The step is retrograde and will not curb illegal mining; but a government-nominated agency could ensure accountability in exports.
GOKUL CHAUDHRI
Partner, BMR Advisors
“India is already dependent on imports of crude and LNG and can hardly afford to constrain the development of its remaining natural resources industry”
Concerns about illegal mining have accelerated in the past few years, especially in the context of the scale alleged in the states of Karnataka and Goa. The Shah Commission, along with other policy-makers, have reportedly opined that the export of iron ore needs to be banned or, at the very least, canalised to curb illegal mining. The objective of curbing or eliminating illegal mining is noble but the question is on the means to be adopted to achieve it. This raises the fundamental question of whether banning or canalising exports will actually help curb illegal mining operations or whether it will cause a long-term adverse impact on the overall development of the mining industry in India. This, in turn, raises the issue of the focus of the country’s mineral policy — especially the need to allow and encourage legal mining and to enable the development of world-class mining assets in India that would encourage downstream investment in mineral-based projects.
The approach of banning exports that potentially – again, according to the reports on the interim findings of the Shah Commission – can generate over $9 billion of revenues for the country could be a retrograde measure. India is already dependent on imports of crude and liquefied natural gas and can hardly afford to constrain the development of its remaining natural resources industry. Exports enable the generation of market-based production and price frameworks because they require producers to network and rely on international markets and global prices. If ring-fenced into the domestic market, there will be a long-term deterrent to the development of large-scale global mining assets in India. Canalisation, via existing or proposed government trading organisations, is a fallback to the pre-liberalisation era, a concept that struggles to find relevance in the rapidly developing ecosystem of global investment and trade.
Some of the immediate areas of concern that the government needs to address while evaluating the proposal are:
- State intervention could deter bona fide private investment in the sector that has tremendous potential to sustain a seven per cent- plus economic growth on a year-on-year basis.
- The prevailing price dynamism, which enables private miners to enjoy remunerative prices for exports and access global markets for hedging their risks, could be adversely impacted because international buyers may not appreciate state intervention and regulations in bilateral trade. State trading organisations could, in turn, struggle to meet the rapidly evolving trading terms and needs in international markets.
- Canalising exports could impact the efficiency of the sector per se, since the bureaucracy and politicking could well create delays in sourcing and delivery schedules as a result of the introduction of government rules and regulations. The absence of an efficient and effective supply chain could adversely impact the advantages that exporters hitherto enjoyed.
- Last mile governance alone in the form of the government intermediary facilitating exports may not be adequate unless effective provisions are enacted to discourage illegal excavation operations. This calls for robust governance for ensuring legal sourcing of mineral by traders.
To ensure curbs on illegal mining, the government could consider a well-defined set of Know Your Customer (KYC) rules for sourcing for private exporters. Such KYC-governance should be monitored at the production stage by the central and state machinery with subsequent filings when the exports take place.
Curbing illegal mining is an enforcement issue, an environmental challenge and a law and order matter, and needs to be addressed with the penal powers and administrative regulations that are located in the mining and environmental rules. There is also the introduction of the much anticipated Mines and Mineral (Development) and Regulation Bill in Parliament to empower the state governments to speed up trials for offences relating to illegal mining.
Placing curbs on the supply chain of exports, an activity essential for the overall growth and investment in the sector, can be a sub-optimal solution that does not provide a holistic and sustainable answer for the development of world-class mining assets in India.
SHIV DAYAL KAPOOR
Former Chairman and Managing Director, Minerals and Metals Trading Corporation (MMTC) Ltd
“Canalisation would cut out avoidable competition in exports witnessed under the Open General Licence regime and plug unethical practices”
In 2010, India produced about 226 million tonnes of iron ore, of which nearly 100 million tonnes was exported. Owing to lack of adequate domestic capacity to convert fines into sinter or pellets, all the fines generated in the course of mining and processing iron ore cannot be consumed locally. Export of fines and low-grade ore is, therefore, an economic necessity for mining companies to continue excavation activities.
To ensure that an unlimited quantity of high-grade iron ore is not allowed to go out of the country, export of iron ore with iron content of 64 per cent and above is canalised through MMTC Ltd. All other grades can be exported under Open General Licence (OGL). It is not difficult to manage a cut-off limit of 64 per cent iron content to get out of canalisation. And since such exports of iron ore with iron content below 64 per cent are under OGL, regulation of and accountability in exports is not being enforced. Many cases have come to light in which exporters have circumvented foreign trade policy.
Notwithstanding an export duty of 20 per cent ad valorem and very high railway freight on the movement for iron ore for export (in contrast to freight charged for domestic movement), export is still an economic proposition for miners since it enables them to evacuate surplus fines and low-grade ore for which domestic demand is limited. If incentives from export increases (as is likely with the weaker Indian currency) this activity will increase, encouraging illegal mining and cheating the exchequer by adjusting quantity and quality in exports. This could be better managed by close monitoring and control by a government-nominated agency that could also be charged with the responsibility of tracing the producer of iron ore.
It is possible to enforce traceability of ore for exports. The mining licence enjoins certain responsibilities on the lease holder. The Indian Bureau of Mines (IBM) approves the mining plan and conducts regular checks as to whether production is proceeding according to the sanctioned plan. Geological permits are required for authorised movements of ore from mines to rake loading points. Third-party inspection is enforced to check the quality before the mined produce is allowed to move. Yet another independent inspection for quality and quantity is conducted at rail loading points and during shipments. Obviously, such a strict regime became a casualty when large-scale exports started going under the OGL.
In contrast, canalisation would cut out avoidable competition in exports witnessed under the OGL regime and plug unethical practices. There have been cases in which the special dispensation on railway freight for domestic movement of iron ore was unethically availed of for export traffic.
With demand of iron ore increasing globally, especially from countries with a low resource base, the export prospects of low-grade ore from India have increased. A focussed approach to evacuate such surpluses over domestic demand from locations in India such as Redi in Maharashtra paid rich dividends in the past when MMTC Ltd, by deploying a transhipper vessel, could overcome the logistics constraints of the low draft at the port by loading ships midstream, thus, converting a non-usable surplus into an exportable resource.
Banning exports will also not help. In fact, it would hurt sectors like Redi-Goa in which iron ore production will continue to be higher than local demand and transporting such surpluses to other consumption points in India will not only be uneconomical but put an additional burden on an already stretched road-rail-port network.
With Indian crude steel capacity forecast to increase to 149 million tonnes by 2016-17 (from 78 million tonnes at the end of last fiscal year), iron ore surpluses available for export would get reduced significantly over time.
Fortunately, India has a large reserve base of iron ore. It would, therefore, be prudent to encourage mining of iron ore to bring about an optimum balance between rising domestic demand and production; otherwise, prices will go up locally even without exports.
