The Indian economy has finally taken off. Its engines are firing on all cylinders to take it to the immense heights that it is capable of. There are many sectors in the economy that are playing a vital role in charting this flight of the nation’s economy. The need of the hour is to kick start the other underplaying sectors and thus bolster and strengthen the pace of economic development and industrialization.

One such sector is the mining industry whose significance in any developed economy is long-familiar. The importance of the Indian mining industry can be underscored by the facts that it contributes to 16% of India’s exports, provides employment to about 300 million both in the organized and unorganized sectors together and contributes $15 billion to the nation’s GDP. Coupled with this, the nation stands in top 5 in the production of a number of minerals and has an estimated 85 billion tons of minerals still to be exploited. On the demand front, the world is already facing shortages of some of the important minerals like petroleum and coal and so the demand for such products will only increase with time. Most of this demand will come from the Asia Pacific region where India is conveniently located. India is even more in an advantageous position due to the availability of low cost labor. Moreover, in addition to the international market, there is a growing domestic market that companies can target and reap benefits from.

Given all this, it’s hardly surprising that the Indian Mining Industry attracts one of the highest Foreign Direct Investment (FDI) inflows. However, the downside here is that this is still far below potential. Industry estimates suggest that the mining industry could potentially become a $70 billion industry in the next decade, more than double the present size of IT, BPO or Pharmaceuticals industries.

CHALLENGES FACED BY INVESTORS IN INDIAN MINING INDUSTRY:

Government:

Regulations and policies which play a major role in encouraging facilitating investments in other countries such as Australia prove to be a major deterrent in the case of India.

The delays caused due to approvals in India (around 3-7 years) is much larger than most of its mining counterparts (1.5 years in Australia).

There is a great necessity for consistency in the interpretation of laws, policies and approvals processes.

In addition, certain states make downstream value addition a pre-condition for granting Reconnaissance Permits ("RP").These local policies further deter the investors from entering the Indian mining sector.

Infrastructural limitations:

The infrastructural facilities provided by India to its investors in the mining industry are scarce and leaves the investors in wanting.

India's road, rail and port networks are run down and in need of massive investment.

Companies are forced to hold large inventories in order to prevent delays.

As a result of these factors, the cost of production in India is high due to which the firm's competitiveness suffers.

Technological difficulties:

Technologies in use for mineral exploration haven’t seen many improvements over the decades. Modern techniques like aerial, geo-physical and geo-chemical surveys are required to be taken up on an extensive basis to increase efficiency and reduce costs of regional exploration activities.

Also since there are no manufacturers of modern mineral exploration equipment in India, such companies have to import the machinery from abroad. This further increases the costs for setting up business in India.

Geological Exploration

The potential of the Indian mining industry hasn’t been tapped completely. While South America accounted for 23 per cent of the global exploration expenditure, followed by Africa (17 per cent), India accounted for less than 1 per cent of the global exploration expenditure.

Constraints of funds:

The potential for attracting such investment is very high as no major investment has taken place in prospecting.

But, raising funds is a big ordeal for prospecting companies. Large-scale prospecting can be a high-risk and high-return venture and only specialist funds that have a penchant for high risk will seek investment opportunities in prospecting companies.

Financial Regime and Political Stability

In order to be sustainable, mines require fiscal regimes at Federal and State levels that are stable, globally competitive and enable investment evaluation and decisions to be made. Random imposts cause concern to international investors and deter them from investing.

Also, in some cases, price setting leads to poor investment decision making.

Environmental and Resettlement issues

The biggest challenge facing investors in the mining industry is the environmental issues and resettlement problems.

The potential adverse impacts on ??environmental quality relate to concerns about the degradation of air, water, lands, and forests.

As of now, an unclear mechanism exists for sharing benefits with local population. The royalties given are not commensurate with economic value. Also, companies have to wrestle between monetary versus land-based Compensation in the case of the displaced people whose subsistence is highly dependent on land.

STEPS PROPOSED BY GOVERNMENT

If India wants to attract state of the art technology and encourage private as well as foreign companies in exploration and mining it is important that the market forces are allowed to play. The Government on the other hand has to maintain an arms length relationship in its role as a regulator versus that of a market participant.

Following are some of the investment guidelines that the Government has laid down to attract new investments:

- 100% FDI is allowed (except Coal and Lignite, Atomic Minerals)

- Government owned agencies would be treated on par with private players for award of mineral concessions

- Supported by independent judiciary and a sophisticated framework of commercial law and practices

The NMP 2007 is a direct result of the efforts put by the Hoda Committee in understanding the needs of the various market players and stakeholders.

The first and the foremost important change that the Draft policy has suggested relates to the issues of seamlessness and transferability across the various stages of the Mining Value Chain. The first stage involves Regional Exploration (Reconnaisance) followed by Detailed Exploration (Prospecting) and then Mining (Development and Extraction).

