poo1 wrote:I cant understand why ans C is wrong

Redundancy not once but twice and the resposible element is same in both cases!

C)steam engines in eighteenth-century England allowed an increase in coal production by permitting

That's it!

However, read on if you want to get to the detailed version and much indepth treament-

C)steam engines in eighteenth-century England allowed an increase in coal production by permitting

Omit modifiers in italics

C) simplified version-
C)steam engines allowed an increase by permitting the drainage of mine water

Steam engines allowed something...
How?
by permitting something...

now have a look at the non underlined portion in conjunction with the underlined portion by applying llism to the second part-

steam engines allowed an increase in coal production by permitting extraction of deeper layers of coal
Steam engines allowed something...
How?
by permitting something...

Another reason, albeit minor, if you analyze it with OA(vertical scanning)-
C)...by permitting the drainage ... and permitting extraction
the applies to drainage but cannot be applied to extraction

contrast the the issue with OA, even though the in OA was not required, courtesy llism.

Please internalize and strengthen the concepts related to redundacy and ll-ism, the recurring concepts in GMAT SC.

PS:
Note that the prep phrase in eighteenth-century England changes position in B and C and thus ends up modifying different elements in the sentence.
Both positions are fine.
Therefore, it can be taken as a case of fake decision point or distraction.