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Resource Federalism in India: The Case of Minerals

While natural resources are spatially located, their development is of a wider national interest. Gains from their development accrue to a large common market though the process affects local lives and environments. The distribution of powers and functions across levels of government and the way they play out determine the effectiveness with which various policy goals are met. The need to examine these becomes important given the increased demands from resource-bearing states for a more "fair" distribution of resource rents in buoyant commodity markets, and from local people in resource regions for greater recognition of their rights and compensation for the effects of resource development. This paper examines the federal structure in India in the context of minerals, and suggests ways in which this can be strengthened through expanding the space and institutional capacity for local governance and by improving compensation and the sharing of resource revenues.


Resource Federalism in India: The Case of Minerals

Ligia Noronha, Nidhi Srivastava, Divya Datt, P V Sridharan

While natural resources are spatially located, their development is of a wider national interest. Gains from their development accrue to a large common market though the process affects local lives and environments. The distribution of powers and functions across levels of government and the way they play out determine the effectiveness with which various policy goals are met. The need to examine these becomes important given the increased demands from resource-bearing states for a more “fair” distribution of resource rents in buoyant commodity markets, and from local people in resource regions for greater recognition of their rights and compensation for the effects of resource development. This paper examines the federal structure in India in the context of minerals, and suggests ways in which this can be strengthened through expanding the space and institutional capacity for local governance and by improving compensation and the sharing of resource revenues.

The authors are grateful to the Inter State Council for a financial grant in support of this project, in particular its former secretary Amitabh Pande; to state governments and central ministries for their feedback; and to J L Bajaj of The Energy and Resources Institute (TERI), New Delhi, for his advice and guidance.

Ligia Noronha (, Nidhi Srivastava, Divya Datt and P V Sridharan are at The Energy and Resources Institute, New Delhi.

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uoyant commodity markets and liberalised investment rules are attracting foreign and Indian capital to resourcerich states in India. Given their financial and development problems, these states see the resources – minerals, oil, natural gas, and hydropower – as key revenue and development handles, and are demanding a greater share of the economic benefits of their development. While the centre and states are proactively engaged in creating investment opportunities in resource development, the local people in resource-bearing states are concerned that the authorities may overlook local environmental and social responsibilities.

It is against the backdrop of the states demanding a more “fair” distribution of resource rents, and of the local people demanding a better recognition of rights and compensation for the adverse effects of resource development that we undertook an analysis of compensation issues and the way “resource federalism” plays out in India. The present paper focuses on mineral resources, drawing from a larger study on “Compensation to Resource Bearing States” done for the Inter-State Council (TERI 2007, 2008), which covered the oil and gas, hydropower and the minerals sectors.

It is evident that while natural resources are spatially located, they have a wider national significance. Gains from their development accrue to a large common market though the process of their development affects local lives and environments. A discussion on resource federalism in India thus needs to focus on the following issues:

  • How are the powers and functions over resources and resource development assigned among various levels of government?
  • Do governments at different levels respect the constitutional assignment of powers and functions, or is there an encroachment into each other’s domain?
  • How does the functioning of the institutions of federalism in the context of resource development balance the government goals of economic efficiency, political participation and protection of rights?1
  • How can federalism be strengthened given the developments in the area of natural resource development?
  • An analysis of resource federalism needs to recognise the three perspectives on resource development: agency, spatial, and temporal. Resource development has an agency perspective because there are a number of actors involved in the production and marketing process, those impacted and those charged with regulation and oversight. It has a spatial basis because resources are “located” and have a “place”. Their exploitation affects local lives and other resources that are found conjointly.2 For example, a discussion on the development of minerals cannot be independent of the land below which they exist, forests where they are often located, or rivers, which may get polluted or used up in the process of development. And there is a temporal perspective given that these are long-term projects, and that being finite, they involve intergenerational issues, since extraction today implies development opportunities foregone tomorrow.

    Thus mining minerals is not just about minerals, but also about all these attendant issues. The complexity for resource development policy, and consequently for sharing costs and benefits from the development of a particular natural resource, say minerals, arises not just from issues related to this resource, but also from the roles and functions that other “effected” resources perform and the values attached to them. Apart from material value, resources can also have a cultural or an existence value, and are sometimes seen as “resources for collective representations that exceed the concern with immediate material use” (Baviskar 2003: 5052). Demands made by various stakeholder groups reflect the different meanings and values that are attached to resources. These demands can most often be traded off against each other, but in some instances values are not comparable and no exchange is possible.

