challenges of mining in India

Challenges of Mining in India

Industry Magazine Articles

The recent global macroeconomic uncertainties including plummeting commodity price cycles, currency devaluation in Brazil, the cost reduction strategies of the firm, the falling economic growth in China, the lowering capital expenditure (CAPEX) investment on infrastructure projects have had tremendous impact on the firm level competitiveness and the underlying earnings before interest, depreciation, taxes and amortization (EBIDTA) of mining firms, inevitably affecting mining in India as well. The turmoil in the European Union and the Quantitative Easing in USA can also affect the mining firms in terms of financing and trade.

Despite the increasing recognition by economists, mining executives and macro policy makers on the impact of macroeconomic policies on the competitiveness of mining sector, there is hardly any systematic analysis on this issue. This paper attempts to bridge this gap by exploring the impact of macroeconomic policies—especially fiscal policy on mining in India. The question relevant to ask here is, whether efforts to increase the fiscal space through additional taxes and levies and tying up fresh auctions with royalty is burdening  mining in India, which is already overburdened by ‘tax terrorism’, given India has the highest rates of mining tax in the world. Would it augment the state exchequer in the long run if firms are adversely affected in terms of competitiveness and productivity?

Foreign firms, one finds, have undertaken many strategies in the backdrop of international macroeconomic uncertainties. While a few firms engage in ‘market arbitrage’ and quit from non-core businesses to finance the debt burden and enhance the underlying EBITDA, the others benefit from short term currency devaluation in terms of cost effectiveness. However, these are all market-determined short term solutions.

Role of fiscal policy stance

The Indian government has a major role to play in enhancing the competitiveness of  mining in India. Debate has been confined to the quality of mineral endowments and the firm level performance variables (including the capital structure and cost of production) in determining the competitiveness of mining firms. However, in recent years, there is a growing recognition of the role of public policy-taxation regime, royalty regime and regulations.

Public policy on mining in India

The 2015 Mines and Minerals Development and Regulation (MMDR) Ordinance suggested provisions for generating a District Mineral Foundation (DMF) (Section 9B) to address persons or area affected by mining operations (GOI, Annual Report, 2014-15). The Ordinance suggested that DMF would be funded by miners operating in mining districts through a levy in addition to the royalties paid by miners. The Ordinance also suggested a National Mineral Exploration Trust (NMET) for mineral exploration, under which the holder of the mining lease or a prospecting license-cum-mining lease has to pay the trust a sum equivalent to 2 per cent of the royalty. If ‘auctioning’ is the mode of resource allocation of mining concessions, and in case, based on a bidding methodology related to royalty, this can further aggravate the mining taxation burden of firms and hence its competitiveness, and in turn, revenue augmentation. Thus, if rates of mining tax in India are already on the higher side, additional levies could further burden  mining in India.

Onerous mining taxation regime

Mining taxation can be defined as the payment due to the sovereign owner (government) in exchange for the right to extract mineral. As royalties on minerals are related to natural resources, the fiscal instruments on mining are controversial and manifested itself in multivariate forms, sometimes based on profitability, though often based on ad valorem (value based) or the quantity of mineral extracted. The royalty regime in India is gradually shifting towards ad valorem from a unit based system. However, the royalty rates are still high. For instance, royalty rates reached 15 per cent ad valorem for the ferrous regime. Analysing the international mining taxation and royalty regime, mining taxes and royalty rates in India were found to be among the highest in the world (GOI, Indian Minerals Yearbook, 2013).

Unit based royalty or gross royalty is when the royalty is determined with reference to the volume of production, or is determined with reference to gross revenues. On the other hand, ad valorem royalty is calculated by applying a percentage rate to the gross sale value. This is usually ‘ex-mine’ or pithead value (sale realisation) less allowable expenditure. Net smelter return (NSR) royalty is one of the most recurrent systems of ad valorem royalty. Here the royalty is expressed as a percentage of the enterprise’s NSR, which is generally defined to be gross revenues, minus shipping, smelting, refining, and marketing costs. Profit-based royalty is where the royalty is calculated as a percentage of gross/net profit.

