Resource crunch: Mining trundles along at Orissa's Talcher coal field, which has the highest coal reserves in India. PHOTO: VIVAN MEHRA
Billionaire Lakshmi Niwas Mittal has the uncanny ability to work successfully with governments of all kinds across the globe. That, and his unbridled ambition, have enabled him to set up or acquire steel factories in 20 countries. But the man who created the world's largest steel empire from scratch tasted the bitter fruit of failure when he decided to invest in his country of birth - India.
In a bid to capitalise on India's huge iron ore deposits and rising steel consumption, Mittal in 2005 announced plans to set up a steel project in Jharkhand that year and in Orissa the next. Later, he proposed another mill in Karnataka. The total intended investment was $30 billion.
In July this year, ArcelorMittal, Mittal's company, scrapped its $12-billion mill in Orissa after having failed to acquire land and iron ore mines for seven years. Its other projects have not yet been called off, but are also facing delays. Mittal's decision came just a day after South Korean steelmaker Posco, the world's fifth-largest, abandoned a $5.3-billion project in Karnataka for similar reasons.
The two developments highlight how the Indian mining environment is scaring investors away. So, what is going wrong?
Mining has faced multiple problems in recent years. There have been problems in acquiring land for new mines and delays in government approvals. Increased judicial scrutiny following corruption scandals in the allotment of mining blocks and environmental degradation caused by illegal mining have made matters worse.
The Comptroller and Auditor General of India, the country's top auditor, said in a report last year that a flawed coal mine allocation process resulted in a notional loss of Rs 1.86 trillion (one trillion equals 100,000 crore) to the exchequer.
Following the report, the Central Bureau of Investigation filed cases against several companies including leading ones such as Jindal Steel & Power and Hindalco, as well as a few company executives and former government officials. The companies and executives have all denied any wrongdoing.
No wonder the mining sector shrank 0.6 per cent
in both 2011/12 and 2012/13 - at a time when the overall economy was growing. In fact, had the government managed the mining sector better, one of the biggest problems it is grappling with today - the large current account deficit - may not have arisen.
How? India imported coal worth over $15 billion in 2012/13 while its iron ore exports were negligible compared with about $7 billion a couple of years ago. Had there been no coal imports and had iron ore exports continued, the current account gap of $88.2 billion in 2012/13 (4.8 per cent of gross domestic product) would have been a relatively comfortable $66.2 billion (3.6 per cent).
A simple and transparent policy for natural resources, auctioned through a revenue-sharing model, can be a win-win situation for the government, industry and the people, says Vedanta group Chairman Anil Agarwal. PHOTO: Rachit Goswami
That's not all. "Developing our natural resources and the resultant growth of manufacturing can generate enough funds for infrastructure, alleviate poverty and create employment for at least five crore people," says Anil Agarwal, Chairman, Vedanta Group,
who is also facing problems investing in the sector.THE DICHOTOMY
India is rich in natural resources. The country produces as many as 87 minerals including fuel, metallic, non-metallic, and atomic minerals.
Among the minerals, reserves of coal, iron ore and bauxite are vast and will last decades. India's coal reserves of 293 billion tonnes are the fourth largest in the world and account for nearly 10 per cent of global deposits. Bauxite reserves of 3.5 billion tonnes and iron ore deposits of 28.5 billion tonnes are the fifth and seventh largest, respectively, in the world.
NOT ENOUGH: India accounts for just 0.5 per cent of the USD 10.7 billion (global budget in 2010) global spending on mineral exploration. Source: Ernst and Young
But is India taking advantage of this geological windfall? The answer is a resounding no.
Take coal. Sixty years ago, India and China had comparable coal reserves and output. China's annual output now exceeds three billion tonnes while India extracted 558 million tonnes of the dry fuel in 2012/13. This fell well short of the 772.84 million tonnes the country needed that year (see Increasing Shortfall). As a result, India had to import 140.63 million tonnes. Still, supply fell 59 million tonnes short of demand. Only consumers in coastal areas found it feasible to import as high inland transportation costs made it unaffordable for others.
"When we have coal reserves that will last 200 years why are we not questioning the need for imports," says V. Raghuraman, former principal energy analyst at the Confederation of Indian Industry (CII).
Inevitably, coal shortage is hurting power generation. More than half the country's electricity generation is coal based, as will be 85 per cent of the new capacity coming up by 2016/17. The country lost 15.1 billion units of electricity due to non-availability of coal in 2012/13, contributing to a peak power deficit of 11 per cent and hurting economic activity.
