An unalloyed mess

Author - Baijayant 'Jay' Panda

Posted on - 3 August 2011

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It is hard to believe that only a few years ago many mines were practically going a-begging,with several partly idled and few serious applicants for new leases. Yet,today mining is not only a booming business,but is also symbolic of so much that is wrong with India: massive corruption; nexus between politicians,big business and mafia; disenfranchisement of local residents; and environmental damage. How did all this come to pass,and what can be done to set it right?
(In the interest of full disclosure,I am from a business family with interests in the production of metallic alloys since the 1960s,which include the operation of captive mines.)
The present mess in India’s mining sector has its roots in half-a-century of atrocious governance,but it required the boom in commodities prices that started less than a decade ago to ignite this tinderbox. Easy money has always attracted the unscrupulous,and when mining went from operating in the red to mark-ups of several hundred per cent,it is no surprise that it became irresistible to a certain kind of operator.
Even when mining did not yield such windfall profits,there was enormous rent seeking due to flawed policies. The 1957 Mines and Minerals Development and Regulation (MMDR) Act exemplifies the labyrinthine ways of the pre-liberalisation licence raj. It is particularly tortuous since,mining being a concurrent subject,there is overlapping authority between the Central and state governments. It is common for would-be mine operators to bounce around the system for years,seeking favourable interpretations of complex rules,and corruption is rife.
But mine owners are no babes in the woods. They have learned to game the system to their advantage,causing incalculable losses to the exchequer. Mining lobbies have colluded with crooked netas and babus for decades,with the three most egregious areas of manipulation being suppressed royalties; excessive exports of unprocessed ores,and unauthorised production and smuggling. Unlike most other countries,where royalties are levied ad valorem — that is,as a percentage of the market value of the ore — the Government of India persisted until recently with arbitrary,administered rates. Invariably,due to lobbying,these were a pittance,thus depriving state governments of thousands of crores of rupees in revenue over the years. This is the single biggest reason why mining areas have not seen any lasting benefits,nor adequate investment in social infrastructure.
Like many other mining countries,India has policies on paper to encourage investment in downstream processing,for example steel plants in the case of iron ore,and has restrictions on the quantities and grades of raw ores that may be exported unprocessed. But while mining is a relatively low-tech,low-capital activity,downstream processing plants are the exact opposite,and are often beyond the capabilities of the typical mine owner. Add to that the fact that,particularly during commodity market surges,the profits in the value chain are overwhelmingly in the mining part,not the downstream processing. Thus it is again no surprise that a section of the mining lobby makes enormous efforts to facilitate the export of raw ore,rather than the value-adding,job-creating,revenue-generating downstream investments in India.
Finally,surging prices have made it extremely lucrative to increase mining output. Since the legal ways of doing that are cumbersome,involving years of wrangling,there has been a sharp rise in unreported production and smuggling. This involves a complex web of unscrupulous mine owners,contractors,corrupt officials,political patrons,transporters and the like,who together comprise the mining mafia.
What can be done to rectify this appalling situation? First,it must be recognised that unlike what some woolly-eyed activists would like,mining can’t just be abolished. It is wishful thinking to believe that today the country can do without steel or aluminium,or coal for that matter. But there is no need to throw the baby out with the bathwater. Despite environmental concerns,it is no coincidence that all manner of countries — including developed,ecologically conscious ones like the US and Australia — continue to have operating mines,and largely without scandal.
The solutions are fairly straightforward and commonsensical,but much easier said than done. Essentially,they consist of simplifying the procedures to acquire and operate mining leases and replacing discretionary powers with transparent procedures,like auctions and market-linked royalties. Furthermore,the laws in associated areas like land acquisition and environmental compliance need to be revamped. All this will only work if there are stiff penal clauses for violations,but worded in simple terms,without loopholes,for easy implementation.
That commonsense is difficult to legislate is obvious from the fact that the proposed overhaul of the MMDR Act has been doing the rounds for several years,with intense,behind-the-scenes lobbying by various stakeholders. Apart from the usual industry-related lobbying,many state governments have also been speaking out,asserting their rights under the Constitution. But the mandarins in Delhi are no slouches when it comes to hanging on to discretionary powers. An example is a development last month,when the mines ministry did a volte face on the draft bill,going back on a proposed new simplified procedure for state governments to auction mining leases,and insisting on retaining powers of prior approval,just as they do now.
The good news is that some progress has been made,as in last year’s amendment to the 1957 MMDR Act,which now provides for auctioning of new coal blocks. What is very important is to now ensure that the “all-new” 2011 MMDR Act should reflect a similar spirit of reform,instead of being mostly old wine in a new bottle.