Opinion Free the captives

Although steel manufacturers with captive iron ore mines get their raw material at a cheaper price,they are free to sell their finished products at market prices. In other words,they need not pass on the benefit of low input costs to steel consumers. This is a clear policy anomaly that cannot be justified.

Another benefit for steelmakers is that international prices of iron ore can be quite volatile. However,there is no such risk in sourcing ore from captive mines.

Significantly,oil and gas producers have to share their profits with the government in addition to payment of royalty and cess on crude oil. Besides,they have to incur expenditure on exploration,which is recoverable only when they make a discovery. Otherwise,they have no option but to write off the expenditure. In contrast,there is no such exploration risk for captive iron ore miners. And they are required to pay royalty only,because there is no concept of profit-sharing with the government.

Other sectors,too,like fertilisers and power,get key inputs — like natural gas — at a subsidised price. But in each other case,the pricing of their final product is regulated by government.

While power consumers directly benefit from low gas prices,the availability of cheaper natural gas to urea producers helps the government cut its fertiliser subsidy burden. So there is at least an apparent justification for subsidising input prices in these sectors.

But for steel?

Captive iron ore mines have been allocated to steel manufacturers on the grounds that it would provide them an assured supply of the raw material. There is some merit in that argument. But should only steel producers benefit from natural resources which legally belong to all Indians? All people should benefit from the harnessing of natural resources; but since steel manufacturers are selling their products at freemarket prices,only they benefit from low-cost iron ore.

The government’s decision to ask steel manufacturers to hive off their captive iron ore business is a step in the right direction. However,the government needs to go far beyond that. The government is already planning to auction captive coal mines. There is no reason why it cannot adopt the same yardstick for allocation of iron ore mines.

Significantly,the government has started allocating captive coal mines to bulk consumers from sectors like power,again saying that it would ensure an “assured supply” of fuel for their generating stations. Bulk coal users have been allotted captive mines on a “nomination basis”. Even though,in this sector,it is not generators but power consumers who benefit from the low cost of coal,the government is still planning to move over to the auction mode for allocation of captive coal blocks. It is because by auctioning captive coal blocks,the government expects to generate additional revenue,which it might use for the welfare of the general public.

Mining is a stressful activity,in terms of displacement and ecological damage. The benefits from it should,therefore,be properly spread. But unfortunately,in India,it is miners who get to make hefty profits at the cost of everyone else. Perhaps that is part of the reason resistance to mining is growing in the country.

While auctioning captive coal blocks would necessarily push up the cost of power generation and electricity for consumers,there is no such risk in case the government auctions captive iron ore mines to steel manufacturers. At the most,it would raise the cost of iron ore for steel producers.

In any case,steel consumers do not benefit from the availability of cheaper iron ore to producers. So they have nothing to lose if the government starts auctioning iron ore mines. On the other hand,steel companies would be forced to improve their operational efficiency if they were to face pressure on margins. That would be good for the country,and for steelmakers too.

The writer is a senior correspondent with ‘The Financial Express’

noor.mohd@expressindia.com