Centre to link iron ore royalty to market price

Written by Economy Bureau | New Delhi | Updated: Jun 23 2009, 08:07am hrs
BK Handique
The Centre plans to link the royalty on iron ore to market prices, discontinuing the fixed rates system. This will raise the ore price and encourage mining firms to sell ore to domestic steel companies, instead of exporting it.

Mines minister BK Handique told reporters on Monday that his ministry will revise the royalty rates to ad valorem. This will make assessment and collection simpler and enhance royalty accruals to state governments, Handique said, spelling out the 100-day agenda of his ministry.

The proposal drew criticism from the mineral extraction companies---which pay the royalties. RK Sharma, secretary-general of the Federation of Indian Mineral Industries, said, Making the royalty ad valorem is a good concept technically, but not in India. At the present juncture, the ad valorem royalty will increase the cost of steel production and as a result exports of steel will suffer.

The change could raise government income to about Rs 1,500 crore a year from Rs 300 crore now. The present royalty rate on iron ore ranges between Rs 4 to Rs 27 per tonne, depending on variety and grade. The rates have stayed the same from 2004, despite the price of iron ore rising manifold, from Rs 1,400 per tonne to over Rs 7,500 per tonne during the period.

While the minister did not say at what rates the royalty would be charged, a committee of secretaries set up in March 2008 favoured a 10% ad valorem rate on the market price of iron ore, which is the main input in steel production.

The switch could also raise the costs for companies like Tata Steel and Steel Authority of India Limited, as they have captive iron ore mines. To an extent, this will take away their current advantage over other steel players that do not have captive mines, as they will no longer be insulated from the volatility in iron ore prices. At the same time, in times of a slump in demand and iron ore prices, their royalty payments would be revised downwards not possible currently.

But the committee of secretaries had taken this into consideration. It had explained that in periods of high metal prices, the proposed revision in royalty will not have any significant impact on prices of finished metal product. State governments, in any case, are clamouring for an increase in royalty rates for long. However, fearing an impact on inflation, the Cabinet Committee on Economic Affairs had deferred a decision on the change.

The government is also in the process of forming a new law to bring in transparency in the concession regime for mineral companies. A new Act on scientific development of mines and minerals would be drafted and placed in Parliament during the winter session, Handique said.

Considering the importance of private investment in mining, the government will improve the regulatory environment and develop a sustainable development framework, in line with the National Mineral Policy 2008.

Many countries are interested in investing in India and bringing in new technology, and it is mainly getting the policy and the legislation right that will determine how much investment flows into India. One ballpark figure could be up to $5 billion, additional secretary (mines) S Vijay Kumar said.