Indian mining: Stuck in the slow lane

By IM Staff
Published: Friday, 01 November 2019

Frustration at the lack of progress in India’s mining sector was simmering at the annual FIMI meeting in Delhi in September. Sunder Singh discovers how many in the industry believe that, far from advancing, mineral production in India is going backwards.

The combination of India’s abundant mineral wealth and its voracious appetite for raw materials has never been sufficient to elevate the country to one of the world’s top mining jurisdictions.

The lackluster state of Indian mining is clearly illustrated by its coal industry. Indian coal reserves are estimated at around 319 billion tonnes, yet the country remains heavily dependent on coal imports.

The volume of foreign coal consumed in India has increased significantly in the past three years, rising from 191 million tonnes in 2016-17 to more than 235 million tonnes during 2018-19, with a value of around 1,708.8 billion rupees ($24.4 billion*).

With a view to enhancing production and efficiency in the domestic coal sector, in February 2018 India’s government opened up commercial coal mining to the private sector, having previously reserved most of the available deposits for state-backed companies.

More recently, it decided to allow 100% foreign investment in coal mining and related infrastructure projects, removing a requirement for partial domestic ownership of mines.

While these steps have largely been welcomed, and are looked on as an approach that could be positively emulated across the wider Indian mining industry, many stakeholders in India are apprehensive that domestic and foreign investors may be deterred by the government’s process of allocating coal mining blocks through auctions.

The tepid response to the auctioning of coal blocks to date suggests that these concerns are well founded.

Of the five tranches of coal block auctions concluded so far, the last two failed to attract any bidders.

Aside from a dislike of the auction process, the multiple challenges facing India’s mining sector are well-known, including disjointed policies, high taxes, illegal and unscientific mining methods, environmental and statutory process violations and lack of investment. And they are frequently lamented by domestic and international commentators alike.

India produces around 95 types of mineral, including four fuel, 10 metallic, 23 non-metallic, three atomic and 55 minor minerals, from more than 2,400 known mines spread across the country.

India has significant reserves of garnet, barites, ball clay, china clay, dolomite, feldspar, fireclay, quartzite, laterite, mica, ochre, quartz/silica sand, talc/soapstone/steatite, vermiculite and zircon.

But despite being rich in a number of industrial minerals, India imports sizeable volumes of these materials. 

Miners, processors and end-users often blame the federal and state governments and the Indian mining ministry for local shortages of these minerals, forcing buyers to source products from abroad.

Many mining projects across the country have also been stalled by legal challenges, delays in obtaining environmental permits, and other regulatory and land acquisition problems.

Auctions

During an event organised by the Federation of the Indian Mineral Industry (FIMI) held in Delhi in September, Indian mines minister Prahlad Joshi spoke of the "pivotal role" India’s mining industry is expected to play in the government’s 'Make in India’ policy.

He outlined a government target to increase mineral production by 200% in value terms over the next seven years, but was sketchy on the financing and operational details of how this will be achieved.

India’s National Mineral Policy 2019, unveiled earlier this year, has the objective of attracting more private investment into India’s mining sector. While many are skeptical that the government will finally be able to turn India’s mining industry around with this ambitious new policy, most are anxious to see change.

"There is hardly any role for the private sector in mining in the country," FIMI president Sunil Duggal said.

"The government exploration agencies have limited expertise and technology, and a lack of infrastructure to undertake exploration. We feel that the private sector, particularly junior exploration companies, which have state-of-the-art technologies and investment funds, can play an important role in furthering exploration activities," he added.

"These companies raise funds for investment from stock exchanges. There is therefore no risk of spending taxpayers’ money on exploration, where the success rate is 1:100," he said.

Duggal also repeated the frustration, voiced by many, regarding the Indian government’s insistence on auctioning mineral rights, instead of distributing them in a less cumbersome and bureaucratic way.

