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Support Mining Industry For Fuelling Growth

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Endowed with a gamut of minerals and being leader in production of some of the key minerals, Indian growth story in new millennium started its script on the availability of the raw materials to feed its manufacturing and power Industry though has been lagging behind for some time now. Mining sector’s contribution to GDP has been ~2 per cent on an average in the past decade. 0.6 per cent of total employment in India is created by mining industry. The significance of this sector can be derived from the fact that slowdown in the sector comprising mining and quarrying, manufacturing, electricity, gas and water supply, and construction sectors has restricted the Indian economy to resurrect post global recession of 2009.

The Indian mining sector has experienced significantly low growth rates in past couple of years (-0.6% in 2011-12 and 0.4% in 2012-13) which has also contributed to poor growth of downstream manufacturing and power sector. Despite 100% FDI being allowed in Indian mining sector, the actual inflow of foreign investment has been quite low. Gross Capital Formation (GCF) rate in mining sector has remained stagnant at 3.8%. Investment in exploration to enhance our mineral resource base is very low (at about 0.5% of global spent). Combined with the policy issues which are evident from the poor ranking of India (63 of the 112) as per Frasers Institute’s mining policy perception ranking, the mineral sector in India today faces huge challenge to support India’s ambitious economic growth. While addressing some of these challenges such as policy matter, ownership and allocation issues would need structural policy overhaul, some budgetary measures can help investor restore confidence in investing in mineral sector and attract new investment. 
  • As highlighted above, the level of funding for mineral exploration (including solid fuel sector) in India has been extremely meager in comparison with global spent. Similarly the exploration spending in India is also low at US$ 15/sq.km as compared to US$ 124/sq.km. in Australia and US$ 118/sq.km. in Canada. The mineral potential remains hugely unrealized with huge resource base of all key minerals yet to be fully explored to reserves status. One major concern has been budget allocation for exploration. The budget should focus on increasing the budgetary outlay to exploration agencies and investment in creation/capacity building of existing institutes in enhancing capacity and adopting new technologies to bring them on par with global counterparts. A definite portion of budget needs to be specifically allocated for modernization of exploration equipment. Though in longer run, it is imperative to consider policy changes which allow sale/transfer of exploration licences which will allow specialized exploration companies to enter into sector. Further, investment tax credit for pre-production expenditure would help generate more interest in exploration.
  • Similarly, there are limited incentives for investment in the improvement of technology and larger high efficiency equipment in mining projects. While in longer run investments are required in R&D to develop indigenous technology in large capacity equipment and in technologies to mine and beneficiate sub grade minerals from high depth; for immediate benefits, import of mining equipment should be made duty free. 
  • Focus is required to impart training in handling of latest mining equipment and skill development for areas such as mine planning, mining operations, maintenance, equipment handling. Government focus is required to set up technical training centers to impart training to operators and field level employees to train them in latest technology, efficiency improvement, better recovery techniques and help them understand and connect their work with larger financial benefits. Budget needs to be allocated for development of training institutes, procurement of simulators, updation of training techniques etc.
  • Indian is largely dependent on coal to meet its commercial energy demand. Our domestic production is unable to meet the demand hence imports are inevitable and are expected to increase in near future. Owing to price difference, electricity generated by imported coal is expensive. To make it more competitive, government may do away with duty on stem coal imports.
  • India faces challenge of availability of desired quantity and quality of gypsum for growth of cement industry. Local consumers have so far depended on imports. The domestic demand and subsequent imports are envisioned to increase further. Yet a 2.5% import duty is charged on gypsum while the finished product (cement) is imported duty free. To promote domestic manufacturing, government should consider rationalizing import duties on raw material and finished product in a way to promote local manufacturing.
  •  On iron ore, Government has imposed 30% ad valorem export duty since 2011 with an intention to restrict export, stop illegal mining and enhance supply to domestic market. While the high export duty makes Indian Iron ore less competitive in export market and pushes it to domestic market, curtailment of production has still made iron ore expensive in domestic market. A two pronged approach is required to deal with challenge in iron ore sector, increase production level to make iron ore available to domestic market at the same time, it is necessary to rationalize export duties to earn much needed foreign currency. Further, given import of iron ore is only to meet immediate shortage, import duty on iron ore can be done away with.
  • Currently most of the iron ore consumed in India is higher grade ore while low grade iron ore and fines are staked at mines unutilized. Pelletisation is a way to upgrade low quality fines and promote its use. Currently, Pellet export is subject to 5% ad valorem export duty. To make Indian pellet competitive in export market which in turn will make low quality ore and fines usable, export duty on Pellets can be waived off. Further, beneficiation of low grade ore and then pelletisation can be encouraged through an Interest Subsidy on capital loans.
  • The railway freight category for iron ore and coal has been increased meaning greater transportation cost. On top of that, iron ore meant for exports (including pellets) is charged with additional duty known as distance based charge (DBC). Government needs to consider reducing freight for both the commodities. The lower fright on coal would help reduce electricity price while rationalization of DBC will make input cost more competitive for product meant for exports. Specially rationalization of DBC should be considered for value added products.
  •  India does not have sufficient production of fertilizer minerals and thus depends on import of these minerals. Currently, phosphate import is charged at 2% and potash at 5%. This has to be relooked given India doesn’t possess sufficient phosphate and potash reserves while fertilizer subsidy is one of the large subsidy burden.

Views are of the author, Pukhraj Sethiya, Senior Manager  – Coal & Mining,  PwC India .
The views and observations expressed in the above article represents the personal and independent views of the authors and should not be construed as representative of the views of the firm


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