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Deallocation of coal could hit economic recovery: Fitch

September 26, 2014 08:44 IST

A coal minerIndia Ratings, a Fitch Group company, said cancellation of 214 coal blocks by the Supreme Court could adversely impact the country’s economic recovery, though it would clean the system in the long run.

It said the court's ruling was similar to its earlier one of February 2012 on cancellation of telecom 2G licences.

While the SC order could pave the way for a transparent system of selling natural resources, it will have an immediate effect on a number of stakeholders and on the overall economy, the agency said.

“The impact of the  ruling will be felt across various channels and lead to a rise in non-performing assets of the banking sector, a rise in the cost of coal and in turn a rise in power tariffs (rates), pressure on current account, currency and, finally, on overall inflation,” it said.

India's economy grew at a two-year high of 5.7 per cent in the first quarter of this financial year, after a below-five per cent growth in 2012-13 and 2013-14.

“While the ruling will have a direct impact on corporates with allocated coal blocks, the tremors will be felt on state governments as well,” it said.

There could be some windfall gain for the central government this financial year from the fine of Rs 295

a tonne on each block holder.

The total fine comes to Rs 7,905 crore (Rs 79.05 billion) for operational blocks.

However, the finances of six states would be affected by this ruling, says the analysis.

It said West Bengal was likely to be the worst affected, as six operating blocks allocated to various state government companies have been cancelled.

So has an operating block each allotted to a state government company from Arunachal Pradesh, Karnataka, Madhya Pradesh, Punjab and Rajasthan.

These state companies now have to pay an additional levy on coal extracted by them.

These companies’ accounts are not consolidated with the respective state’s balance sheet but in case of stress on the individual balance sheet of these companies, the state governments have to support the operations, it said.

According to K K Venugopal, senior advocate, on behalf of the Coal Producers Association, closure of mines would result in an estimated loss of Rs 4.4 lakh crore (Rs 4.4 trillion) in terms of royalty, cess, direct and indirect taxes.

A note by Kotak Institutional Equities said India might not experience significant negativity in real economic variables in the short term but the negative externalities in the medium term on the investment cycle outlook could be profound if the government failed to take the necessary steps.

BS Reporter in New Delhi
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