The Hindu Business Line : Testing the limits of market economy

The primary economy ought to be bridled with some price or other controls that would take the benefits of natural resources to the people who ‘own’ them.

M. Ramesh

Heard of a (non-IT) company whose net profit is 60 per cent of sales? Welcome to the public sector mineral giant, National Mineral Development Corporation. NMDC achieved a turnover of Rs 4,185 crore for the year 2006-07, on which it made a net profit of Rs 2,320 crore. The company’s performance has only increased since then. In October-December quarter of last year, for instance, the company’s turnover was Rs 1,623 crore. Net profit was 60 per cent of sales 212; Rs 968 crore.

And why would it not be? For a mining company to take out one tonne of iron ore, it costs Rs 190 if mining is done through semi-mechanised means. A fully mechanised mine would spend only Rs 130 to ‘raise’ a tonne of iron ore. Add another Rs 25 for cess and royalty to the State government, and it costs, at the maximum, Rs 220 to mine a tonne of iron ore.

Mining companies sell the ore to neighbouring steel units at ‘international prices’, or about Rs 7,000 a tonne. And the results are there to see in the bumper profits these companies make. No wonder steel prices have gone through the roof. A tonne of steel sold at Rs 23,000 just a year ago.

Today, it sells at Rs 50,000. Those steel companies that have captive mines (SAIL, TISCO) have also made bumper profits, undeservedly — not due to any increase in productivity, not as a consequence of any breakthrough in R&D, not even because of more sales, but only because of a phenomenon called ‘international prices’.

Mineral wealth

Adding to the problems is export of iron ore. In 2006-07, Indian mining companies exported 72.93 million tonnes of fines and 12.91 million tonnes of calibrated lump ore. (Fines are sintered or pelletised before use in blast furnaces for making steel while CLO is fed into the furnace directly.) At a time when a number of steel units needed iron ore, half of the raw material produced in their own backyard was exported.

Yet, the Ministry of Finance responds by withdrawing some paltry benefits on export of steel, while letting exports of iron ore happen, although only 5 per cent of the steel the country produces is exported.

The issue is pretty much the same in the case of another mineral — oil. Companies such as ONGC boast that their cost of production of oil is around $1 a barrel, but they sell the commodity to a neighbouring refinery at over $100.

A moment’s reflection reveals the unfairness of the whole situation. Whom does the mineral wealth of India belong to? The people of India, right? In the name of globalisation and market economy, you and I pay ‘international prices’ for something that is produced in our own backyards.

Even this international price is not a just a function of demand and supply. If a ship is sunk in the Strait of Hormuz, blocking an oil route, oil prices spike, and you and I pay so much more for the oil produced at Bombay High or Gujarat or Krishna-Godavari — even if this oil ‘belongs’ to us.

Economic owners

We are the economic owners of the country’s natural resources. A company that mines iron ore or takes out oil is not the economic owner of the resource but only an agency that provides the service of making the resource a product — for which, they deserve a rich profit.

An oil company, which may invest thousands of crores in prospecting and yet come a cropper, deserves sufficiently high profits to compensate for the risks. But that a $1 product is sold at $100, should shock the conscience of the most committed market-economist.

Here is where we come to the limits of free markets. The primary economy ought to be bridled with some price controls or other measures that would help reach the benefits from the natural resources to the people who ‘own’ them. To put it graphically, suppose an oil company were to discover that the entire State of Madhya Pradesh is sitting on vast reserves of oil and, yet the production of that does not make one bit of difference to the price you and I buy petrol and diesel at, would we not feel cheated?

A completely free market economy cannot work in a situation of partial globalisation. I would not mind paying international prices of oil, if I get paid the same salary my counterpart in the US gets, but not until then.

mramesh@thehindu.co.in

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