    This multifunctionality of resources and the multiple dimensions of resource development create three key policy issues. One, of balancing the interests of the wider constituency (say, the mineral consumer) with that of the more vulnerable, local groups that have insufficient information and voice. Two, of seeking to understand and include the interests of different stakeholder groups, particularly the marginalised. And three, of addressing the aspirations to modernity of indigenous (tribal) groups (in areas where minerals are found) while providing them with the option of remaining or being able to return to traditional ways of living, given that people have multiple affiliations that are intrinsic to their lives and that these create contradictions to what they want at different points of times.3 This, of course, is part of the larger development debate.

    This paper is organised as follows: Section 1 reviews the minerals potential of resource-rich states, their economic and fiscal condition; Section 2 examines the constitutional provisions that regulate centre-state relations in this sector; Section 3 focuses on decentralisation as it is key to resource development given its spatial and local impacts; Section 4 briefly examines resource revenue assignments and sharing in India; and the final section concludes with a commentary on how we see resource federalism

    playing out in the country.

    1 Minerals and Mineral-Rich States in India

    India produces about 90 minerals, including major fuel (coal), metallic (iron-ore), non-ferrous (bauxite), and industrial (limestone) minerals. Internationally, India is a leading producer of coal and lignite (fuel minerals) and iron ore, bauxite, chromite, and manganese ore (metallic industrial minerals such as baryte, steatite and kyanite. The mining and quarrying sector constituted about 2.8% of the gross domestic product (GDP) in 2005-06. Coal occupies an important position among minerals, as about 60% of India’s energy needs are met through it. The index of total mineral production in 2004-05 was

    153.8 (1993-94 = 100), which went up to 155.25 in 2005-06 (http://ibm. nic. in/frames. html). In 2005-06 the country exported (including re-exports) Rs 79,790 crore worth of minerals, an increase of 13% from the previous year. Diamonds and iron ore constituted 64% and 21% of the value of exports.4

    The mineral-rich states of India are Andhra Pradesh, Chhattisgarh, Gujarat, Jharkhand, Karnataka, Madhya Pradesh, Orissa, Rajasthan and West Bengal. Figure 1 shows the state-wise distribution of key mineral reserves in India.

    Figure 1: Statewise Distribution of Select Mineral Reserves in the Country (as in 2005)

    Proved coal reserves (95,867 million tonnes) Proved iron ore reserves (49,45,329 th tonnes)

    Others Chhattisgarh


    23% 37%

    Others Jharkhand

    12% Orissa 27%

    West Bengal 12%

    Jharkhand 45%

    Karnataka 18%


    Chhattisgarh 9% 10%

    Proved bauxite reserves (5,38,945 th tonnes) Proved limestone reserves (74,91,971 th tonnes)


    Others 5% Others

    Gujarat 8%


    23% Andhra Pradesh Chhattisgarh 27% 6%

    Chhattisgarh 9%

    Rajasthan 15%

    Gujarat 8%

    MP 8%

    Karnataka Orissa 10% 70%

    The contribution of the mining and quarrying sector is higher in some states when compared to the national average (depicted by a vertical line in Figure 2). In states like Chhattisgarh and Jharkhand, the contribution of minerals in the state domestic product (SDP) is next only to agriculture and manufacturing.

    Figure 2: Importance of Mining in Select States: Some Indicators (2005-06)
    Mineral Production Share in all-India Production Mining in SDP (%) Royalty in State’s Own Revenues
    (Rs Crore) Value (Rs Crore) (%)

    6955 6409 6132 5645 3421 3247 2840 1070
    8.29 7.64 7.31 6.73 4.08 3.87 3.38 1.27



    8.96Andhra Pradesh Chhattisgarh Madhya Pradesh Gujarat Rajasthan West Bengal

    Karnataka Goa


    2.69 1.36 1.07






    11.14 4.72 16.18 7.51 7.20 5.97 0.51 1.51 1.42


    * Data for royalty in states’ own revenue is for the year 2004-05.

