Dr. Susmit Kumar, Ph.D.

Coal India is the country's second-biggest employer. As per a June 2017 Niti Aayog draft of a new energy policy, Coal India Ltd (CIL) should be broken up into seven independent companies to make it more competitive. Apart from this as per the draft paper, fresh production from new mines should come from private sector, calling for comprehensive reforms in allocating coal blocks on commercial lines to independent companies. The division of CIL is fine, but private sector in new mines will be death knell for CIL.

One major criticism of Coal India is that it is inefficient because as per Reuters, its output-per-man shift is estimated at one-eighth of US based Peabody Energy, the world's largest private coal producer (NITI Aayog proposes break up of Coal India into seven firms, The Times of India (Reuters), June 28, 2017). But if you take the dollar, being over-valued, nearly six-times vis-à-vis Indian rupee in PPP (Purchasing Power Parity) terms (please read my article: The US Dollar – A Ponzi Scheme), into consideration, there is not much difference in output-per-man shift in CIL and Peabody Energy. If US dollar goes down to its PPP value, Peabody Energy would have to pay six times the present hourly rate to its employees so that employees can maintain same standard of living. Apart from this, Peabody Energy filed for bankruptcy in 2016. As per Niti Aayog draft of new energy policy, the share of coal in India’s commercial primary energy supply was 55% in 2015-16 and is expected to remain high at 48-54% in 2040. Hence coal being a vital resource in India, bankruptcy by a large private firm in coal industry will have a profound adverse impact on the economy which is not acceptable for a country like India.

Apart from this, it is certain that in future, some crooks in the government would sabotage the CIL in order to help private firms. We all know how Air India was deliberately sabotaged by a few people in the UPA government a decade ago by purchasing a massive number (a total of 111) of new aircrafts, not needed by the airlines, and by giving up profit making routes and timings in favour of national and international private airlines, which led to a huge loss to the national carrier but came as a boon to private operators. Apart from this, they also leased planes from private operators even while the process to acquire new planes was underway. As per the FIR by the CBI, all these were done to benefit private companies (CBI files three FIRs on UPA’s aircraft buy, Air India decisions, Neeraj Chauhan, The Times of India, May 30, 2017).

Instead of allocating new mines to the private sector, let these new seven coal companies bid against each other for them. It would result in efficiency and also reduction in the price of coal. The resulting competitive pressure will foster efficiency and bring about substantial reduction in coal price.

A firm works for the shareholders. In US, Wall Street forces firms to show profit every quarter. Hence CEOs have to come up ways to reduce expenditure and increase income. They squeeze as much money from the firm (like keeping it lean and thin, i.e. having as few employees as possible) as possible for the shareholders. They lay off employees even if the firm has profit year after year. In worst case, they just shut down the firm and imports from overseas, mainly China, as they can make more money by manufacturing overseas. For this very reason due to being excessively dependent on the US educated economists, the country has been experiencing jobless growth after the NDA2 has taken over the reins in 2014, similar to "Jobless Recovery" in US since the 2008 Great Recession. This is not good for a nation’s economy. A country is not a firm. For the development of a country, you need to keep entire population in mind rather than few like shareholders in case of a firm.

This same argument, i.e. privatization in every sphere, has resulted in massive loss of jobs in US, especially due to the Wall Street pressure to show profit every quarter. The US lost massive number of jobs, related to

(i)     a decrease of nearly 35% (from 14.2% in 2000 to 9.3% in 2008) of the world export market in just eight years (thereafter it is hovering around 9%) as shown in Table 1, and

(ii)   related to the goods for its own consumption corresponding to record increase in trade deficit since mid-1990s as shown in Chart 1.

