Explorers, welcome

The mining sector in India constitutes the bedrock of industrial development as it provides the basic raw materials for most industries. During 2005-10, the mining industry registered a growth of 5.7%, thereby supporting the critical raw material requirements of the country.

The mining sector in India constitutes the bedrock of industrial development as it provides the basic raw materials for most industries. During 2005-10, the mining industry registered a growth of 5.7%, thereby supporting the critical raw material requirements of the country. With the support of the mining industry, India?s GDP grew at a CAGR of over 8% during this period. Unfortunately, even after two decades of the introduction of liberalisation policies, the sector remains largely under the purview of PSUs?with very few private players and fewer fresh equity investments.

Despite the opening up of the sector to private participation in 1993 and to 100% FDI since 2000, it has failed to attract investors. The FDI ceiling for exploration and mining of diamonds and precious stones was also increased to 100% under the automatic route with effect from 2006. Similarly, mining for all non-atomic and non-fuel minerals has been opened up for up to 100% FDI under the automatic route. But these sub-sectors also haven?t seen any big-ticket FDI.

The mining sector?s current share in India?s total FDI inflows has remained abysmally low

at 0.65% over the last decade.

During 2006-10, the cumulative FDI inflows stood at $628.22

million. Figures for 2008-09 were only $34.22 million, which

accelerated slightly to touch $143.12 million in 2009-10.

The National Mineral Policy, 2008, envisages FDI worth $250 million per year in the mining sector by the end of five years, which seems unlikely, given the current circumstances. In fact, the new draft Mines and Minerals (Development and Regulation) Act (MMDR Act), 2010, has not given due recognition for provision of financial incentives that may be attracting new investments into this sector.

The Report of High Level Committee on National Mineral Policy, 2006, has estimated that in the last 50 years, the total amount spent by the Geological Survey of India on mineral search is just about Rs 500 crore, of which as much as Rs 350 crore has been spent on coal exploration. During 2009, the global mineral exploration budget was estimated to be around $7.3 billion for non-ferrous metals, with the top 10 individual countries accounting for 67% of the total budget. Ironically, India?having a significant geological potential (OGP) area comprising 17.5% of its land mass?is not one among the top 10 exploring countries.

The exploration phase of mining is risky, with no guarantee of eventually turning into a commercially viable operation. Further, even if the venture does result in a commercial operation, the high costs and long gestation period involved in the exploration phase act as a deterrent to investment. For such ventures to takeoff, the sector needs investors who are ready to capitalise upon opportunity costs.

Internationally, several mineral rich countries are offering tax relief to stimulate investments in the mineral sector. For example, Canada had introduced a mineral exploration tax credit in 2000, in this sector. Under this programme, a tax credit of 15% of eligible expenses can be applied against a taxpayer?s federal income tax, which can also be

carried forward for 10 years. The programme is applicable to

preliminary mineral exploration activities conducted from or above the ground and excludes oil and gas, coal and bituminous sands. Still, the programme has led to many mineral discoveries in Canada.

Down under, the AUS$80 million exploration incentive scheme introduced by the state government of Western Australia for the long-term sustainability of the state?s mineral resources is another significant step, especially given its focus in under-explored greenfield regions. In Latin America, Argentina has also devised initiatives to attract capital in exploration activities, which include double deduction of exploration expenses and VAT reimbursement. Argentina has allowed weighted deduction for expenses incurred on feasibility studies and pre-production exploration costs (this includes prospecting, exploration, special studies, pilot plant tests, applied research and other tests) at 200% of the amount spent. Also, VAT credits on all exploration expenses are reimbursed after 12 months.

Growing world economic activity and industrial production has resulted in a significant increase in the global demand for minerals over the past decade. Increased consumption by Asian countries like China and India has further boosted world mineral demand and prices. With India emerging as a key economy in the world, demand for metals and minerals is poised to increase. This is accentuated by the difference in mineral export and import values. The value of import of ores and minerals (excluding crude) in FY 2010 was double the value of exports?with imports for the year valued at Rs 85,330 crore and exports at Rs 41,103.91 crore. In fact, the import-export ratio of minerals in India (excluding crude) witnessed an increase around 68% between FY 2005 and FY 2010. This portrays the increasing dependence on import of minerals, which constituted (excluding crude) almost 6.3% of India?s total imports during FY 2010.

Given the emerging importance of minerals in the India, the Indian government may consider setting up a one-stop ?Mineral Development, Trade and Investment Authority? under the aegis of the mines ministry, which can take care of a gamut of challenges faced by the sector, by providing a conducive institutional and regulatory framework for enhancing trade and investment.

Sustainable mining is the need of the hour and all efforts should be made to establish a harmonious relationship between business activity and the environment. The government may look at extending the select incentives it provides under NELP, whereby the oil sector gets 100% deduction on the depreciation cost of exploration equipment within the first year and some 50% on certain capital machinery during the production stage. Apart from this, the oil sector also claims 20% of profit as expenses for bettering the environment (called a site restoration fund). If extended to other mineral exploration activities, such measures will bring in sustainable development.

Augmenting India?s resource position by further exploration of known deposits and discoveries of new deposits, adopting state-of-the-art technology and modern methods like aerial reconnaissance or geophysical surveys can only be made possible through substantial capital infusion. Further, fresh investments will ensure that India becomes more self-reliant and less dependent on imports, especially as it is the world?s second-fastest growing economy. Timely and appropriate government action could create a paradigm shift in an otherwise lacklustre sector.

The author is manager, research and planning, EXIM Bank. Views are personal rahulmazumdar

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First published on: 13-09-2010 at 22:11 IST