"We are importing coal to take care of the immediate fuel requirements," says Arup Roy Choudhury, Chairman of state-run NTPC, the country's largest power producer. "But this cannot be a long-term option as global prices of coal are increasing and will add to the cost of power generation."
Iron ore mining is buried in even bigger problems. Until a couple of years ago, India was the world's third-largest exporter of the mineral, earning $7 billion from it annually. Exports surged from 62.57 million tonnes in 2003/04 to 117.37 million tonnes in 2009/10. The sector expanded rapidly to meet insatiable demand from China in the run-up to the 2008 Beijing Olympics.
Indeed, the industry threw caution to the winds. A politician-industry-bureaucracy nexus led to mining leases being allotted in violation of norms. Also, in the absence of an oversight body, illegal mining became rampant and environmental considerations were disregarded. This, in turn, led the Supreme Court to intervene. The court banned iron ore mining in Karnataka in July 2011 and in Goa in October 2012.
The ban led to a fall in iron ore output to 135.8 million tonnes in 2012/13 from 167.2 million tonnes in the previous financial year, and exports crashed to 18.37 million tonnes. Iron ore imports, inconceivable until recently, are now a reality. They touched three million tonnes in 2012/13 and are likely to exceed five million tonnes this fiscal year.
In April 2013, the Supreme Court ordered the cancellation of 51 mining leases in Karnataka. It also allowed 57 mines to resume production but with an annual cap of 30 million tonnes. All 90 mines in Goa remain shut and are unlikely to reopen at least until early next year.
The impact of a drop in iron ore production on local steel producers would have been higher but for a slowdown in the steel industry. "Had the steel industry grown at 10 per cent as against the current three per cent, it would have been in a real crisis," says A.S. Firoz, Chief Economist at the Ministry of Steel's Economic Research Unit.
Bauxite mining is also caught up in land acquisition and environmental issues. Production of this raw material, used in making aluminium, has fallen since 2007/08. As a result, aluminium output is not enough to meet demand. The country produced 1.72 million tonnes aluminium in 2012/13, lower than demand of 1.97 million and the target of 2.06 million tonnes.
"No new bauxite mine has come up in the last 25 years," says Sushil Kumar Roongta, Managing Director, Vedanta Aluminium. The company has been trying to expand its Lanjigarh refinery in Orissa but suffered a setback recently when, at village council meetings endorsed by the Supreme Court, tribals in Niyamgiri hills rejected bauxite mining in their region for the project.THE WAY FORWARD
Industry players and analysts say a multi-fold solution is required to revive the mining sector. Some executives suggest the government should auction mines rather than allot them to private companies. This, they say, will boost mineral output and minimise the scope for corruption.
"A simple and transparent policy for natural resources, auctioned through a revenue-sharing model, can be a win-win situation for the government, the industry and the people," says Vedanta's Agarwal.
The government should also replace outdated mining laws, says Anjani Agarwal, Partner and National Leader for metals and mining at consultancy Ernst & Young (E&Y). The new laws should encourage commercial mining, address environment and social issues, share benefits of mining equitably and bring in technology to modernise the sector, he says.
Coal imports cannot be a long-term option as global prices of coal are increasing and will add to the cost of power generation, says NTPC Chairman Arup Roy Choudhury. PHOTO: Shekhar Ghosh
The Mines and Minerals (Development and Regulation) Bill 2011, which will replace a 1957 law, addresses some of these issues but the Lok Sabha has yet to pass it. Without the backing of the law, the National Mineral Policy 2008, which tried to address a few mining issues, remains ineffective.
The legal ambiguities have delayed approvals and mining leases. As many as 65,337 mining applications are pending with states, apart from those with the Centre. The central government says the decision on granting mining permits lies with state governments while the states blame a policy paralysis at the Centre for their indecision. Even in cases where mining leases have been allotted years ago, they are now being questioned. In November, the coal ministry cancelled the mining licences for 11 blocks held by corporate houses including the Tata group and Jindal Steel & Power. Also, new mining areas are located either in forests or regions inhabited by tribal people and permission to mine is hard to come by. As a result, investors are jittery and are holding back investments.
Coal Secretary S.K. Srivastava admits that environment and forest clearances and land acquisition problems pose the biggest challenges to mining. "We are working with states to get through these hurdles quickly," he says.