    Sources: Finance Commission, Government of India, Fiscal profile of States,<; IBM (2006), Central Statistical an emerging world player in Organisation, National Accounts Division,

    minerals). The country is also

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    Further, income from mineral royalties is a significant contributor to revenue in some of these states, it being the single most important contributor to non-tax revenue (Figure 2). It is seen that coal accounts for 65-90% of the royalty revenue in Chhasttisgarh, Jharkhand, Orissa, and Madhya Pradesh. Other important minerals in terms of their contribution to royalty in these states are limestone, iron ore, bauxite, and chromite.

    Despite their mineral wealth, these states are economically weak. Figure 3 highlights that the leading mineral-producing states of the country have per capita incomes lower than the national average. Looking at fiscal indicators, mineral-rich states present a mixed picture – some newly formed states like Chhattisgarh are better-than-national average performers on most indicators, while much older states like West Bengal do not fare as well. On the other hand, newly formed Jharkhand falls short of

    Figure 3: Fiscal and Economic Indicators for Select Resource Rich States (2005-06)

    Revenue Deficit Fiscal Deficit Current Transfers from

    (% of GSDP)

    Jharkhand Orissa Andhra Pradesh

    Chhattisgarh -0.6

    Madhya Pradesh Gujarat Rajasthan West Bengal Karnataka -0.7Goa

    (% of GSDP) Centres (% of GSDP)

    3.1 3.9 3.2 6 4.4 5.5 5.4 2.7 5.4


    4.7 2.5 4.5 4.2 2.5

  • 6.9
  • 7.3
  • 6.2 4

    1.8 0.9 1 1 1.6 1.9 1

    The vertical line indicates the corresponding national average.

    Sources: Reserve Bank of India, 2007, State Finances: A Study of Budgets of 2007-08,,

    Central Statistical Organisation, National Accounts Division,

    national averages. Clearly the size of the mining industry is only one of the factors influencing fiscal performance.

    With growing expenditures and rising fiscal deficits, states are increasingly looking to augment their revenues. In resourcebearing states, the focus is on ways in which they can benefit from mineral royalties, which are non-tax revenues. The memos submitted by them to the Twelfth Finance Commission suggest that these states see the potential for income and revenue generation by the resource sector as a key policy option to increasing their fiscal capacity. The memos also demand more control over minerals development.5 Analysing these demands requires us to examine the provisions and the distribution of powers and rights over natural resources in the federal set-up of the country.

    2 Assignment of Powers with Respect to Natural Resources

    The Constitution of India has assigned functions, legislative competence and fiscal powers to both the centre and states with respect to different subjects.6 Different aspects of natural resources are admini stered by either the central or a state government depending on where they are in Schedule VII of the Constitution. This aspect can be clarified by a discussion on how mineral resources and land (a key factor in minerals development) are dealt with in the Constitution.


    In India, the proprietary title to onshore minerals vests in the federating states. However, this ownership is subject to legislation governing regulation and control of mining enacted by the Parliament.7 Minerals within the maritime jurisdiction of the country are owned by the central government. The Mines and Mineral Development and Regulation (MMDR) Act confers the right to allow exploitation of minerals by way of granting licences and leases on the state governments, but in accordance with the MMDR Act and its Rules, as enacted and notified by the central government. With respect to Schedule I minerals, states have little powers except possession, receiving royalty and a few other payments. Neither can they determine the rates of royalty, the most im-

    Per Capita NSDP (Rs)

    portant non-tax revenue from minerals.

    With respect to minor minerals,8 the states can make their own rules and regulations, a provision they have taken

    21620 20250 22873 17649 20095 27822 30494

    advantage of. Taxes on mineral rights are the prerogative of the state in which they are

    39649located. However, this power is not absolute and is subject to any limitations imposed by any law enacted by the Parliament. In 1992, when certain West Bengal laws9 levying cess on coal were 79387 challenged, they were held ultra vires by the high court. However, the Supreme

    Court upheld the legislation on the

    ground that states were competent to levy cess as long as the cess was on coal-bearing land. It was further held that “So long as a tax or fee on mineral rights remains in pith and substance a tax for augmenting the revenue resources of the State or a fee for rendering services by the State and it does not impinge upon regulation of mines and mineral development or upon control of industry by the central government, it is not unconstitutional”.10 Box 1 summarises how legislative powers over mineral resources are shared by the central and state governments.

