According to a news report in The Indian Express on Monday, the ministry of mines is planning to hand over mineral prospecting licences other than coal to those ?first in the queue? along with the right to sell off the licences at a premium. If this turns out to be the case, then it seems to indicate that the government has learnt no lessons from the telecom tangle. By now the government ought to have realised that, for precious natural resources, auctions are better than discretionary giveaways.
Mineral production is a big business whose annual turnover stood at Rs 1,15,981 crore in 2008-09. But while a large part of the allocation of mining leases, especially oil and gas, has moved to an auction basis with the government working out profit-sharing contracts with the bidders, the allocation of metallic mineral mines, whose total output was valued at Rs 29,189 crore and the non-metallic mineral mines with output of Rs 13,728 crore, largely continue to be governed by administrative processes.
Historically, administrative process has been the preferred route for granting mining leases in India. This was mainly because the demand for mining rights from private investors was limited and there was hardly any competition for cornering mineral rights. This method also had the added advantage of flexibility, which enabled governments to modify the decision criteria to suit policy goals.
But burgeoning demand and growing competition for scarce mineral resources has forced governments the world over to discard the use of administrative process for allocating mining leases. This is not only because the processes were too slow and cumbersome but also because they lacked in transparency, which led to assigning rights far below market value and often even for free.
And the country has paid a huge price for such arbitrary practices. The numbers show that despite the booming market for minerals, the number of mines in India has stagnated or even fallen. The number of reporting mines, excluding those of atomic minerals, petroleum, natural gas and minor minerals, went down from 3,005 in 2006-07 to 2,854 in 2007-08 and then increased marginally to 2,954 in 2008-09. While the number of coal mines (including lignite) has remained stagnant at around 569 in the last three years, the number of non-metallic mineral mines has declined from 1,796 in 2006-07 to 1,694 in 2008-09. The only consolation is that the number of metallic mines has crawled up slowly from 639 to 691 during this period. India?s opaque mining licensing system has clearly deterred both private and foreign investors.
India?s lacklustre show on the mining front is in stark contrast to the development in China, which has opted for bid and auction mechanisms. Numbers show that in 2008 alone China transferred 542 exploration rights through bid and auction, which brought in revenues of 6.319 billion renminbi and another 7,696 mining rights were transferred through bid and auction, which added another 4.034 billion renminbi to the revenues. This indicates that the potential for mobilising resource from auction of mineral rights in India can at least match that from the telecom sector, if not beat it.
China was also able to sign 149 mining contracts with foreign investors, which brought in $573 million in 2008. In comparison, though India was able to attract foreign investments worth $461 million into the mining sector in 2007-08, it dropped sharply to $92 million in the first six months of 2008-09. But despite the poor record on attracting private investors into the mining sector, government efforts to correct the market distortions have been half-hearted. And the attempt to shift from the auction-based system, which has been preferred by the Hoda Committee that looked at the problems in the mining sector, to the ?first in the queue? basis, is a retrograde step for many reasons.
The ?first in the queue? is more like a lottery system, which works quickly and cheaply but leads to inefficient outcomes as the government is free to choose the designated queuing mechanism to favour particular players as happened in the case of telecom. And giving the resource away on a ?first in the queue? basis also has implications on revenues, as free allocations are a substantial loss to the public exchequer. This is especially true in the Indian context where the royalties paid by the mining companies to the state government have been so low, with total receipts just Rs 2,103 crore in 2007-08, that instead of contributing any surplus to the state finances, the amounts collected would be insufficient to pay even for the cost of restoring the ecological balance or the cost of building related infrastructure in the mining areas. Though the royalty rates have been revised up in August 2009, the actual gains that trickle down to the states are yet to be known. One more thing to think about.
p.raghavan@expressindia.com
