Coal Terminal Mundra Port India
Modi government may consider breakup of behemoth Coal India. Reuters

India's prime minister-designate, Narendra Modi is considering breaking up the state-run Coal India, the world's largest miner of the fuel, a move that can attract foreign investments into the sector, increase coal output and slash imports.

Any reform in the country will begin with Coal India, as it accounts for 80% of the nation's coal output, a source at Modi's Bharatiya Janata Party (BJP) told Reuters.

Modi's government could convert the various Coal India units into independent firms, and bring on board the respective state governments as equity holders to expedite land acquisition and other processes, a top Coal India official told the news agency.

The new government could also take to auctioning coal blocks through open tenders, as New Delhi already does for oil and gas deposits.

The plan to set right the coal sector will guarantee uninterrupted electricity supply across Asia's third-largest economy. Coal-fired power plants generate more than half of India's electricity and remain the cheapest source of energy.

Coal India's stock has surged 27.48% this year on hopes that the new government will reform the sector, boosting the firm's prospects.

By comparison, India's main stock index, the S&P BSE Sensex, has jumped 17.28% this year.

Coal India Struggling

Coal India has not been able to meet output targets for years.

Bureaucracy, strikes, protests against land acquisition and delays in securing environmental approvals have left coal output far below demand – India is now the world's third-largest importer even as it sits on the fifth-largest reserves.

Credit Suisse analysts Neelkanth Mishra and Ravi Shankar wrote in a 19 May note that a dismal domestic coal output is one of the main reasons for the slowdown in India's investment cycle.

Boosting coal volumes could be a top priority for the incoming government, they added.

"The only meaningful solution, though much harder to implement, is to either break Coal India up, and divide ownership of its subsidiaries among the states where they operate, or in some way introduce an incentive structure so that the respective state governments participate in the growth of coal mining in their states," the Credit Suisse analysts said in the note.

Barclays analyst Chirag Shah wrote in a 16 May note that a decisive election victory has offered the incoming government an opportunity to effect a complete image makeover of the mining sector and that mining sector growth, particularly coal, will tackle several economic and social issues

"We think it is time that India put its mining sector house in order. The sector's GDP contribution has dropped from 4% in 1994 to 2% in FY14E and the sector's current account deficit has increased to $26bn [£15.4bn, €19bn]....

"We estimate the Indian mining sector needs investment of $20bn, and policymakers should draw on global best practices in a way that attracts large private sector participation," the Barclays analyst said in the note.

Output and Imports

India's coal production in the 11 months to February 2014 was 497.2 million tonnes, according to data from the Ministry of Mines. Output stood at 557.8 million in the financial year 2012-13.

India imported 158.8 million tonnes of coal in the financial year 2013-14, according to data from research firm OreTeam.

Government data released in February showed the nation imported 145.8 million tonnes of coal in the financial year 2012-13. Indonesia was the top supplier that year.