    To sum up, while states own the mineral resources located within their territory, the centre has jurisdiction over the regulation of mines and mineral development. At the same time, states are empowered to legislate on regulation and development of mines

    Box 1: Sharing of Legislative Powers over Mineral Resources
    State Centre
    Regulation of mines and mineral development 3*
    Safety in mines
    Minor minerals
    Tax on land
    Tax on mineral rights 3*
    Tax on production
    Tax on sale
    Fees on respective subjects
    *Subject to law made by Parliament, that is, the MMDR.

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    and mineral development, but subject to the powers of the centre under List I. So, even though states may own mineral resources, legislative control over them effectively lies with the centre.


    Land is a particularly contentious issue with regard to minerals development, especially in areas with tribal populations, and it is important to understand the constitutional provisions here. The Constitution of India provides specific protection to tribal rights over their customary resources, particularly in Schedule V and Schedule VI areas. Under the framework of the Constitution and, in line with the spirit of the Government of India Act, 1935, which categorised “Tribal Areas” as Excluded Areas, special provisions were made in Schedule VI of the Constitution for administration with special powers. Other tribal tracts, categorised as “Partially Excluded Areas”, were christened Scheduled Areas and placed under Schedule V of the Constitution.11 The object of Schedule V and Schedule VI is to ensure that tribals remain in possession and enjoyment of the lands in Scheduled Areas for their economic empowerment, social status and dignity. Equally, exploitation of mineral resources is for the development of the nation. The competing rights of tribals, or adivasis, and the state have to be adjusted without defeating the rights of either.12 The National Forest Policy, 1988, has a separate section on “Tribal people and forests”.

    Most of the geographical areas rich in minerals and other natural resources fall under Schedule V of the Constitution.13 In these areas, the governor is empowered to make regulations, repeal or amend any law of Parliament to prohibit or restrict the transfer of land by or among members of the scheduled tribes, or regulate the allotment of land to members of the scheduled tribes in such area.14 This power vested in the governor is subject to only the condition that it does not affect the basic structure of the Constitution. Relying on Schedule V provisions empowering the governor to restrict or prohibit transfer of land in Scheduled Areas, the Supreme Court in the landmark Samatha judgment ruled that government lands, tribal lands, and forest lands in Scheduled Areas cannot be leased out to non-tribals or to private companies for mining or industrial operations. Although this case was specific to the state of Andhra Pradesh, the court categorically ruled that land in Schedule V areas could not be so transferred. It was held that the executive, while exercising the constitutional power to dispose of its property,15 “should equally be cognisant to the constitutional duty to protect and empower the tribals. Therefore, the Court is required to give effect to the constitutional mandate and legislative policy of total prohibition on the transfer of the land in Scheduled area to non-tribals.”16

    Environmental and Livelihood Protection

    Environmental protection is clearly provided for in the Constitution of India and judicial interpretation has strengthened this mandate. In recent cases, the courts have recognised the right to a wholesome environment as being implicit in the fundamental right to life, guaranteed in Article 21 of the Constitution (Rosencranz et al 1991). In the national interest and in certain special circumstances, the Constitution enables Parliament to legislate with respect to matters in the State List under Articles 249 and 252. The government of India has enacted several Acts on the environment. The Water (Prevention and Control of Pollution) Act 1974 was promulgated under Article 252,17 as water is a state subject. On the other hand, the Air (Prevention and Control of Pollution) Act 1981 and the Environment Protection) Act 1986 were promulgated under Article 253. The Forest Conservation Act of 1980, enacted primarily for conservation of forests and checking the dereservation of protected areas, governs the diversion of forest lands for non-forest activities. As per the Act, development activities are not prohibited in forest areas but restricted and subject to clearance from the central government. The juridical principles included in the National Environment Policy 2006 include the polluter pays principle, right to life, inter-generational equity, and the precautionary principle.18

