Kameswara Rao

An unforeseen additional levy, such as higher royalties, will directly impact the viability of the end-use plants—a problem that the auctions were meant to solve

Coal auctions are just a first step to achieve the goal of securing new investments in mining and cost-effective fuel supplies. Policy and regulatory certainty and the ease of doing business are key to realising the benefits of coal auctions. The bidders participated in the auctions aggressively, basing the calculations on replacement cost of inputs and logistics. An unforeseen additional levy, such as in the form of higher royalties, will directly impact the viability of the end-use plants—a problem that auctions were meant to solve.

Natural resources such as coal, iron-ore and bauxite are basic inputs for infrastructure and manufacturing—the cornerstone of the government’s development strategy. The prices of mineral resources have a cascading impact on the cost of infrastructure projects and capital goods. Commodities suffer a disproportionate burden of levies through hike in rail freight rates, clean energy cess and various social costs.

India’s natural resources sector is one of the highest taxed in the world, with a tax burden of 46% against 32% in China. Monopoly pricing means Indian industry suffers from one of the highest electricity costs in Asia. Mature mining countries such as Canada, South Africa and Australia extend tax incentives and financial structures to promote mining industry. Exploration spend is among the lowest in India, and as commercial mining is not permitted in coal or discouraged by value-addition clauses in other minerals, pre-development costs fall on lease holders. This stunts the development of industry (growth in gross capital formation is below 4% over last decade) with resulting supply shortages.

Mineral rights in many jurisdictions are granted, not auctioned, by the governments and in return extract rent as lease payments and royalties. Coal auctions transfer effective ownership to end-use plants at a market-determined rate. It would be incorrect to revise royalty rates for supply to unregulated sectors that lack the benefit of cost pass-through. It will lead to end-use assets getting stranded, causing economic and social loss that mineral-rich states already suffer. The threat of irrational royalty rates is detrimental to the premium the states can earn from future auctions.

Policy-makers must take note of the experience from other countries, notably Australia, which has repealed the much-debated Mineral Resource Rent Tax. The legislation to raise levy on coal and iron-ore profits resulted in far lower revenues for the government (less than 10% of initial estimates), but affected the mining industry in investment and jobs. Governments would benefit more from a stable policy and tax regime.

States can do a lot more to enhance the value from auction premium and from royalties. Experience shows mine development takes an average of 5.5 years, largely spent in approvals. The bids are discounted for end-use restrictions, loss due to hurdles in the movement of materials, law and order issues, and other challenges. The government must address these issues to attract premium and generate higher royalties sooner.

The author is partner and energy, utilities and mining leader, PricewaterhouseCoopers

Bhartruhari Mahtab

Mineral-rich states such as Odisha have been lagging behind in economic development. The Centre should look at reasonably hiking coal royalty, which is long due.

The revenue expected to flow to the states from the current coal auctions is long overdue, which the earlier UPA regime ignored. The UPA’s allocation of coal mines was done arbitrarily and the Supreme Court had to intervene. Historically, mineral-rich states such as Odisha have been lagging in economic development. These coal auctions and the 14th Finance Commission provides an opportunity. The Centre should look at reasonably hiking coal royalty, which is long due.

We are not against auctioning of mines. However, the Centre has taken some ‘subjective’ decisions on the issue; we were not taken into confidence by the Centre while deciding on ‘regulated’ and ‘non-regulated’ mines.

Odisha, apart from some other coal-bearing states, has got a raw deal in the auctions as eight of the nine mines in the state were put up for reverse auction. The Centre claims a huge amount of money would flow into Odisha from the auction, but the fact is we’ll get a smaller amount because of unfair bidding process which deprives states having minerals a chunk of revenue. Though the Centre said the states will get above R1 lakh crore from the auction of coal and iron-ore mines, Odisha is likely to get a substantially lower amount from coal block auctions.

In reverse bidding, end-consumers benefit at the cost of mine-bearing states. Under this route, companies compete with each other to lower the bid amount and the one who promises to extract coal at the lowest cost gets the mine. In the regular auction process, the highest bidder gets the mine. In both the cases, the bid amount goes to the state. As three bids have been reversed fearing the alleged fear of cartelisation, we have urged the Centre to have a re-look at this auction system of lower or higher bids. A state such as Odisha is a net loser in terms of revenue because we have the minerals.

Power-consuming states impose levies or duties on power supplied to the consumers, while the state which has coal mines doesn’t get anything in terms of taxes. Odisha has repeatedly requested the coal ministry to give due consideration to the requirement of coal for the state-government owned PSUs. For the industrial transformation of Odisha, we need additional 250 million tonnes of coal per annum for power and steel plants under installation, but only 50 million tonnes is being made available now.

The coal ministry has since been requested for allocation of 7,000 million tonnes of coal reserves to the mining PSUs of the state under the government dispensation route, but the allocation of coal blocks from the state has been done to other state PSUs ignoring the requirement of coal for the ongoing projects.

Not only coal, even in case of 14th Finance Commission allocation, we have been discriminated. The PM claims the Centre has raised the share of states somewhere even up to 62%, but it’s mathematical jugglery. We’ll place fact-based documents in the house. We have met FRBM norms, stabilised our population, yet have been clubbed with fiscal deficit states. Odisha is an emerging state and deserves more financial allocation.
(As told to Sandip Das)

The author is a Lok Sabha MP, Biju Janata Dal