licences.
  • The claim of revenue loss: Cancellation followed a  claim by the CAG that the “presumptive” revenue losses may have been as high as ₹1.76.
  • Result of the two events-policy of revenue maximisation: The net result was that all subsequent auctions were designed to maximize spectrum bids.
    • Winner’s curse: The policy finally ended up becoming a winner’s curse, evident in the pile of debt incurred by the telecom sector.
  • Why did this happen? This happened because of the absence of a clear policy goal.

Real estate sector

  • High land prices: The same goes for real estate, which is struggling right now due to high land prices because the bureaucracy prevents price reduction in land.
    • Unaffordable to middle-income buyers: That make most properties unaffordable for middle and lower-middle-income buyers.
  • Low FSI issue: Urban land prices are high due to artificial constriction of supplies through the fixing of low floor space indices (FSIs) even in land-scarce localities.

Technology and periodic review of policy

  • Technology can lower costs: Spectrum or land or coal mines are not always in short supply, for new technology lowers costs.
    • Efficient spectrum use: The same spectrum can, with the use of newer technology, be used more efficiently.
    • 3D printing in construction: Better infrastructure and improved building technologies (even 3D printing techniques for mass housing projects in non-urban areas) can lower housing costs enormously.
    • Automated coal mining: Automated coal mining can lower coal production costs, enabling higher profitability even with relatively high auction bids.
  • Need for periodic policy review: Technology can reduce the prices of the resources and hence the periodic review of the prices at which the resources are allocated need to be taken to for balanced pricing.

Conclusion

  • Policies on the allocation of scarce resources need to evolve based on actual experience and changing technologies and processes.
  • The success or failure of a specific policy cannot be judged purely from a revenue or transparency point of view.

 

 

 

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