More than 300 people rallied in Melbourne on Monday to protest against a proposed $1bn federal government loan to Adani for a rail line before an expected meeting in the city between Malcolm Turnbull and the head of the Indian mining company, Gautam Adani.

Adani and Turnbull were expected to meet on the sidelines of the Australian Indian Leadership Dialogue in Melbourne, which they are both scheduled to attend.

The minister for northern Australia, Matt Canavan, confirmed the federal government was considering lending $1bn toward the construction of a 310km rail line from the proposed Galilee Basin coalmine to the port.

Adani coal mine: green groups fume over plan for $1b federal loan Read more

The potential funding deal was reported on Saturday.

Canavan told the ABC’s RN Breakfast that the proposal was currently before the independent panel of the National Australia Infrastructure Fund (NAIF), which makes recommendations to government on how the $5bn fund should be spent.

Canavan said there was “no decision to be made by the federal government at this stage” but that it would not be unusual for it to support mining infrastructure.

He said progress on the proposed mine was “good news for our country”.

“It is a major project, it will be the first time a new minerals basin has opened up for 40 years, and this has the potential to be the platform for many other projects in our region as well,” he said.

“We have some of the highest-quality coal in the world, so providing India with its energy needs from Australian coal is good for the environment because it burns at a higher rate and produces less emissions per kilowatt hour produced.”

The Galilee Basin is the largest untapped coal reserve in Australia but the coal is lower quality. Six companies, of which Adani is the largest, have sought permits to develop the basin, despite warnings from scientists and conservationists that it could damage the already fragile Great Barrier Reef.

Galilee basin coal must be left in ground as a ‘priority’ – new report Read more

A recent report said mining Australia’s untapped coal reserves, including the Galilee Basin, could produce enough emissions to push global warming beyond 2C.

Canavan dismissed concerns about the quality of the coal, saying it was higher quality than coal being mined in Indonesia and South Africa, India’s two other options for cheap fuel. India, he said, was “agnostic” about where the coal came from.

The Australian Conservation Foundation’s campaign director, Paul Sinclair, said at the protest in Melbourne’s Treasury Gardens that committing any funding toward the project would break the Turnbull government’s election promise.

“Malcolm Turnbull has a very clear choice to make,” Sinclair said. “He made an iron-clad promise during the election campaign, which he can honour, or he can make a dirty deal with a billionaire polluter and bankroll coal.”

Behind him, the crowd chanted “reef not coal.”

Calla Wahlquist (@callapilla) Under these terrifying Pixar bobbleheads are Sean Dougherty (Nemo) and Marie Lakey (Dory). They look uncomfortable. #adaniprotest pic.twitter.com/ShtyfZbHdV

Sinclair said Canavan’s comments about the relative quality of the coal was misleading and accused the government of trying to drum up public support by leaking the NAIF proposal.

“I think that the government is in fairyland when they say coal is good for the environment,” he said. “It’s like saying smoking is good for your health.”

Charlie Wood, campaign director for 350.org, said the suggestion of any federal funding for Adani’s project was “deeply concerning.”

“It’s a sign that the government is putting the big polluters ahead of the people they are here to represent,” Wood said. “Here we are outside while Gautam Adani, the head of one of the biggest coal companies in the world, is meeting with our prime minister ... has that level of access. This is outrageous.”

Behind Wood, two masked protesters showing Turnbull as a puppet being controlled by Adani tried not to crash into the crowd.

Facebook Twitter Pinterest Protesters at Treasury Place before an expected meeting in the city between Malcolm Turnbull and Gautam Adani, the head of the Indian mining company Adani. Photograph: Julian Smith/AAP

Among the protesters was Mary Beech, who told Guardian Australia she began fighting to save the reef to honour her parents, who moved to northern Queensland after the second world war.

“It is 30 years ago tomorrow that my mother died,” Beech said. “At the funeral she didn’t want flowers, all the money went toward saving the reef and saving the Daintree … I’m so against the government using taxpayers money to fund this dirty, dirty coalmine.”

India, she said, could meet its energy needs elsewhere. “If it wants its coal that badly it can get it from somewhere else,” she said.