Opinion India is talking about critical minerals. But do we have a plan?

Less than 20 per cent of India’s vast geological potential has been explored, and much of this has been carried out by governmental agencies like the Geological Survey of India (GSI). Yet, realising India’s mineral resiliency goals is an uphill battle, as the global average time from discovery to first production in mining projects, according to the International Energy Agency, is over 16 years, with Indian projects often faring worse amid regulatory challenges, low private-sector investment, and several stalled projects.

India has a mine-sized gap in its mineral strategy. In many ways, the policy changes made since the 2012 Coalgate scandal continue to have detrimental effects on the industry today. India’s recent attempts to secure critical minerals must grapple with the mining industry’s long-standing trust deficit and historical baggage.

Following the 1991 economic liberalisation, the National Mineral Policy in 1993 and the 1994 amendments to the Mines and Minerals Development and Regulation (MMDR) Act, 1957, sought to expand the role of the private sector and fuel FDI. Subsequently, a policy of First Come, First Served (FCFS) was put in place to allocate mineral blocks. The period between 1998 and 2008 saw a boom in activity. A 2012 CAG report on coal block allocations between 2004-2009 cited a notional loss of Rs 1.86 lakh crore to the exchequer owing to the government’s failure to employ competitive bidding, triggering severe political backlash.

In its judgment on the 2G spectrum license allocations in 2011, the Supreme Court (SC) held the FCFS method to be prone to manipulation and cancelled 122 issued telecom licenses. It later opined that auctions were a preferable method insofar as the objective is revenue maximisation, but acknowledged that the “common good”, not revenue maximisation, must be the guiding principle behind resource allocation. The court held that the primary test of the method employed is that it be fair, transparent and in pursuit of healthy competition. Of the 218 coal blocks allocated since 1993, 204 were deemed to have failed this test and were cancelled.

The 2015 amendment to MMDR replaced the FCFS method of granting mineral concessions with the auction system. About 66,000 applications pending with different state governments from the pre-2015 regime got automatically cancelled. An additional National Mineral Exploration Trust (NMET) contribution and a District Mineral Fund (DMF) levy were introduced.

However, the evidence is clear. Auction data from 2015-2021 indicates that these changes have had detrimental effects and that auctions are also prone to manipulation. Further, auctions necessitate an upfront capital risk with no promise of returns, which does not meaningfully spur any private sector investment or mining activity.

For instance, several auctioned blocks were already operational (not greenfield) and triggered by a mere procedural feature of the 2015 amendment. Several saw extremely high bids, even exceeding the estimated value of the mineral reserves, skewing the bidder profile toward captive miners able to transfer mining losses to downstream activity rather than merchant miners who sell the ores in the open market. A decade later, it is this track record of predatory governance and the burden of a tarnished reputation that India must shed to unlock its vast mineral reserves.

The 2023 amendment laid emphasis on critical minerals, and policies have since rapidly improved to streamline processes. Six minerals were removed from the list of “atomic” minerals, allowing private sector participation. The cap on the sale of minerals in the open market by captive mines has been removed, and the NMET, in its rebranded form, invests in international projects. These are positive changes, but several bottlenecks remain.

A separate exploration license (EL) regime was introduced for prospecting and reconnaissance. This was meant to attract junior explorers specialising in advanced technologies to act as feeders into mining operations granted via auctions, while avoiding vertical integration in the sector. Several jurisdictions also offer these firms tax rebates to offset exploration losses.

However, exploration activity, generally, is incentivised by a preferential right to mine, which India’s EL does not offer. The current system in India offers a 50 per cent cost reimbursement, capped at Rs 20 crore, split across six stages of the exploration process, which is too little when compared with the ~Rs 150 crore exploration costs. The long wait for production, contingent upon which the EL holders earn revenues, will deter prospects.

One way to remodel the current EL regime may be to approach critical mineral extraction as a semiconductor fab construction project and provide upfront capital support on a pari passu basis. The funding needed for this should be sourced without imposing additional burdens on mining firms.

While the corruption allegations in the Coalgate scandal may not allow India to revert to the FCFS process, which helped incentivise private sector participation, the process of two-stage bidding that is progressively and iteratively competitive should be converted to a single, sealed-bid process so as to avoid overbidding.

And finally, while the royalties on several critical minerals have now been rationalised to 2-4 per cent, the royalties on major minerals remain high, resulting in an effective tax rate, inclusive of other statutory demands, for mining companies in India of 60-65 per cent. Consequently, this risks hindering the operationalisation of mines or skewing the costs of downstream products for the economy.

While the system should have progressed towards lowering this, the SC in 2024 held that royalty on mining is not a tax and upheld states’ power to levy additional taxes on mining activities, overturning a previous 1989 judgment. This is characteristic of an extractive state, and needs revision, especially because royalty rates had been steeply increased since 1992 in light of the 1989 judgment.

Reddy and Kotasthane are researchers in technology geopolitics at the Takshashila Institution, Bangalore. Views are personal