Industry executives argue that allowing private players to mine coal for commercial purposes will boost output and help improve productivity. Currently, state-run Coal India is the only company allowed to mine coal for commercial purposes. But it is not terribly efficient, especially compared with companies globally.
According to a study released in November by the Federation of Indian Chambers of Commerce and Industry, Coal India produces 1,100 tonnes of coal per employee a year. US coal miner Peabody Energy and China's Shenhua Energy extract 36,700 tonnes and 12,700 tonnes per employee, respectively, the study showed.
"We have a monopoly in coal mining and that should go," says Suresh Prabhu, former power minister. "It should be replaced with an efficient mining environment which will set new global benchmarks."
The ratio of proven resources to total resources is dismal in India. There is a huge need to convert the vast resources into proven deposits, says GMR group Chairman G.M. Rao. PHOTO: Vivan Mehra
B.K. Chaturvedi, Member (Energy), Planning Commission, says it is time to revisit the Coal Mines (Nationalisation) Act, which nationalised coal mines in the 1970s. "Coal policy is in a dire need of revamp," he adds. G.M. Rao, Chairman, GMR Group, favours opening up the coal sector the way the oil and gas sector's New Exploration Licensing Policy did. "This will encourage private companies, Indian and foreign, to enter the coal sector, bringing in the latest technology, equipment and established practices for a substantial increase in mining of coal," he says.
P.C. Parakh, former coal secretary, recalls making a proposal to allow commercial mining by private companies after Prime Minister Manmohan Singh took charge of the coal ministry following Shibhu Soren's resignation in 2004/05. "The idea was to have two or three large private-sector companies mining about 200 million tonnes of coal each," he says. The proposal did not go through as the government at the time was supported by Left parties, which were opposed to the idea. "Had we done it then we would not be struggling with a coal shortage now," he adds.
An independent regulatory regime is a prerequisite before the government can think of allowing private players into commercial coal mining. The Cabinet cleared the Coal Regulatory Authority Bill 2013 earlier this year. Coal Secretary Srivastava says the ministry is ready to table the bill in the winter session of Parliament. But time is running out. This session will be the last one of the current Lok Sabha - general elections are due by May - after which all pending bills will lapse.
Opinion is divided, however, on allowing private players into commercial coal mining. Firoz, the steel ministry official, says private players will also have to tackle the same problems Coal India faces in acquiring land, getting environmental and forest clearances, overcoming infrastructural challenges and local resistance.
Industry is divided too on the efficacy of the new land acquisition law that comes into effect from January. "The law makes land very expensive. Industry has to pay four times the market price," says Raghuraman, the former CII executive. That doesn't worry Vedanta's Roongta. "We have no problems with compensation," he says. His worry is that the law decrees the land has to be returned if no development work takes place for five years. "We do not get all the approvals in this time period," he says.
Venkatesan Subramanian, Vice President and Global Leader for mines and minerals practice at consultancy Frost & Sullivan, says companies run from pillar to post and engage middlemen to get approvals. "A single-window system with the participation of all concerned ministries will get things moving and boost investor confidence," he adds.
E&Y's Agarwal says India must spend more on mineral exploration. According to an E&Y study, India's exploration budget is just 0.5 per cent of the global spend. Rao concurs. "The ratio of proven resources to total resources is dismal in India. There is a huge need to convert the vast resources into proven deposits," he says.
Also needed is a strong oversight body to monitor mining activities. This is crucial to avoid illegal mining and environmental degradation. Raghuraman notes that though mining does impact the environment , resources have to be mined for economic growth. He adds the government must announce a clear policy which balances the need for mining with environmental concerns. "Today, environmental issues have been left to the Supreme Court to tackle. The government should come out with a plan to penalise errant miners, monitor mining closely in the future and help lift the court's ban quickly," he adds.
Raghuraman also wants the government to improve infrastructure facilities. He points out that construction of some railway lines and roads that pass through forests and Naxal-dominated areas in Chhattisgarh, Orissa and Jharkhand - the states with the biggest mineral deposits - has been stuck for years because of delays in approvals and threats from Naxals. "The government has to take a call on how to handle this," he says.
No doubt the mining sector faces plenty of problems. But the problems are not insurmountable. The government must send the right signals to investors that it is serious about modernising its mining sector. And it must send those signals quickly. Or else, investors like ArcelorMittal and Posco will keep pulling out of India.(Follow the authors on Twitter: @Madhuta, @krbaloo and @anileshmahajan)