Mining royalties

Odisha will soon have something in common with the likes of Lady Gaga and JK Rowling — royalties. The State is set to rake in sizeable moolah through royalty receipts from mining. While artists or writers receive royalty payments for creative work, States receive it for leasing out their natural resources . Last week, Indian royalty rates on 23 minerals were revised upwards, after a gap of five years.

States lease their mineral rich land to companies and get compensated for the mineral extracted by way of royalties. These are over and above other levies such as forest tax and lease charges that miners pay. The Mining and Mineral Development and Regulation Act lists 51 minerals for which varying rates of royalties are levied. The royalty rates for iron ore was recently increased from 10 per cent of the output value to 15 per cent and for zinc from 8.4 per cent to 10 per cent. While royalties flow into state government coffers, the rates are fixed and reviewed every three years by the Centre.

How royalty is computed has evolved over the last two decades. Currently the calculation is ad-valorem- computed based on the quantity of mineral unearthed and the sale price.

The royalty rate is fixed after taking into account the rates in other mineral rich countries. The reference rate used now is from Western Australia.

Mining activity, just like liquor sales, is a large source of revenue for State governments. The total value of mineral output in India last fiscal was estimated at over ₹2.3 lakh crore. Mining revenue accounts for nearly 10 per cent of GDP in states such as Goa and Chhattisgarh and royalties are sizeable. For example, with the recent hike in royalty rates, Odisha may earn ₹4,880 crore annually from royalty.

But why pay for digging minerals out of the ground? Well, apart from the fact that natural resources belong to the State, mines are usually situated in remote hilly areas where infrastructure needs to be developed. Local people, typically tribals, who are displaced due to mining activity, must be rehabilitated. Also, mining pollutes water with heavy metals such as arsenic and States have to provide safe water supply. But for mining firms, royalties increase cost and may make them uncompetitive in the global market.

Over the last few years, we have seen local populations protest against indiscriminate mining activity and the Courts imposing ban on mining minerals such as iron ore. This has ballooned the import bill and hit economic prospects for mine-rich states. Higher royalty rates establish a way for miners to share super normal profits with the State and thus with the locals. But higher royalty charges do hike costs for miners and if they pass it down the value chain, metal producers may be forced to take a hit.

So if you have invested in stocks of steel makers or copper users such as home appliance makers, you may want to keep an eye on royalty payments. And if they manage to pass it on to end consumers, you will find yourself paying more for a number of your purchases — from your Coke can to the upmarket passenger car.

While there’s a lot of song and dance about who should get a piece of mining profits, natural resources belong neither to the State nor to the mining companies. They belong to future generations and mining extracts a cost on them. That’s why it is time somebody paid for it.

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