Friday, November 11, 2011

To mine or not to mine...

IIPM: What is E-PAT?

The government, through a new legislation, wants mining companies to share 26 per cent of their net profit with the local community. While worried miners have projected the new-profit sharing formula as an end of road for the industry, the government seems confident of making it work.

After having displayed a laggard approach on the need of a more contemporary mining policy for years, the government has recently shown great urgency in bringing out a new legislation that promises to address mining-related concerns of most stakeholders. The new proposal, 'The Mines and Minerals (Development and Regulation) Bill, 2010', which is an amendment to the MMDR Act, 1957, and has been approved by the Union cabinet to be put before the Parliament in the forthcoming Budget session, aims to increase the benefits from mining to local communities and also open up the country’s resources to foreign and local private investment. Most interestingly, the contours of the new Bill make it mandatory for mining companies to give 26 per cent of their net profit as compensation to locals displaced by the projects. As S. Vijay Kumar, Secretary, Department of Mines, explains to TSI in an exclusive interaction, “We are trying to give enough options to the local communities by giving them a recurring financial compensation. And it's not a compensation for land, it is to empower them to do something different.”

The expansion of mining in India is a key towards maintaining the GDP and export growth of the country. While Mines minister B K Handique says that the share of mining sector to the country's GDP (between 2.5 per cent and three per cent currently), is poised to increase substantially, the current scenario of mining in India is rather disappointing. The battle between the mining companies and the people displaced by their projects have posed as a huge obstacle for the growth of Indian mining industry in the past. In this context, the question remains, can the new Bill go a long way in resolving these battles?

Going by the miners, well, it will not be as easy as it seems. As per them, they are disturbed with the new profit-sharing formula. The reason, they say, is that 26 per cent sharing is an addition to the regular corporate tax and royalties they are already paying. “While there is no denying that the interests of the tribal population have to be kept in mind, the government also needs to ensure that the industry does not get wiped off,” says R K Sharma, Secretary General of the Federation of Indian Mineral Industries (FIMI).

While the industry contests that royalty linked contribution by mining companies is the best way to deliver justice to affected people, the Mines ministry, on the other hand, has proposed that a 'District Mineral Foundation' be created and the beneficiaries be paid out the 26 per cent net profit of the mining companies from it.
The government is firm on its stand to ensure that miners give tribal and other affected sects of the population a share of the profits they make from exploiting mineral resources. However, Sharma firmly believes that appropriating a percentage of earnings will demotivate entrepreneurs. “On one hand the government says that it wants to bring tribals to the national mainstream, and on the other hand you yourself ensure that they don't,” he observes.

It is interesting that both the government and industry have raised similar concerns on this issue. Both sides recognise the need for a fresh thrust in exploration of minerals and metals in which India is deficient and depends totally on imports (such as gold, copper, nickel and platinum). Both parties also believe that mining should be carried out in a manner that does not hurt the interests of the locals or tribals. However, a consensus still eludes.

Apart from the new profit-sharing formula, there are some other facets of the proposed legislation which has the industry worried. “The Bill stipulates a payment of 26 per cent of net profit or 10 per cent as royalty, whichever is more. So, even if a company is in loss, it will still have to pay the 10 per cent royalty, above other taxes that we are already paying,” Sharma says, adding that the fresh move will only lead to illegal mining in India.

While the actual impact of the renewed Act on the mining sector in India will unfold only once it is implemented, the government is fairly confident of making the new formula work. “I agree that by giving away 26 per cent, the company’s reserves will go down, their expansion plans might be hit and I sympathise with the industry. But there is no other option, if the locals do not get 26 per cent they will not allow mining. The option here actually has to be between mining and not mining rather than expanding or not expanding,” says Kumar.

Nevertheless, the Bill offers the miners some reasons to smile as it proposes transparent and quick procedure for granting of licenses, size specifications designed to invite interest from big players with better technology and expertise, creation of a National Mining Tribunal for appeals against executive decisions et al.

The aspirations of the new draft legislation provide enough evidence of the damage caused by current mining practices. Even though FIMI's Sharma terms the Bill in its current form as “the grand obituary of the mineral resource industry in India”, Mines Secretary Kumar is very clear about his plans. “Everybody is extracting from mining areas and nobody is giving back. Even the royalty from the state governments is being used in non-mineral areas. I am paying back. Others will have to adjust,” he concludes.

With the need for changing the image of the mining industry in India gaining momentum, the government will have to strike the right balance between the social and economic demands and implications of mining in India, while ensuring that it does not pitch itself as an unattractive destination.

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