Ideas for a better mineral policy

Many years of regulatory neglect have resulted in a growing disquiet towards mining in India. Distributive and environmental conflicts are evident in many mineral states. State collusion with the mining industry supports the view that the government does not always reflect the interest of the people. National and local regulatory frames are often in conflict. Land is a key contested site, given many unfair appropriations and inadequately-compensated damages to arable land.

If the country is to develop its mineral wealth, it needs to do things differently, not only because mining creates negative impacts, but also because mineral-rich states, such as Jharkhand, Orissa and Chhattisgarh - home to 65% of India's bauxite, 71% of coal and 46% of iron ore - are amongst those with the highest incidence of poverty. We need a more just mineral policy that focuses not just on rules and regulations that are indeed key, but also on more holistic outcomes from such development. To paraphrase from Amartya Sen's The Idea of Justice, what is required is 'the realisation of justice in the sense of nyaya, which is not just a matter of judging institutions and rules (niti) but judging societies themselves'.

A mineral policy from a people's outcomes perspective will require, on the process side, not only improved coordination across and between government levels, but also operationalisation of popular sovereignty. This should involve a consultative process to establish 'no-go' areas for mining; strict adherence to free prior, informed consent (FPIC) regarding project proposals; institutionalised, regular consultations with local bodies and gram sabhas, and an ombudsman for appropriate oversight of minerals development practice. Apart from environmentally- and socially-responsible practices from operators, appropriation, management and an equitable distribution of resource rents are key to support and ensure comprehensive outcomes.

The Teri study in 2007 on compensation issues argued that while compensation systems exist, these are unsatisfactory in scope and execution. Some recommendations of the study are found in the draft minerals policy, as well as in the XIII Finance Commission Report. But more is needed, including more coordination, given that mineral development involves different ministries. Policy also needs to create more permanent income streams to ensure intergenerational equity as these are exhaustible resources.

Australia's resource super profits tax (RSPT) has some lessons for India. It seeks to mop up 40% of the supernormal profit of the mining companies, replaces royalty and is supported by a lower rate of company income tax. The proceeds are to be used for wider budgetary support, but also in a pension fund. It is triggered at a threshold rate of 6% (long-term government bond rate) and has a 40% safety net for project losses. The tax triggered protests across Australia, and was a reason for Kevin Rudd's fall. While the tax may admit some reform in design and insufficient prior consultation, it is, in principle, required, given the rising prices of minerals.

India too needs such a tax. Economic rent from a natural resource is a surplus that arises from the intrinsic qualities of the resource, which may also be linked to its scarcity, and is not a product of the sweat and capital of the operator. High mineral prices over the last decade have significantly increased rents, but failed to benefit the public at large. The company's share of resource revenues should be based on the expected return from the capital invested which, in any case, already allows for interest plus the risk premium needed in the sector, and includes market-determined cost of all other factors of production. The surplus over this should belong to the owner.

In the Indian case, the owners are the federating states for onshore and the Centre for offshore minerals. Or the surplus could be treated as a fiscal commons and be collected by the Centre and shared with the states through fiscal transfers, but with a clear weight in favour of the mineral-rich but poor states. Whether and what share of the economic rent is captured by the owner depends on the kind of contractual relationship between the government and the company. India could, for example, examine the benefits of rate of returnbased profit-sharing contracts. This would involve an additional profits tax with negotiated rates. The threshold is fixed so that the investor gets an agreed rate of return, and when this is achieved, additional taxes are levied. For mineral riches to help the poor, clear guidelines for investment and use of funds collected through these taxes, and accountability and transparency are key.

Such funds can be used for conditional cash transfers to improve nutrition, education and health; to build physical and social infrastructure; and to invest in financial instruments that give safe and secure returns to fund current and inter-generational state outlays.

Such policy innovations will not only improve outcomes, but also reduce the 'above ground' risks for companies.