    Loss of habitat and livelihood are one of the earliest and most direct impacts of development activities. The Constitution of India does not explicitly recognise any right to be protected from losing one’s habitat and livelihood. However, as in the case of environmental jurisprudence, using the fundamental rights and directive principles under the Constitution, the courts have often dealt with the problem of dislocation. Article 21, which confers the right to life, is undoubtedly one of the most read into provisions of the Constitution. It is up to the states to determine the extent to which the communities who are dislocated and suffer loss of habitat and livelihood can have a say in the matter of being compensated for livelihood losses. Since relief and rehabilitation policies should have adequate local participation and a decentralised approach, some states like Orissa have also come up with their own rehabilitation policies besides the National Relief and Rehabilitation Policy.19

    An analysis of the assignments of powers and the way they have functioned suggests that even though the centre may be empowered by the Constitution to take mines and mineral development under its control, there is encroachment on the states’ domain because the MMDR Act does not sufficiently recognise their ownership rights. Despite states being the owners, important matters such as fixing royalties and revision, and approval for Schedule I minerals are all under the centre’s control. The encroachment, or the need to encroach, is to ensure that mineral resources are used in the national interest. While this is reflected in the fact that regulation and control over the major minerals is vested in the centre, the controls over decisions that relate to revenue augmentation for the states ought to be decided by an independent body, such as the Finance Commission or some other third-party mechanism that is neither linked to the centre nor the states.

    3 Decentralisation and Resource Development

    With the 73rd and 74th Amendments, local governance bodies received constitutional recognition. It paved the way for a“multi level federation with elected local bodies at district and below”20 in a polity earlier governed by the centre and the states. Local government being a state subject,21 the power to legislate for local government, including village administration, rests with the states. Earlier the states were mandated to take steps to organise village panchayats and “endow them with such powers and authority” so as to enable them to function as units of self-government. After the insertion of Part IX in the Constitution, establishment of

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    panchayats for rural areas at three levels – village, intermediate and district – was envisaged.22 The Constitution states that a gram sabha, or village assembly may exercise such powers and perform such functions as the legislature of the state may by law provide.23 Hence, states are not bound to devolve powers on panchayats but they may endow these units of local governance with power to prepare and implement plans for economic development and social justice, levy, collect and appropriate taxes, duties, tolls and fees in matters as they may find appropriate.

    Part IX and IX A of the Constitution, which embody the principles of self-governance, did not include the Scheduled Areas in its application till as late as 1996 except for the power given to the Parliament and state legislatures to extend provisions of this part with necessary modification and exception.24 Based on the recommendations of the Bhuria Committee,25 the Parliament, in 1996, passed a separate legislation as an annexure to the 73rd Amendment laying down provisions for panchayats in Schedule V areas.26 The Panchayat Extension to Scheduled Areas (PESA) Act was enacted giving special powers to gram sabhas in Scheduled Areas, which were a little different from the powers given to gram sabhas in non-Scheduled Areas. Here, not only the elected panchayat but also the gram sabha has been made the core of decentralised administration. One of the important features of the PESA is that it acknowledges the competence of gram sabhas, the formal manifestation of village communities, to “safeguard and preserve the traditions and customs of the people, their cultural identity, community resources”.27 It mandates that there should be consultation before land acquisition for development projects and before resettling or rehabilitating persons affected by such projects. The PESA further provides that every panchayat at the village level shall obtain from the gram sabha a certification of utilisation of funds for these plans, programmes and projects. In the case of minor minerals, it is mandatory to obtain the recommendations of the gram sabha before granting any lease or concession.

    Under the PESA Act, all the states were given one year to amend their panchayat legislations to bring them in conformity with the new law. By now all the states have made necessary enactments and amendments but “a closer look establishes that almost all powers have been made subject to rules/further orders by the State Governments”.28 It is not just the panchayat law that has to be consistent with the PESA. There are other laws as well which have a bearing on the rights and powers of gram sabhas and therefore need to be looked into. To summarise, the steps taken by the States for the purposes of the PESA have not been adequate in strengthening the concept of self-governance as envisaged by it.