Mining royalty regime varies widely between countries and minerals. Minerals include coal, metallic minerals and non-metallic minerals. Globally, specific royalties tend to apply to low value high volume non-metallic minerals. In the context of developed countries like Australia, Canada, and USA, mining royalty is mainly profit based or ad valorem, however, the most consistent application of profit-based royalties are in Canada. In the context of countries in Africa, Latin America, and Asia Pacific, mining royalty is not profit-based. On the contrary, the royalty regime is mainly ad valorem in Africa and Latin America, while some combination of unit-based and ad valorem royalties can be seen in the Asia-Pacific countries. None of the countries in Asia- Pacific, Africa and Latin America has adopted a profit-based royalty to date (Pricewaterhouse Coopers, 2012; 2014)).

It is also interesting to note that there is a correlation between the royalty rate and the system of royalty. Gross royalty rates (unit-based royalty rates) tend to be in the 2-5 per cent range, while ad valorem royalty rates tend to be somewhat higher, with profit-based royalty rates higher still.

The logical reason for it may be—in the case of profit-based royalty, the government is less certain of collecting a royalty, because the royalty base (profit) is less predictable. The government will seek a higher royalty rate to compensate for this risk. On the other extreme, in the case of a gross royalty, the government is at a lesser risk, because the costs of mining in India, milling, smelting, and refining do not affect the royalty base (revenues or production). Therefore, the government will seek a reduced royalty rate. Ad valorem, particularly NSR royalties fall between gross royalties and profit-based royalties on the risk and rate scale.

Mining royalty revenue is a significant source of revenue for the Governments of Jharkhand, Odisha and Chhattisgarh. It constitutes around 10 per cent of their revenue receipts. Indian ferrous firms spend a huge chunk on royalty payment and mining taxes. The ratio of mining taxes for National Mineral Development Corporation (NMDC) is as high as 70 per cent of its total net expenses.

Sectoral highlights

Figure 2 shows that exports have been sluggish through the years whereas imports are on an upward swing in the steel sector. The government hence, needs to create a level-playing field against unfair foreign competition. Over the years, India has become a net importer of steel as the domestic steel industry has lost its export competitiveness in recent times. Distorted global prices and public policies have also adversely affected competitiveness of the steel industry. In the long run, it can impact the profitability, employment and prospects of new investments too. Yet, the potential demand for steel (Fig. 3) is on the rise. The consumption pattern reveals that only 8 per cent of steel is consumed by capital goods, while 20 per cent is absorbed by the infrastructure sector (Fig. 1).steel consumption pattern in india

India ranks 4th in iron ore production. In the recent past, high export duties imposed on iron ore has resulted in plummeting exports. However, in the Union Budget (2016) the government removed export duty on low grade iron fines and lumps to make the domestic industry more competitive as compared to the global market. Export duty on iron ore fines with iron content below 58 per cent was reduced from 10 per cent to nil. Export duty on iron ore lumps with iron content less than 58 per cent was also brought down from 30 per cent to nil. The production of iron ore from 2009-10 to 2013-14 is shown in the (Fig. 4).

figure-18-24_8a-b

Exports of iron ore have plummeted over the years (Fig. 5). One major reason is the high export duty imposed on iron ore. Exports stood at 16302 thousand tonnes in 2013-14 which was the lowest in the past five years. Imports of iron ore are given in Fig. 5.

trends in solid fossil fuel production

Production of bauxite, meanwhile, has gone up in recent years. It increased from 16612 thousand tonnes in 2012-13 to 21666 thousand tonnes in 2013-14 (Fig. 6). Exports too sky-rocketed, with the quantity of bauxite exported increasing from 401 in 2011-12 to 3493 thousand tonnes in 2013-14 (Fig. 7).However, of late, exports have been dwindling owing to high export duties on bauxite. Though the export duty stands at 15 per cent, exports remain uncompetitive.

figure-18-24_6-7

The total production of raw coal increased by 8.25 per cent in 2014-15. It rose from 565.765 MT in 2013- 14 to 612.435 MT in 2014-15. Lignite production grew by 9.00 percent from 44.271 MT in 2013-14 to 48.257 MT in 2014-15 (Fig. 8 (a, b)).