"All [other] resource-rich countries allow the junior exploration companies to bring the latest technologies and funds for resource development, by adopting a first-come-first-served principle for granting concessions," he said.

Changes to India’s mining regulations, brought in since 2014 and which included the introduction of mineral block auctions, have resulted in what many in the industry view as considerable problems for the mining sector.

These include creating a backlog of leases for parcels of prospective land, which are now effectively stuck in the government system.

During the years 2010-14, 494 leases were granted for exploration, but in the post-auction period (2015-19), none of these leases have been executed, leaving a total of 42 greenfield blocks unexplored, while just four leases out of 14 awarded for partially explored areas in Karnataka have been acted on.

Partially explored areas tend to have existing environmental and forestry permits, but even the reduced bureaucracy in these areas has failed to stimulate significant development.

The situation is expected to become even more difficult from next year, when hundreds more mines in the country will come up for auction.

According to the secretary general of FIMI, RK Sharma, tenure of 329 non-captive mining leases is due to expire on March 31, 2020.

Of these non-captive mines (commercial projects not annexed to a large company that buys the mine’s output), 48 are working mines which will be forced to shut down while they are auctioned. The closure of these mines will lead to a shortage of nearly 50-60 million tonnes of raw material, according to Sharma.

"The auction route is a costly way of developing mineral resources and leads to delays in mining," he said. "It is a fact that the auction mechanism for granting mineral concessions has not given the desired result during the past four years."

Tax

India’s mining sector is one of the highest taxed in the world. The effective tax rate in India works out at about 58% for existing mines and 54% for new mines granted through auction.

These taxes include corporate tax, dividend distribution tax, royalties, District Mineral Fund (DMF), National Mineral Exploration Trust (NMET) and corporate social responsibility (CSR) taxes.

This compares with most other resource-rich countries, where effective tax rates range between 30% and 45%, according to government data published for popular mining jurisdictions in South America and the Asia-Pacific region.

Indian miners are also burdened with a plethora of other taxes and levies, including Net Present Value (NPV) for surveys and mining in forested land, auction premiums, performance securities, stamp duty and compensation for deforestation.

These charges increase the cost of producing minerals in India, making selling prices more expensive and encouraging buyers to opt for cheaper imports.

"India’s mining sector contributes just 1.53% to national GDP, compared with 7-7.5% in resource-rich countries such as Australia and South Africa," Sharma said.

"One of the biggest challenges for mining in this country is the excessive taxation. The mining sector in India is heavily taxed, not only in comparison to international levels but also against other domestic sectors. This is having an effect on all downstream industries," he added.

"The tax structure in the mining sector needs to be rationalized to derive long-term benefits in terms of sustained raw material security for industries," he said.

According to Arvind Singhal, managing director of wollasonite producer Wolkem India, taxes on mining companies make India’s mining industry cost-inefficient.

"Unless the government changes these policies, the mining sector in India will not be able to grow quickly, increase the number of areas under exploitation, or provide employment opportunities and development in tribal areas of the country," he explained.

Industrial minerals bear the brunt

Because it is one of the largest raw materials consumers in Asia and one of the major producers of basic materials for construction and industrial use, India’s persistent failure to feed itself from a minerals perspective has long confounded economists and industrialists.

The country has seen huge capacity additions and steady growth rates in almost all industrial-minerals-consuming segments, such as steel, ceramics, glass, paints, plastics, cement and construction.

But domestic mineral production capacity has not kept pace. This is partly due to India’s high population density, environmental and biodiversity challenges, which force policy makers to perform difficult balancing acts between the interests of mining companies, people and wildlife.

In the case of beach sand minerals, including silica, titanium minerals and garnet, concerns about coastal erosion and the effect of sand mining on shoreline ecosystems, ostensibly led the Indian authorities to ban private sector beach sand mining at the beginning of 2019.

Even though India’s beach sands are rich in minerals and are naturally self-replenishing, the Indian government accused private companies of over-exploiting the deposits and made it illegal for anyone other than government-owned companies to mine them.

