Fix high-cost structures, from telecom to mining
While the government readies to auction more coal mines and to allot mines to states to allow commercial mining—this will be the first challenge to Coal India’s commercial mining monopoly—it needs to consider if the moves, including the passage of the MMDR Act, will enthuse global investors. There can, of course, be no doubt the situation today is dramatically better than it was earlier since there is a more transparent auction system that has been put in place for both coal and other minerals. The problem, however, is that the imposts are just too high and will discourage investment in the sector over the near- and medium-term. Just as, in the case of corporate and other taxes, India is trying to ensure it has the same rates as in competitor countries, it has to ensure this in the case of natural resources. In the case of coal, for instance, apart from the royalties that have to be paid to various state governments, the current system of auctioning requires miners to pay a further amount by way of the auction bids—a sum of R3.3 lakh crore is to be paid for just 67 mines to state governments over the next 30 years. And, as has been seen in the case of mines like Gare Palma, if the government finds the bids are too low, it is free to reject them. What has now been done, via the MMDR Bill, is that in addition to the royalty that has to be paid, an amount of up to 100% of this has to be paid to the states to spend in the districts where the mines are located. The amount is 100% for all existing mines and 33% for new mines—the saving grace here is that this is a ceiling and the states are free to fix what the amount is actually going to be.
In the case of telecom spectrum, for instance, while the auction is a good idea, it is incompatible with the high annual licence fees (8% of annual revenues) and spectrum usage charges (5%) that are also levied—indeed, as has been pointed out before, while countries like the US auction spectrum in perpetuity, India’s 20-year licenses and other charges make India one of the highest-taxed countries. Similarly, in the case of iron ore, India’s royalty rates are 15%—plus another 15% in the case of existing mine-holders—as compared to 6.5-7.5% in Australia and just 2% in Brazil. In the case of zinc, it is 9.4%—plus 9.4% as per the new MMDR Act—versus 2.5-5% in Australia. The Companies Act’s proposal that 2% of net profits be spent on CSR remains unaffected by the MMDR and is an additional impost compared to that in other countries. Since mining is critical to most manufacturing industry, it would be unfortunate if, in an attempt to provide more funding to states, this results in a situation where Indian industry gets uncompetitive. That would upset prime minister Narendra Modi’s grand Make-in-India plans.