    Box 2: Functions and Functionaries
    Key Functions/Responsibilities Centre State Local Government
    Land issues: access, compensation DoRev, for damage Agriculture
    Missing/weak link
    Post-closure issues IBM DoMines
    Oversight of environmental impacts, MoEF SPCB, DoEF including forests
    Mining clearances IBM/MoM/ MoEF DoMines
    Rehabilitation of project-affected people MoRD DoRev/RD
    Social investment programmes
    IBM = Indian Bureau of Mines; MoEF = Ministry of Environment and Forests; MoM = Minsitry of Mines; MoRD = Ministry of Rural Development; SPCBs = State Pollution Control Boards; DoRev = Dept of Revenue.

    Drawing from the assignment of powers and functions in the context of minerals, the table below shows the organisations across various levels of government that are charged with some key functions and responsibilities. These relate to land, to post closure of mining, oversight of environmental (including forests) impacts, rehabilitation of project-affected people (PAP) and social investment programmes. It is evident that local governments have not so far been assigned some of the functions that are key to improved governance. Moreover, resource revenue related social investment programmes are left to mining companies.

    Fiscal Decentralisation

    Fiscal decentralisation involves “the devolution of taxing and spending powers to lower levels of government”29 while revenue sharing refers to the mechanism through which revenue collected by one or more parts of the government is distributed across various levels of government. Both fiscal decentralisation and revenue sharing are crucial concepts in intergovernmental fiscal

    Figure 4: Public Costs and Tax Revenues across Life Cycle of Resource Development






    0 1 3 5 7 9 11 13 15 end-2 end

    Mine opens End of period without taxes Closure Public costs Tax revenue

    Source: Olle Östensson, Presentation at the RIIA workshop on Sustainable Relationships: Financing and Monitoring Responsibilities.

    relations. The 73rd and 74th Amendments to the Constitution demarcated the functions and sources of finance between the centre, states and local governments. Schedules XI and XII specify roles and responsibilities for rural and urban local bodies, but leave the actual devolution and the assignment of revenues and expenditures to the states. Fiscal transfers in India tend to be independent of the financial contribution by a region for the development of its natural resource activities and the revenue so generated is generally used for broad social and infrastructure needs. Fiscal decentralisation, however, has met with different degrees of success in different parts of the country.

    A key fiscal issue in the context of minerals development is the timeliness of resource flows: the flow of funds from resource development and the actual time of need in producer areas do not match. State and local government units require large amounts of funds in the initial stages of resource development to address the needs of the local people affected, but resource rent flow gradually increases only with production. Funds are also needed at the time a mine is closed to take care of its environmental and social impacts. Moreover, the initial phases are

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    often declared “tax-free” to attract investors. Figure 4 captures this fiscal challenge.

    4 Existing Revenue Assignments and Sharing in the Mineral Sector

    Both the centre and states in India collect revenue through different taxes and levies imposed on minerals under different legislations. States collect revenue through royalty, dead rent, cess, sales tax, environmental protection fees, prospecting and mining lease fees, and so on. The centre collects revenue in the form of excise duty, forest conservation charges, corporate taxes, and so on. Apart from these taxes, some states like West Bengal impose a cess on minerals. Box 3 summarises the main payments in the case of minerals and Table 1 points out the levies across government levels at different stages of mining.

    Research by the authors based on some limited data sets from the minerals and coal sector seems to suggest that resource revenue distribution between the centre and states is very much linked to the amount of profits that companies are making. So in the case of coal development, the distribution across a select group of profit-making coal companies suggests a 50% share of revenues between the centre and the states. An analysis of the balance sheets of two iron ore companies for 2005-06 (one each in the public and private sectors) reveals that the share of state taxes (royalty and sales tax) in total revenues is in the range 17% to 23% while the centre’s share (mainly income tax and dividend tax) accounts for the balance. This is because large profits are made by iron ore companies due to increased demand, high prices, and the very low royalty payments that they make to states.30

    The royalty system in India is a mix of unit-based and ad valorem-based approaches. For 39 minerals, the royalty is based on an ad valorem system (ranging from as low as 1% of sale price in the case of manganese concentrates to as high as 20% in the case of gypsum) while for 18 others, including iron ore, coal and lignite, it is a fixed amount per tonne of dispatch. There is currently a move in the direction of ad valorem rates, as the specific rates yield very low revenues to states in a time of buoyant commodity markets. While this move may be in conformity with international practice, the issue of determining the “value” on which royalty is charged needs to be resolved. Comparing unit based rates, it appears that with a few exceptions like iron ore, the royalty rates in India are higher than international rates (Table 2, p 57). This could be due to several factors, including mining conditions and costs.

