Mining in India Equals Selling the Family Gold

The Hindu     19th January 2021     Save    
QEP Pocket Notes

Context: Treating mineral sale proceeds as revenue or income hides the real transaction — the sale of inherited wealth.

Issues with the exploitation of mineral wealth:

  • Undervaluation: Treated as an economic resource instead of intergenerational resource driven by lobbying, political donations and corruption.
    • Vedanta group report: over eight years (2004-2012), the State of Goa lost more than 95% of the value of its mineral.
    • Treated as “revenue” or income: A crucial error which hides the real transaction — a sale of inherited wealth.
  • Unsustainable mining: Since politicians and voters perceive more mining equals more government revenue equals good.
    • According to the International Monetary Fund (IMF), many governments of resource­rich nations, including the United Kingdom and Norway, face declining public sector net worth.
    • The extractors are keen to extract as quickly as possible and move on. Trees, tigers and tribals are labelled as anti­development or anti­national.

Way Forward:

  • Aim to achieve zero loss in value: The state as trustee must capture the full economic rent (sale price minus the cost of extraction, cost including reasonable profit for extractor).
    • It would limit corruption, crony capitalism and growing inequality.
    • National Mineral Policy 2019 states: “natural resources, including minerals, are a shared in­ inheritance where the state is the trustee on behalf of the people to ensure that future generations re­ceive the benefit of inheritance.”
  • Create a Future Generations Fund: like Norway, for entire mineral sale proceeds.
    • Setting a global judicial precedent: In 2014, Supreme Court ordered the creation of a Goa Iron Ore Permanent Fund, which already has a corpus of around ?500 crores.
    • Distribute it as a citizens’ dividend, having six-fold economic boost:
      1. Sustainable capital has been maintained;
      2. The savings rate would rise, making available more long-term domestic capital;
      3. It diversifies risk while likely improving returns — it is nearly impossible to outperform the market rate of return;
      4. The dividend is in effect a Universal Basic Income;
      5. Lower inequality leads to higher economic performance, and
      6. As budgets no longer have easy mining money, public investment, and tax administration will become more effective and efficient.
  • Modify standards for public sector accounting and reporting for mineral wealth: under the Government Accounting Standards Advisory Board.

Conclusion: It is essential that as a nation, we change our paradigm to understand minerals as a “shared inheritance”, not a source of “windfall revenue”.

QEP Pocket Notes