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New Mining Bill – Good Politics Bad Economics

, October 6, 2011, 0 Comments

mining-bill-economics-marketexpress-inOn 30th September 2011, Union Cabinet approved a new bill [The Mines & Minerals (Regulation and Development) Bill, 2011] aimed at regulating mining activities. The new mining bill proposes a profit-sharing system and higher royalties.

The cabinet has approved a bill calling for funding local schools, hospitals and roads using profits and royalties from reluctant mining firms, a move that may kick start stalled projects and boost rural support for the government. The new mining bill seeks to replace a 1957 act, also provides for setting up of National Mining Regulatory Authority and Tribunal and formation of District Mineral Foundations in 60 mineral-rich districts across the country.

Social Push with Increased Revenue from the  Government

The government is trying to address issues such as expand social programs for the poor and needy, simultaneously trying to  please its core support base and also block flows of new recruits to a Maoist insurgency. The government is hoping to double its revenue from royalties after the bill becomes law. An estimated amount of Rs. 10,000 crore will be generated annually from miners and an average amount of Rs. 200cr will be distributed among District Mining Foundations of 60 mineral rich districts that include 25 districts affected by Left Wing Extremism.

Corruption and Politics

India’s mining sector has among the worst regulatory environments and is a source for some of the country’s biggest corruption scandals. Karnataka chief minister and BJP Leader BS Yedurappa have been forced to resign on the pending charges such as involvement in Illegal Mining activity directly or indirectly.

The Mining legislation, spearheaded by ruling Congress party leader Sonia Gandhi, is seen as crucial in the government’s effort to campaign against graft and could help the party improve its image in order to get political benefits in national elections in 2014.

Industry Reaction

The day on which bill was passed by  the cabinet, stock prices of Coal India – biggest miner in the world were down more than 6% reacting negatively along with all other mining and metal stocks such as Tata Steel (Down 5%), Hindalco Industries (Down 5.7%), Sterlite Industries (Down 4.35%). A clause such as 26% Profit sharing and 100% increase in Royalty are going to affect profitability of all these companies along with deterioration of Investment sentiment.

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