    Box 3: Key Payments

    Royalty and dead rent Compensatory afforestation and NPV (forest lands) Fees R & R payments Income taxes Local taxes Environmental fees Water cess General sales tax Local taxes Labour welfare cess Cess on coal bearing lands (some states)

    As a percentage of price, the current royalty rates of noncoking coal in India translate into about 8-16% of the pithead price,31 which is much higher than the ad valorem rates charged internationally (2-8%), though

    Table 1 Charges Levied by Various Tiers of Government at Different Stages of Mining

    Instrument Remarks

    Pre-production stage

    Central government

    Compensatory Afforestation All money paid by user agencies towards

    charges and net present value (NPV) Compensatory Afforestation and NPV of diverted

    of diverted forestland forestland is required to be put into a Compensatory Afforestation Fund established under the new Compensatory Afforestation Management and Planning Authority (CAMPA).

    State government

    Reconnaissance permit fee Prospecting fee Application fee for reconnaissance permit Application fee for prospecting licence Application fee for mining lease Security deposits for reconnaissance permit,

    prospecting licence and mining lease Consent to establish fees paid to the state pollution control board

    Production stage
    Central government
    Labour welfare cess Applicable to mines of iron ore, manganese ore,
    chrome ore, mica, limestone, and dolomite
    Customs duty Certain concessional rates available for mining
    Excise duty Minerals, except coal, exempted, however
    beneficiated/intermediate products subject to duty.
    Intermediate products include mineral
    concentrates, cement clinkers, etc.
    Income tax
    State government
    Royalty Levied on a per-unit of weight basis or an ad valorem
    basis on sale price. Rates laid down by the central
    Dead rent Uniform rate for the country, varies by lease area, period
    of idleness of lease, value of mineral and whether the
    lease is captive or not. The holder of the lease is liable
    to pay either royalty and dead rent, whichever is greater.
    Surface rent Paid on surface area used for mining operations at a
    rate not exceeding the land revenue
    Water rent/rate/cess/tax For the use of water for mining operations
    Development charges Some state governments levy charges for
    construction of roads, bridges, etc.
    Tax on land-use Some state governments levy tax on the land used
    for mining purposes
    Stamp duty On the instrument of transaction
    Forest produce tax and forest passes
    Consent to operate fees paid to the
    State Pollution Control Board
    Local government taxes
    Property/house/municipal tax On the basis on the asset value of property
    Local government body taxes
    (village panchayat levies)
    Post-production/marketing stage
    Central government
    Central sales tax
    Export duty
    State government
    General sales tax For availing of the government-provided road
    Non-agricultural land assessment May be levied on diversion of land for
    non-agricultural purposes like mining
    Local government body tax
    Toll tax/Octroi/entry tax Levied on a good entering the local
    jurisdiction for sale or consumption on tonnage or on a
    lumsum basis or on the basis of the mineral
    Other charges
    Port charges Levied by the port authorities for various services
    offered. For handling of cargo, landing and shipping
    fee, plot charges for stacking and other technical
    services like towing, varies by port and mineral.

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    strictly speaking it may not be Table 2: Royalty Rates for Select Minerals in Some Countries of Asia

    Coal Iron Ore Limestone Copper Bauxite

    relevant to compare rates given

    Indonesia 13.5% fob or of <100,000 tonnes, <500,000 tonnes, <80,000 tonnes, <200,000 tonnes

    the differences in the quality of

    sales revenue $2.7/tonne; > $0.14/tonne; > $45/tonne; > $0.40/tonne; >=200,000 Indian coal and the lack of 100,000 tonnes, 500,000 tonnes, 80,000 tonnes, $0.50/tonne clarity on what the value basis $2.9/tonne $0.16/tonne $55/ tonne

