Coal reforms much needed, but statutory implementation hurdles remain

Finance Minister Nirmala Sitharaman launched a series of structural reforms across many vital sectors for the economy on Saturday, including coal and non-coal minerals, as part of the fourth tranche of the government’s economic package to fight the Covid-19 induced slowdown.

Among the key sectoral announcements, approval for commercial mining of coal on revenue share basis and with no eligibility conditions; Rs 50,000 crore investment for augmenting infrastructure related to coal evacuation; and an overall thrust on expanding domestic production and thereby reducing imports underlines the government’s mission of becoming a self-reliant country. On the non-coal side, 500 mineral blocks to be auctioned, joint auction of coal and bauxite blocks, rationalisation of stamp duty payable at the time mining leases, no-distinction between captive and non-captive mines, and development of a mineral index have been announced.

While commercial coal mining, which was enabled by amendments in the mineral laws in March 2020, has been long awaited and can indeed change the sector’s paradigm, there are key implementation issues that need sorting. Among them, the inordinate delays in statutory approvals and land acquisition need to be fixed at the earliest. Another chronic impediment is the lack of rail connectivity, or evacuation infrastructure, to which the Rs 50,000 crore-investment is indeed the right move, albeit that too is fraught with similar set of institutional issues.

Further, while keeping no eligibility conditions for a commercial coal miner to participate in auctions will facilitate bid competition, the benefit comes with certain costs. Lack of eligibility condition may get unserious and inexperienced bidders in the fray as compared to a certain eligibility condition that requires some demonstrated experience of having handled coal mining projects in the past with due care given to environmental, social and health matters. At the least, there should be a certain threshold for net-worth so as to attract financially sound parties that commit the investments required at the development stage and muster the technical strength required for developing and planning a green-field coal-block.

With the abundant inventory within India, there’s a clear a need to reduce imports, especially thermal coal, imports of which were around 200 million tonnes last fiscal. A huge outgo of foreign exchange, thus, can be easily contained. Further, the spate of cancellations of both coal and iron ore mining projects seen in the past years have made investments in mining sector riskier, especially for a global miner. Accordingly, ease of statutory approvals, faster implementation of projects under the proposed package, and consistency of regulations and security of tenure will go a long way in achieving the end objective of commercial coal mining.

A similar story unfolds on the non-coal side, around 80 blocks comprising iron-ore, limestone, and other minerals have been auctioned in the last five years with 20 iron ore mines auctioned in Odisha very recently. However, just a handful of these blocks have started operating. Reasons are similar – delayed approvals and land acquisition. While details of the proposed 500 mineral blocks, including the mineral type or stage of exploration or status of other preparatory works, is not clear, the key is to expedite the development stage so as to realize the economic benefit and importantly create jobs which is the need of the hour right now.

Auctions of bauxite and coal are regulated under different rules with their own set of eligibility criteria and bidding parameters, while different government agencies oversee the same. So, a joint auction needs to clearly provide that incremental advantage similar to bidding for an aluminum plant.

Stamp duty combined with upfront payments and submission of performance security at the time of mining lease execution poses substantial economic burden for the miner. Accordingly its rationalisation will be helpful, especially in the current Covid-19 scenario when the metals and mining sector is facing a slowdown. While non-captive mining in non-coal minerals has not been a major issue, eliminating the distinction further, will be a positive for the sector as it will help sale of material that’s not required by the end use plant of the operator and help dispose of accumulated stocks.

The Indian Bureau of Mines (IBM) currently publishes an Average Sale Price every month for different non-coal minerals to which the auction payouts and royalties payable to the state government are linked. It’s not clear if the new mineral index will be a more refined version of the IBM published index or will be altogether a new index. A number of mineral blocks have already been auctioned based on the extant IBM index and the methodology it employs, so a calibrated approach may be required here when switching over to the new mechanism.

In sum, the steps announced will go a long way in shaping the coal and minerals sector towards a more deregulated and competitive scenario. Key is a robust implementation design and faster execution.

(The writer is Director at Crisil Infrastructure Advisory. The views expressed are personal.)