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For India to achieve its full potential in the mining sector, policymakers need to give a leg-up in lifting the mining sector on a high growth path. <span style="font-weight: bold;">Jayanta Roy</span> elaborates on the mining industry scenario in India. <p></p><p>The domestic mining industry has been traditionally dominated by large public sector undertakings (PSUs), which contribute around 70 per cent to India's mineral output by value. Though the government has gradually brought in an enabling framework to increase private sector participation, PSUs still dominate the mining sector. In contrast, the private sector mining space is largely fragmented, characterised by many small to medium-scale miners. </p><p>Within India's mineral basket (excluding petroleum and natural gas) for FY2017, share of coal remain the highest, at around 39 per cent by value, followed by iron ore, limestone and lignite, at 10 per cent, 3 per cent and 3 per cent, respectively by value. Between FY2013 and Q1 FY2020, the mining industry contributed 2.9-3.1 per cent to India's gross value added (GVA), which is a fraction of the other leading global mineral producing countries. India's geological topography is similar to that of a number of other resource-rich countries, which leads one to believe that the country is yet to fully realise the potential of its mineral reserves.</p><p>Since FY2015, the Supreme Court had delivered important judgments on illegal allocation of captive coal mines, and illegal mining of iron ore in the states of Karnataka, Odisha and Goa. These judgments have become reference points for framing fresh regulations like The Coal Mines (Special Provisions) Act, 2015, and The Mines &amp; Minerals (Development and Regulation) Amendment Act, 2015 (MMDRA Act 2015) that have helped create a framework for the transparent allocation of mineral resources. In the initial years following the enactment of the new regulations, the domestic mining industry registered healthy GVA growth rates ranging from 9.5 per cent to 10.1 per cent between FY2015 and FY2017. However, the sector's growth has stymied in more recent years, as it rapidly decelerated to 5.1 per cent, 1.3 per cent, and 2.7 per cent in FY2018, FY2019, and Q1 FY2020, respectively. This article highlights some of the key drivers that could help the mining industry move to a higher growth orbit going forward.</p><p> <span style="font-weight: bold;">FDI in commercial coal mining</span> <br />The domestic coal mining industry is dominated by Coal India (CIL) and Singareni Collieries Company (SCCL), which cumulatively account for over 90 per cent of the domestic production. The track-record of private captive miners in ramping up the domestic coal output has not been very encouraging, with production levels remaining range-bound between 40-60 million tonne per annum (mtpa) in the last several years, and accounting for a paltry 6-10 per cent of the overall domestic production. To increase competition and allow greater private sector participation, earlier in February 2019, the government allowed captive coal miners to sell 25 per cent of the mine output in the open market, subject to payment of an additional premium of 15 per cent of the bid price, and more recently, in end-August 2019, the government allowed 100 per cent FDI through the automatic route in commercial coal mining. Over the medium to long term, this is likely to result in faster ramp up of coal production, helping gradually reduce India's import dependence. Moreover, the enabling provision for 100 per cent FDI opens the doors for global coal miners to invest in India, which can benefit the sector in the long run through increased technology adoption and mechanisation, thereby helping the industry achieve better operational efficiencies. </p><p>Coal mining in India is largely restricted to a depth of 50-100 m below the surface and share of underground mining remains a miniscule 5 per cent of the overall production, much lower than its international peers. Given the latest advancements in mining technology, entry of global mining players could help India progressively explore the feasibility in selectively carrying out underground mining operations to minimise the ecological impact as well as overcome challenges associated with land acquisition. The success of opening up of commercial coal mining to the private sector and foreign players however would critically hinge on several factors which would include:&nbsp; </p><p><span style="font-weight: bold;">Size of the mines being offered: </span>Large commercial miners would find limited rationale for investing in smaller mines where costs are likely to be much higher compared to larger mines.</p><p><span style="font-weight: bold;">Infrastructure preparedness and location of the mine with respect to end-users:</span> Mines having supportive infrastructure and proximity to demand centres, leading to ease of coal evacuation can incentive private miners to participate.</p><p><span style="font-weight: bold;">Geological challenges in mining:</span> Opencast mines having unfavourable stripping ratios would adversely impact cost competitiveness and in turn dampen prospects for private sector participation.</p><p><span style="font-weight: bold;">Land acquisition: </span>Mines located in proximity to human habitation increases risks associated with rehabilitation and resettlement and in turn project delays.</p><p><span style="font-weight: bold;">Timely regulatory clearances: </span>A supportive framework enabling timely clearance of regulatory permits would enhance ease of doing business.