Imports of Coking coal were to the tune of 43.715 MT in 2014-15, an 18.56 per cent over 36.872 MT in 2013-14. Imports of Non-coking coal increased to 168.388 MT in 2014-15 from 129.985 MT in 2013-14, an increase of 29.54 per cent. (Table 1) The imports were mainly from Indonesia (118.22 MT) followed by Australia (47.46 MT) and South Africa (30.73 MT).

India could not meet its own demand for coal in spite of sufficient domestic production, mainly because the supply of high quality coal (low-ash coal) in the country is very limited, as compared to low quality coal.

Even otherwise, India’s coal exports have fallen from 2.188 MT in 2013-14 to 1.238 MT during 2014-15. Coal was mainly exported to Bangladesh (0.54 MT) and Nepal (0.48 MT).

Policy Pointers

  • Rationalise the mining tax rates: There is a shift in royalty rates towards lower rates in ad-valorem across the globe and Western Australia. There is an urgent need to lower or stabilise the current rates of mining in India to international best practices to protecinternational competitiveness of the firms.
  • No upward revision of mining taxation and royalty rates: As the royalty regime is market-linked, any upward revision of the royalty rates should be made keeping in mind the competitive edge of firms.
  • Streamline BCD: In the Union Budget 2015-16, there was an increase in the basic custom duties (BCDs) on metallurgical coke from 2.5 per cent to 5 per cent. This can affect mining in India.
  • Strengthen infrastructure: New policies will be required to strengthen the infrastructure with required technical and financial assistance. The land acquisition process also needs to be dealt with. One way is to make better use of land under public ownership. The land held by steel companies is currently underutilised. Fuller utilisation of the land for maximum output is the need of the hour.
  • Inadequate skilled labour: According to estimates by the Steel Sector Skill Council (which year and name of document), the steel sector will need an additional 2.4 million skilled workers by 2030 to meet its growing needs.
  • Access to raw materials: India has manganese and chromite reserves and other raw materials for steel making. However, with increasing exports, there is a need to encourage production through investment in low-grade ores.
  • Collaborative R&D: Adequate budget for conducting research on mining in India.

Endnote

To overcome the challenges faced by the mining industry, India needs to encourage research and development, invest in skills, avoid upward revision of taxes, strengthen infrastructure, and streamline basic custom duties.

References

Government of India. 2013. Indian Minerals Yearbook 2013, State Reviews, Ministry of Mines, Indian Bureau of Mines.

Government of India. 2015. Annual Report 2014-15, Ministry of Steel, Government of India.

Government of India. 2015. Strategic Plan for next five years, 2011-16, Ministry of Steel.

Government of India. 2015. Standard Tender Document, Ministry of Coal, Govt. of India.

Government of India. 2015. The Coal Mines (Special Provisions) Act, 2015, Ministry of Law and Justice (Legislative Department).

Government of India. 2015. The Mines and Minerals (Development and Regulation) Amendment Act, 2015, Ministry Of Law and Justice (Legislative Department).

Government of India. 2015. Mines and Minerals (Development and Regulation) Amendment Bill, 2015, Controller General, Indian Bureau of Mines, Nagpur.

India Brand Equity Foundation, 2016.Steel Report, January 2016, IBEF.

Pricewaterhouse Coopers. 2012. “Corporate Income Taxes, Mining Royalties and Other Mining Taxes: A Summary of Rates and Rules in Selected Countries”, Global Mining Industry Update,June 2012.

Pricewaterhouse Coopers. 2014. Mine 2014 Realigning Expectations, Review of Global Trends in Mining Industry, 2014.

Monthly Statistics of Mineral Production, Indian Bureau of Mines, Mining & Mineral Statistics Division, Nagpur.

Provisional Coal Statistics. 2014-15, Government of India, Ministry of Coal.

Statistical Profiles of Minerals. 2013-14, Indian Bureau of Mines, Ministry of Mines, Government of India.

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