Critics have suggested that the ban was partly motivated by the government’s desire to reserve the industry, worth 50 billion rupees ($702 million) per year, for its own benefit. India has been exporting beach sand minerals worth 35-40 billion rupees annually for the past three years, according to export data.

The government has been scorned for deciding to ban the practice of beach sand mining, rather than improve the regulatory mechanism for one of India’s most lucrative mineral industries.

VV Minerals, one of India’s leading mineral sands producers, has indicated its intention to seek mineral deposits abroad, including opportunities in Africa, to compensate for the domestic ban. The company has so far applied for licenses in Kenya and Tanzania.

"The government opened up beach sand mining to private companies almost 20 years ago. Now, they have removed this right overnight," S Vaikundarajan, chairman and founder of VV Minerals said. "We expect to get all the requisite permits for a 300 square kilometer site in Kenya and a 15 square kilometer site in Tanzania in the next few months. We are hopeful of being able to start production soon after."

Prospects for growth

Even if India does achieve its 200% production increase target over the next seven years, the outlook for the country’s economy is uncertain and some fear government reforms will stifle growth – a factor which may discourage some investors from funding major capacity expansions.

"Industrial mineral demand this year is subdued, compared with previous years," Wolkem India’s Singhal said.

"We are sure this is a temporary phase and should be over shortly. But the mining industry in India is facing huge challenges, primarily because of changes in government policies," he added.

"Mining’s contribution to India’s GDP is declining, the number and size of mining lease areas have reduced considerably, and new mining concessions are not being granted. Under the current government policy, all major mineral mining leases will terminate after 50 years’ tenure. Both captive and non-captive mine leases will terminate on March 31, 2030, after which they will be auctioned," he said.

Singhal believes that this policy acts as a disincentive to business, because entrepreneurs who have put hard work into making discoveries and building profitable mines will have their concessions taken away from them without good reason in little more than 10 years’ time.

Previous owners are allowed to bid for their former mines, but there is no guarantee they will win them back, especially if other, larger companies with deeper pockets decide to bid for the assets.

"The people who discovered, explored and risked their own capital to develop the mines may get left behind," Singhal said.

An executive from a leading European industrial minerals company with operations in India, who did not want to be named, said that the new policies are designed to bring mineral exploration and exploitation in India under government control.

"The performance of the government in auctioning newly explored areas has been dismal," he said.

"After the auctions, hardly any mines have started commercial production. This is primarily because there is no single window for granting all the required licenses before the auctions and the complicated and time-consuming post-auction compliance policies," he added.

"No private company is allowed to make any discovery or conduct exploration with the protection that what they find will be allocated to them to develop," he said. "There are huge restrictions and costs to transferring mineral concessions, so nobody is incentivized to conduct exploration on another company’s property, even if the owner of the concession is doing nothing with it. This is blocking the introduction of new technology and finance to India’s mining sector."

*Conversions made October 2019


India’s National Mineral Policy 2019

In February this year, the Indian government launched its National Mineral Policy (NMP) 2019.

The new policy will govern the country’s mining sector, and replaces the 2008 version, stating that "exploration, extraction and management of minerals have to be guided by national goals and perspectives, to be integrated into the overall strategy of the country’s economic development."

The NMP proposes to increase domestic production of major minerals by 200% and to reduce India’s trade deficit in minerals by 50% in seven years.

It aims to attract private investment through incentives such as offering financial packages to investors and first refusal at auctions to companies which have demonstrated they have the means to develop deposits.

It also introduces the concept of Exclusive Mining Zones, which will come with in-principle statutory clearances for the granting of a mining lease, and emphasizes the need to simplify the process for obtaining permits more generally.

NMP 2019 encourages mergers and acquisitions of mining entities, and promises to ensure the transparent transfer of mining leases, as well as the harmonization of royalties and other levies and taxes with those common in successful mining jurisdictions across the world.