</p><p> Greater private sector &amp; foreign participation in mineral exploration<br />The prevailing non-exclusive reconnaissance permit regime has failed to create a favourable risk-reward model in attracting specialised overseas mineral exploration companies to invest in India. The domestic mineral exploration space today is dominated by a handful of companies which are largely owned by the Central and state governments, and investments in mineral exploration have not kept pace with the industry's requirement to discover new large deposits to replenish the rate of exploitation of existing reserves. Consequently, a supportive policy framework to incentivise the entry of niche mineral exploration companies could provide the necessary fillip in this critical domain starved of private capital as well as access to the latest exploration technologies.</p><p> Better logistics infrastructurer Greater investment in logistics infrastructure could help debottleneck mineral evacuation capacity. Logistics remains a key cost component in the overall landed cost of a mineral to an end-user. India's large infrastructure deficit has been an important factor that has tempered the growth rate of the mineral sector. We have seen that in the past few years, the evacuation capacity of the railway network has not kept pace with the pace of production of key minerals. The share of iron ore movement by rakes has progressively declined from 87 per cent in FY2015 to 63 per cent in FY2019. A similar trend is seen for coal dispatches, with its share of rail movement declining from 75 per cent in FY2015 to around 67-69 per cent between FY2017 and FY2019. Given the bottlenecks in railway infrastructure and rake availability, end-users of minerals have been left with no choice other than bearing with the higher cost associated with road transport. </p><p> Over the medium to long term, a major thrust towards CIL's production is expected to come from the coalfields of North Karanpura (in Jharkhand), Mand-Raigarh (in Chhattisgarh), Korba - Gevra (in Chhattisgarh), Talcher (in Odisha), and the Ib Valley (in Odisha). However, given the logistical bottlenecks in some of these mine clusters, the development of eight rail corridors remains critical, as these railway lines can support incremental coal evacuation of 372 mtpa from these mine clusters. Among these eight-railway links, benefits are expected to flow in from only two links in the near term. This includes: the 52.41 km Jharsuguda-Barpalli-Sardega line, which can help evacuate 70 mtpa coal from the Ib Valley coalfields, and the 44.37 km Tori-Shivpur line, which would help evacuate 32 mtpa from the North Karanpura coalfields. However, the progress in the remaining six railway links has been limited thus far, and this is expected to remain a bottleneck in the development of several large expansion projects of CIL, which could take the central miner closer to its stated aspirational goal of reaching one billion tonne of coal production. Moreover, logistics is foreseen as a key challenge to be overcome if India were to aim for its steelmaking capacity more than double to 300 mtpa by FY2031.</p><p> <span style="font-weight: bold;">Time-bound auctions</span><br />Timely completion of auctions would help mitigate the risk of an impending iron ore shortage. With the enactment of the MMDRA Act 2015, mining leases which had expired after their first renewal following the May 2014 order of the Supreme Court, were automatically extended till March 31, 2020 (for merchant miners), and till March 31, 2030 (for captive miners). This has led to rising domestic iron ore production since FY2016.</p><p>As the deadline for the expiry of many merchant mines fast approaches, apart from Karnataka, progress of mine auctions in other key iron ore producing states have been slow. In Odisha, the largest producer accounting for around 50 per cent of the domestic iron ore production, only three mines have been auctioned thus far, of which none are operational till date.</p><p>Factors leading to the delay include non-availability of G2-level exploration reports, as well as the Government of Odisha seeking clarity from the Central Government on the maximum leasehold area that could be held by a miner. This puts around 50-55 mtpa of Odisha's iron ore production currently being churned out from these soon-to-expire leases at risk. Assuming a lead time of at least 12-18 months for the auctioned mines to reach their peak rated capacity, the domestic iron ore market is on course to swing from surplus to deficit in FY2021, unless the Central and state governments proactively collaborate to ensure a seamless asset transition post March 31, 2020.</p><p><span style="font-weight: bold;">Summing Up</span><br />The Government of India has set an ambitious target of making India a $5 trillion economy by FY2025. Large scale investments in manufacturing and infrastructure remain at the heart of the government's plans to keep the economy humming at healthy growth rates in the foreseeable future. With minerals providing vital elements for infrastructure, capital goods, and manufacturing, and with the increasing trends in urbanisation, the mining industry is likely to play a crucial role in employment generation and ensuring raw material security to Indian businesses. The mining industry grew at an anaemic rate of 1.3 per cent in the last fiscal, and albeit some improvement being witnessed in the first quarter of the current fiscal, absolute growth for the sector remained low at 2.7 per cent. </p><p>Going forward, supportive policy interventions to put the mining industry growth on a high gear would remain a focus area for the government. </p><p> <span style="font-weight: bold;">Jayanta Roy is Senior Vice President &amp; Group Head-Corporate Sector Ratings, ICRA.</span></p><p></p>