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Mining Bill needs refining by Jaideep Mishra

A new draft Bill holds much promise to augment the development delivery mechanism. It is the new mining Bill, 2011, which has specific provisions for earmarking funds for development purposes in the mineral-rich districts that happen to be the regions with high poverty ratios. Revamped mining legislation can boost transparency in the vexed sector that seems much prone to illegality, corruption and extensive fraud. 

Further, a well-crafted mining law can actually boost value addition downstream in metals, for instance , by incentivising production of high-grade steel provided there is proper valuation of ore. The point is that proactive legislation would have a huge positive impact on mining, minerals and metals. 

And yet, the mining Bill may well defeat the policy purpose should it become law as per its present draft. For, it appears to eschew international scarcity value and cross-border traded prices of ore, so as to determine royalty rates that are deemed adequate and just. Now, for major minerals like iron ore, section 43 does call upon the mining lease holder to 'pay annually to the District Mineral Foundation' an amount equivalent to the royalty paid (to the state government ) during the financial year. 

Note that the second schedule of the draft Bill merely says that royalty on iron ore would be 10% of sale price on an ad valorem basis. But with no explicit provision for taking into account going export prices to calculate royalty , the actual levies earmarked can well be a fraction of the potential sums envisaged . It is true that since the latter half of 2009, royalty on ferrous ore is supposed to be on an ad valorem basis, but the standard practice seems to be to use local prices, which can quote at a steep discount to the prevailing export price. Such pricing seems widespread : recently, a steel ministry panel specifically recommended that NMDC, the public sector miner, value its ore for local deliveries at the export prices pegged for Japanese and South Korean steel producers, which are revised quarterly. 

Such valuation for domestic ore is the way ahead to rightly determine scarcity; domestic steel quotes have been linked to internationally-traded prices for two whole decades. And yet, there seems no upfront provision in the draft Bill to peg domestic ore prices to the export rates for working out royalty payment for minerals. It is a glaring anomaly indeed. The point remains that there are very many policy-induced distortions in the mining sector that need to be promptly removed. The fact of the matter is that until quite recently , the prices of mineral ore were depressed by fiat and royalty was at rock bottom, which remained unrevised for years. In the days of prereform , prior to the pathbreaking 1990s, the policy of artificially-depressed ore was put in place in the mistaken belief that it would boost steel output. 

But with import duties on steel as absurdly high as 200%, the policy outcome was a high-cost economy generally complete with stultified, pricey steel output and poor quality to boot. That was then. Fortunately, after opening and reforms of the early 1990s, duties on steel are down to a nominal 5%, domestic output has gone up sixfold and more, and India seems set to be the second-largest producer of the metal. However, there is no parallel reform of mining and mineral pricing, and it is unfortunate that the draft mining Bill prefers not to link domestic ore prices to export prices. 

For globally-traded commodities , such pricing surely ought to be standard policy. Our ore output can but be a fraction of global output, and it is sensible to determine domestic scarcity value by taking into account market-determined export prices. With sound pricing of domestic ore, up to 20% of mineral value can be set aside as royalty, including for targeted social development and economic uplift. As for coal and lignite, where high ash content and other rigidities limit valuation, apart from royalty, such levies as cess, surface rent and other charges can be clubbed together so that such imposts add up to 20% of turnover, the same for other minerals. It would be far more transparent than the 26% profit share mandated for development purposes in coal mining; profits , after all, can be so structured as to accrue to special purpose vehicles and the like. 

It is notable that the draft Bill envisages a nominal central 'duty of excise' on ore output , as per section 44. A central levy would mean keeping better tab on ore output, and the indirect tax can well be set-off against duties payable downstream in the production value chain and input credit availed. Additionally, to remove continuing distortions , captive mining ought to be subject to royalty, central excise, etc, complete with funds earmarked for development purposes. Actually, as captive mining can be inherently uneconomic and subscale from a national perspective , there is solid rationale for doing away with such mining norms once greenfield steel producers lacking access to infrastructure have fully depreciated plants.