Acquiescing to a long-pending demand of mineral-rich states, the Union cabinet last week approved a hike in royalty rates for states for all major minerals other than coal, lignite and sand. Coming on the heels of the abolition of the Planning Commission, which is to be replaced by a new institution in which the states will apparently have greater voice, and the decentralisation of export promotion with the setting up of state-level boards, this move is being seen as part of the Centre’s grand gesture towards strengthening federalism and states’ financial autonomy. By raising mineral royalties, the Centre is also tightening the alignment between the interests of states and mining companies. Cairn India’s Rs 5,000 crore royalty payment to the Rajasthan government for oil exploration, for instance, is a powerful antidote for paralysis and bureaucratic red tape.
After the hike, the royalty payments to mineral-rich states would increase from Rs 9,406 core in 2011-12 to approximately Rs 13, 274 core. These figures are small enough for end users to absorb the hike over a period of time. The real problem for the companies, particularly in iron ore and coal mines, however, is their inability to scale up production to respond to demand and changed cost structures. Royalty on iron ore has been increased from 10 to 15 per cent, but due to the Supreme Court’s regulation, mines in Karnataka and Goa will be unable to increase production — output in 2009-10 was 208 million tonnes, compared to 135 million tonnes the last two fiscals. Coupled with increased competition from imports, the stage is set for financial distress.
Most states have welcomed the hike. But given that the total royalty received is directly proportional to production, it is in their best interests to help companies scale up output, remove supply bottlenecks by resolving outstanding environmental-clearance, licensing and transport-link issues. But states must also be circumspect in piling on more cesses — like West Bengal’s cess on mineral-bearing land. And the Centre must seriously weigh the merits of the “benefit sharing clause” in the draft mining law by which royalty outgo would effectively double. Mining companies are not bottomless pits of tax revenue.