Mining woes

The mining Bill needs changes to keep the sector alive

The Mines and Minerals (Development and Regulation) Act of 1957, generally called the MMDR Act, is clearly not serving its purpose. It allows natural resources to be subject to cronyism and corruption, for example. Nor has the mining sector expanded sufficiently to keep up with growing demand. And there is also a growing perception that mineral resources are being exploited without many inhabitants of the areas around mines receiving any concomitant benefit or a sufficient say in the matter. Starting in July 2011, a new version of the law, also known as the Mines and Minerals (Development and Regulation) Bill, was cleared by the Cabinet, introduced in Parliament, and reviewed by its standing committee. The prime minister in his Independence Day speech, in fact, said that he expected its passage would be “speedy”.

However, it might not be as fast as all that — because the current version continues to have severe problems. While the motivation for the new MMDR Bill is understandable, it shows a lack of foresight. Consider the provision that leaseholders will have to pay into a District Mineral Foundation an amount equivalent to the royalty paid for the whole financial year, for most major minerals, or 26 per cent of their profits, in the case of coal. While the idea that mineral extraction be taxed for the benefit of those in the surrounding area is unexceptionable, there is nevertheless much wrong with this idea, starting with the notion of this “District Mineral Foundation”. A massive principal-agent problem is immediately clear. There are few safeguards evident preventing it from being transformed effortlessly by the more venal elements in the Indian state into a vehicle for patronage and corruption rather than welfare. After all, is there not already a state cess? Why is that not being used to assist those impacted negatively by mining in their neighbourhoods? Other, more sound, institutional methods should be discovered to aid the transfer of the surplus from resource extraction to those in the affected districts.

For coal, in particular, two kinds of problems are additionally evident in the proposed profit-sharing formula. First, it provides an incentive for companies to indulge in complex accountancy fiddles to disguise their actual margins — and recent events have made clear the government does not have the capacity, and sometimes the will, to see through such illusions. Second, even if mineral prices are high right now, allowing for considerable margins to coal miners, it is far from certain they will be so for the entire lifetime of the proposed Bill. If margins shrink, this provision could well kill the entire sector. While many aspects of the new Bill are overdue, the government should rethink some of its provisions.