Differential royalties will hamper competitiveness

Updated: Jan 22 2007, 05:57am hrs
Fixing of royalties for major minerals has up until now been the Centres prerogative and for a good reason. The process has not only taken into account the states views but also the nations growth imperatives. At a time when the country is moving towards harmonisation of policies and fiscal regimes to revive ever-elusive industrialisation, giving states the freedom to fix royalties will be a retrograde step.

For the last few years, mineral-rich states have been demanding a greater say in fixing royalty rates. They feel that the centre has not kept royalty rates in consonance with the rapid rise in the price of minerals. Being mineral rich, but poor in economic development, states like Orissa, Jharkhand and Chhattisgarh naturally expect that getting the right to fix the royalty will bring the necessary resources for their development.

However, to fulfil their aspirations, the tendency of mineral-rich states to become more self-centred, especially in mineral issues like allocation of mines and royalty, is not in the spirit of balanced, overall economic development of the nation. The main intention of the states to demand the right to fix royalty rates seems to be the desire to increase royalty rates, which are in the range of 1-20% today, to 20-25% for all major minerals. However, too high and too many rates will hamper investment in mining, have an adverse affect on trade in minerals and affect the global competitiveness of end-use industries. In effect, not only will the nation suffer but also the mineral-rich states themselves.

Mining is a risky, capital-intensive business where the prospecting stage itself takes a minimum of five years. It is also highly cyclical and has fetched decent margins only in the last four years. The higher royalties will reduce the ability of the miner and mineral-based industries to invest in large scale, efficient and environment-friendly mining. Similarly, high royalty rates will also create unnecessary arbitrage in the price of minerals between different states, hampering the smooth inter-state movement for the balanced industrialisation of the country.

We need to recognise that the primary objective of extracting mineral resources in any country is higher value addition, creation of more economic wealth and employment within the country. So, the economic impact of the royalty rates on competitiveness of end-use industries must be thoroughly understood. Indian businesses should be allowed to leverage Indias natural resources as a tool of global competitiveness. A royalty fixing process, which takes into account the interests of all stakeholders is very important, something that only a Centre-led process can ensure.

It is not out of the context to mention here that as the Hoda Committee rightly pointed out, in most cases, royalty rates in India are already at par with or higher than global levels. In the case of the much debated iron ore rates also, even during the last revision of royalty rates notified in 2004, the ad valorem incidence of specific rate on iron ore had been fixed at over 5% of the price prevalent at that time, which is either at par with or above the rates prevalent in Australia. In China, the current rates are just 2%. Another major pitfall of differential royalty rates will be higher levels of unpredictability in the fiscal regime for minerals and mineral-based industries. At present, the MMDR Act provides that royalty rates should not be revised in less than three years. If states are given the power to fix rates, it is likely that rates will be frequently altered, which will adversely impact investment decisions.

In all respects, the central government is the right agency to determine royalty rates on major minerals. A reasonable level and a stable royalty regime are imperative for developing globally competitive mineral-based industries and fulfilling Indias aspiration to become a global manufacturing hub. The future royalty regime should emerge around this national imperative.

The writer is chief economist, Essar Group. These are his personal views