Initially the companies involved in Reconnaisance and Prospecting were only given preference but no guarantee for next stage concession. Many exceptions, exemptions and discretion were left to the Government. National Mineral Policy 2007 works on the concept of invest, find and mine. Hence the companies involved in Reconnaisance and Prospecting are given the right to the next stage and hence provides security and continuity of tenure.

Another major change is that initially transfer of prospecting license was not transparent subject and was subject to sanction of state. The procedure was also confusing. However NMP 2007 allows the Prospecting licensee the right to transfer the license to a qualified person. The same applies to a mining lease that may have been obtained by the prospector. The NMP 2007 also proposes to allow transfer at a premium to encourage prospecting.

Following are the steps to reduce delays in grant of mineral concession:

- Empowered-cum-coordination committees at central and state levels

- Prescribed time limits to be adhered to by states

- Online Mining Tenement Registry by IBM

- Simultaneous rather than Sequential Processing

All these measures are aimed to attract private players in an industry hungry for investment. Levels have been set to balance out economic competitiveness of the mineral sector while at the same time sharing with the Government to enable them to plough it back for social development. Hence the new Fiscal terms involve:

- Royalties

    > On ad-valorem basis

- Escalating increase in dead rents which would serve as a deterrent for idle holdings

- Levy of transfer fees for concessions

- Several fold increase in penalties on illegal mining or violation of mining plan

In order to ensure that investments should not be at the cost of society, NMP 2007 targets sustainable development and also proposes the following:

- Special Working (Expert) Group for devising sustainable development framework for India keeping in view R&R packages, social infrastructure and compensatory afforestation

- Funds mainly from mining companies: to be routed to receiving beneficiary projects with local participation and NGO support

- Mining companies to spend a percentage of turnover on social infrastructure as Corporate Social Responsibility

- Mining intervention should not only ensure the least damage to the environmental and ecological balance

The importance of investments is not only understood by the Central Government but also by the mineral rich states. The last few years has also seen some state policies like Chattisgah, Orissa and Jharkhand favouring investments by contributing to infrastructural development, research support and formulation of investor friendly mineral policy.

STEPS THAT COULD HAVE BEEN TAKEN

In order that the real mining potential of India is realised, the government must push the following initiatives to unleash the potential of India’s mineral and metal sectors:

- Develop a framework for FDI

   > Security of tenure through preliminary exploration to mine development

   > Speedy and transparent permitting/licensing process

   > Stable fiscal regime

- Accord priority on minerals policies and use that as a vehicle for all round benefits

   > Share economic benefits with local population

   > Special Mining Zones on lines of SEZs.

- Ensure speedy approvals/clearances for projects

   > Push for separate mining zones

   > Create fast track approval process-18 months

   > Create a pull for value addition

- Develop dedicated infrastructure through public-private partnerships

   > Cater to Infrastructure requirements

- Create an environment conducive to Support Service Provider

If India wants to attract foreign players into the mining industry the Government has to create an environment conducive for prospecting companies to raise funds. Thus:

- Unbundling of the currently integrated activities of exploration and mining will help to attract FDI and technology into prospecting and mine development, which are recognised as stand alone economic activities.

- For prospectors to access funds from those interested in investing in such ventures a unique window is required for lenders and borrowers in the financial market place. Such as the Australian and Canadian bourses which traditionally permit prospecting companies to list on their exchanges and offer equity to such risk-oriented investors.

The private equity market can open up to Indian exploration/prospecting companies if enough opportunities arise to encourage global commodity/mining funds to start looking at investing in the country.

Another major issue that the Government currently has in its hands on which it has to take a definite stand is the issue of captive mining.

It is also very important for the Government to learn policies and initiatives taken by Governments in other countries as well.

One such example is that of South Africa where Beneficiation has helped in developing the sector.

Another very innovative concept which is being carried out in Canada and earlier in Australia is Flow Through Shares and Investment Tax Credit.

Thus the expectations from Government chiefly are:

1. To complete the revision of the new Mining policy 2007
2. A clear national policy framework on national resources (Stability of rules)
3. Firm and fast decision making from the government compared to previous administrations
4. To improve security and law enforcement.
5. More discretionary powers to be given to players in mining industry
6. Prominent roles to be played by the private sector

STEPS THAT COMPANIES COULD TAKE

1. Alignment of activity with the level of associated risk

2. Establish and maintain a close relationship with local authorities

3. Strong and proper concern with regards to community development and the environment

4. Establish and maintain excellent links with local NGOs and labor unions

5. Actively participate in discussions with government, parliament etc. concerning the Indian mining sector issues (environment, tax, etc)