Despite the historic loss of millions of middle class jobs during 2000 to 2008 and job losses related to the record increase in its trade deficit since 1990s, the US economy kept on booming, firstly due to the tech stock bubble, and secondly the real estate price bubble. When the real estate bubble burst in 2008, the Bush administration (and later the Obama administration) had to spend trillions of dollars to prop-up banking and real estate sectors. US Fed reduces it rate during recession to spur consumer spending. Once low interest rate was able to kick-start the economy, US Fed used to raise the rate within few years. Before the 2008 Great Recession, the US had recessions in early 1990s and again in early 2000s. As shown in Chart 2, the Fed reduced the rate to about 3% for about a year and a half at the onset of the early 1990s recession and then again it reduced the rate to about 1% for a year and a half at the onset of next recession which occurred in early 2000s, i.e. the Fed had to lower the bar for its rate in early 2000s recession from the previous recession. After the 2008 Great Recession, the Fed have to go down to ZERO percent for nearly 7 to 8 years and it has only inflated the assets like stock market, with no job recovery in sight. The reason for its failing is that this time banks are not finding enough people, with good credit rating (as they do not have good paying jobs), to provide loans to.

Americans are so much frustrated with their economy that they are doing unbelievable things like electing an African-American with a Muslim middle name, i.e. Barack 'Hussein' Obama as President - not once but twice - and then a known white supremacist, racist, serial liar and misogynist who had never hold any elected position, in the 2016 US Presidential election, over the Wall Street favorite Hillary Clinton. Trump won mainly due to getting votes in the US rust belt (Midwest) where people voted for him on just one hope that despite being not a perfect person, Trump might bring back the factory jobs, lost to foreign countries, in the recent three decades and more.

The US dollar is a Ponzi scheme and is over-valued (please read my article: The US Dollar – A Ponzi Scheme). The US just print its currency, which happens to be the global currency, to fund its trade (and also budget) deficit for last four decades. In return exporting countries deposit the same paper, i.e. the US dollar, in the US by investing in US Treasury Bills and US share markets.

Till now the US has been surviving due its over-valued dollar. If the US dollar goes down to its PPP value, there will be a complete collapse of the US economy, akin to the Russian economy during 1990s. Right now even after massive loss of manufacturing jobs, the living standard of even an American hourly wage is very high as compared to the rest of the world. At even $10 an hour, working in a restaurant, they make say $1800 a month, out of which they spend $200-$300 on food, $700 on the room rent (with a/c) and $300 to $400 on a very good car; he can buy a brand new 48" LED TV for less than $400 which is less than one-fourth of his monthly income; he can buy a round-trip air ticket to India in less than $700 in off-season and in $1200 in peak season which are less than 50% and 75%, respectively, of monthly income. If two persons (wife & husband) work, then they can have a life better than a middle-middle class Indian family. But if the dollar goes down to its PPP value, which is about 1/6th of the current value, there will be complete chaos in the US as the purchasing power of the Americans would go down drastically. Then an hourly wage worker, with $300 (1/6th of $1800) a month income, would find it difficult to even survive as his entire money would be good only for food. A brand-new Toyota Camry in the US would then cost $150,000 instead of $25,000, its present price, and it would be out of bounds even for the middle class in US. Right now, the moment a person in US gets a $50,000 a year job, he buys a brand new car like Camry. The US economy would resemble the Russian economy during 1990s.

In an op-ed article, published in the New York Times, William Grieder, a bestselling author, wrote (“America's Truth Deficit,” New York Times, July 18, 2005):

 

“For years, elite opinion dismissed the buildup of foreign indebtedness as a trivial issue. Now that it is too large to deny, they concede the trend is "unsustainable." That's an economist's euphemism which means: things cannot go on like this, not without ugly consequences for American living standards. But why alarm the public?”

 

Chart 1 US Monthly Balance of Trade (1975-2017)

 

Chart 2. US Fed Rate

(a) Early 1990s Recession, Minimum Fed Rate - about 3% for about 1.5 years

(b) Early 2000s Recession, Minimum Fed Rate - about 1% for about 1.5 years

(c) 2008 Great Depression, Minimum Fed Rate - 0% - for last 7 years

(Source: http://www.macrotrends.net/2015/fed-funds-rate-historical-chart)

 

Table 1 (Data source: World Economic Outlook which is published twice a year by IMF)

 

Additional information