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Exploring new options

Exploring new options

The exploration capacities of PSUs and the state governments are almost utilised. Dilip Kumar Jena and Bhavesh Singhavi recommend why we should study the best practices in Canada and other mining-rich countries while engaging the private sector.

As with the rest of the world economy, India has had to embark on low growth in the past two years. However, the fundamentals of Indian economy are still believed to be strong, fostering growth in the future-many agencies have forecast Indian economy to grow at a rate of 6-8 per cent over the coming years. The picture of the mining industry, on the other hand, is different as the growth rate of mining industry has been quite low in recent years, even registering a negative growth in FY 2011-12.

As per the estimates of Department of Mines, the value of mineral production (excluding atomic minerals) stands at around $38 billion (in FY 2011-12), contributing 2-3 per cent to the total GDP of the nation. Coal (including lignite) and iron ore contribute to more than 40 per cent of the total mineral value. Unlocking the potential of the mining sector in India could add around $210-250 billion (Rs 9.45-11.25 lakh crore, about 6-7 per cent) to the GDP by 2025.

However, presently, the mining industry is steering through tough period and calling for action from the government. A study by the Centre for Monitoring Indian Economy (CMIE) shows that there has been an increase in the number of stalled projects since 2009. Six sectors, including steel and mining, accounted for about 80 per cent of all stalled projects in 2011-12. The major reasons for stalling of projects included constraints in land acquisition, coal linkages and bans on mining.

Currently, the major challenges faced by the industry include low level of exploration, multi-layered regulatory approvals, illegal mining, uncertainty and differences in the administration, interpretation and enforcement of rules; absence of fiscal and tax incentives to invest in efficient technologies, disparity between the growing mining industry, poor state of local economy, environmental concerns, etc, among others.

Level of exploration

The Strategy Paper for Ministry of Mines presents a comparison of expenses on exploration by the major mining economies. It has been observed that India’s expenditure at 0.3 per cent of the global spend (as compared to 19 per cent for Canada and 12 per cent for Australia), which is one of the lowest. The absolute investment in exploration (per area) in Australia and Canada is more than 13 times as compared to India. One of the key reasons is exploration in India is mostly restricted to a depth of 50-100 m as compared to 300 m in countries such as Australia.

12th Plan estimates: The Ministry of Mines had proposed an outlay of $788 million (Rs 4,333 crore) for Geological Survey of India (GSI) for 12th Five Year Plan of which only 43 per cent has been allocated.

The Working Group on Coal and Lignite has estimated 69 lakh m of drilling during 12th Five Year Plan, which will require about $820 million (Rs 4,508 crore) of funds. Of these about 36 per cent will be funded by the Government (Ministry of Coal and Ministry of Mines) while the rest will have to be funded by the coal and lignite companies.

There has been a significant increase in the exploration objectives, which on the one hand shows that the government is placing emphasis on exploration activities while on the other hand, also opens up a gap between the existing technical support system and requirements to achieve these targets in the 12th Plan.

Presently, the exploration capacities of PSUs and the state government are almost completely utilised and there is a need of modernisation and capacity augmentation in the exploration activities. The government should also consider encouraging private sector participation for bringing more investments into the sector. It can take a leaf out of some of the best practices adopted in other countries. For example, investors in Canada can claim tax deductions for the exploration expense incurred. Furthermore, in New Exploration Licensing Policy (NELP) rounds, the selected parties are offered tax holidays. And, in order to increase the confidence level of resources, the Ministry of Environment and Forests (MoEF) may consider permitting Central Mine Planning and Design Institute (CMPDI) to drill more bore holes (around 15 bore holes/sq km) in a forest area against the present permissible limits (average of 1-1.5 bore holes/sq km).

Socio-economics in mineral states

It is important to use the mining industry’s potential in the overall development of the economy. The revenues generated from the mining industry should be deployed for the development and benefit of the society, especially, those residing around the mining industry or mines. This will create a positive image of mining companies and help them achieve their objectives of sustainable mining.

The Chart 3 shows the collection of royalty from major minerals in the key mineral rich states.

Although, these states have a wealth of mineral resources; the socio-economic conditions in these states do not reflect a pleasant scenario. The Table 4 depicts a comparison of key socio-economic indicators in these states across the country. It can be observed that the income levels, education and health conditions in mineral rich states are below the national average which raises a question on whether the issues of the affected population from the mining industry are being optimally addressed. If we compare the mineral royalty collection and revenue disbursements towards social services in the states of Orissa and Jharkhand by the respective state governments, it may be clearly observed that state government’s revenue from royalty is about one-fifth of the revenue disbursements towards social services. An increase in the revenue collections from royalty may also provide the state governments with additional resources to improve their spend towards social services. This can be achieved through combination of royalty rate revision; by augmenting mineral productions and by curbing illegal diversion of minerals (for which royalty has not been reported).

The draft MMDR Act focuses on inclusive growth and has provisions of profit sharing with the local population apart from resettlement and rehabilitation of the local population and provisions of employment and skill enhancement as outlined by the concerned state government. In addition, the government has proposed Coal Regulatory Authority/National Mining Tribunal and National Mining Regulatory Authority to help in developing the industry by reviewing safety, sustainability, and pricing, to make sure the timely allocation of mineral licences and no illegal mining. The early implementation of these regulations will help in expediting the growth of the people.

Strategies for investment

One of the major hurdles in timely development of mining assets is the delay in grant of regulatory approvals. Since the functions of the departments and ministries are dependent and complementary to each other with respect to the allocation and regulation of the minerals, a single-window agency at the state and central level will help in streamlining the entire approval process. Moreover, it would lead to speed and consistency in decision making.

Although, presently in India 100 per cent Foreign Direct Investment (FDI) is allowed in mining and exploration of metal and non-metal ores (including diamond, gold, silver and precious ores excluding titanium bearing minerals and its ores). The industry is yet to observe sustained significant foreign investments. The government may boost investments in the sector by encouraging private sector participation through investor-friendly policies and incentives. Since exploration and exploitation for minerals requires huge capital, same benefits and incentives which are available to the oil and gas sector under the NELP may also be extended to the mining industry. This can help in introducing the latest cost-effective techniques in exploration and mining. Presently, all the exploration results are not being classified as per UNFC classification resulting in low confidence among the investors to invest in the explored areas. Central and state governments may be encouraged to report all minerals as per UNFC classification.

For significant number of cases, in the past, mining leases for small areas have been granted to individuals. Since scientific and economic mining in sustainable manner is a challenge in smaller areas, these players may like to dispose of these areas or develop them further via a joint venture. Implementation of the Public Private Partnership (PPP) model by Coal India is an important initiative as it will allow increased participation of domestic and global players (with extensive experience in mining) to contribute towards the development of the coal sector. The government should encourage PPP model, in other mining-related areas as well such as exploration, infrastructure development and development of beneficiation plants.

The government should also continue to the emphasis on exploitation of low grade resources and value addition of minerals. In India, nearly half of the iron ore production is in the form of fines (126 mt in 2009-10), but the pelletisation (25 mtpa) and sintering capacities (~30 mtpa) is very low. Considering this, initiatives taken by most state governments to have value addition units within state for allocation of iron ore resources and removal of export duty on pellets by the central government are a good move Overall, this approach should be extended to other minerals to provide thrust to the sector.

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