    Philippines 10 pesos/tonne 2% ad valorem on 2% ad valorem on 2% ad valorem on Not available

    used internationally is. In the

    market value market value market value

    case of iron ore, Indonesia fol-

    China 1% of sales revenue 2% of sales revenue 2% of sales revenue 2% of sales revenue 2% of sales revenue lows specific rates that are much (add resource tax (add resource tax (add resource tax (add resource tax (add resource tax higher than Indian rates (in ru-0.3-5 yuan/tonne) 2-30 yuan/tonne) 0.5-20 yuan/tonne) 0.4-30 yuan/tonne) 0.4-30 yuan/tonne)

    pee terms). Further, the specific India Coking coal: Rs 4/tonne Rs 55/tonne 3.2% of London (a) 0.40% of London Metal Rs 115-250/tonne; (40% Fe or less) to Metal Exchange Exchange

    rates for iron ore were in the

    Non-coking coal: Rs 27/ tonne (65% Fe Copper metal price Aluminium metal price range of 1-2% of the sale price Rs 65-165/tonne content or more) chargeable on the chargeable on the contained in 2004-05, which is compara-contained copper aluminium metal in ore

    metal in ore produced produced for those

    ble or lower than the rates in

    despatched for use in ternationally. However, a mean-alumina and aluminium

    ingful comparison is difficult metal extraction.

    (b) 20% of sale price on ad

    without clearly understanding

    valorem basis for those the base on which ad valorem despatched for use other

    rates are applied. than alumina and aluminium metal

    States have argued for royalty

    extraction and for export rates to be revised more fre-Source: Otto et al (2006) and Otto and Cordes (2002). quently than what has been done in the past because they claim to have lost out on revenue At the state level, a summary of the major demands would ineven in real terms. In the case of coal, for instance, which ac-clude the following: counts for the largest share of royalty revenue, rates have been – Move to an ad valorem system of royalty; revised only four times since the nationalisation of the industry – Minimise central government intervention and control; and between 1971 and 1973. Second, it is argued that royalty should set – Provide a more stable fiscal regime. on an ad valorem basis so as to provide greater buoyancy to reve-At the local level, anti-mining protests in some states, and diffinues in line with the rise in price of minerals,32 a demand that was culties in starting new mines in others are pointers to poor manrecommended by the Hoda Committee in 2006 but is not get re-agement of the local impacts of mineral development and a fast flected in the National Mineral Policy of 2008.33 The Hoda Com-eroding social licence to operate. Most often this hostility is due to mittee highlights the loss to mineral-bearing states from using decisions taken by govern-

    Table 3: Comparison of Current Royalty specific rates of royalty for iron ore (Table 3). ments without consulting Revenue vs One Based on Ad Valorem Rates for Iron Ore (2004-05) (Rs Crore)

    the local people. Negative

    State Specific Rate Assuming a 7.5%

    Voices from States and Local People

    environmental and social

    Ad Valorem Rate

    Resource-bearing states have become increasingly dissatisfied outcomes in mining re-Chhattisgarh 42 260 with centre-state relations, both fiscal and administrative, and gions are a result of inad-Jharkhand 23 180 the space that is occupied by the centre. The government of equate oversight by regu-Orissa 72 456 Chhattisgarh, for example, had the following to say in its memo latory bodies at various Karnataka 79.75 418

    Country (142 mt) 1,600

    to the Twelth Finance Commission.34 levels of government and

    Assuming a price

    poor rule enforcement.

    … extraction of minerals is governed by the policy of the Union Gov-of Rs 1,500/mt ernment which also lays down the rates of royalty to be charged on

    Our earlier studies in the Source: Planning Commission (2006), pp 152-53.

    minerals. Perhaps since the Central Government undertakings have mining regions of Goa been the biggest consumers of these minerals, the revision of the rates suggest that oversight bodies fail to deliver not only because they of schedule have never been timely. Even the belated revision in the

    are captured by mining interests in the region, but also because

    rates has been guided more by commercial interests of these under

    these institutions lack the capacity and the knowledge to carry

    takings rather than market trends. out their responsibilities. This lack of capacity is compounded by a

    Further it says, shortage of human and financial resources (TERI 2002, 2006).

    For major minerals, the Government of India fixes royalty rates, which

    5 Conclusions

    are supposed to be revised every three years.35 There is always a delay in revising these rates. These delays are obviously of benefit to the Union, This paper sought to address the following questions: How are at the expense of States. As a major mineral producer, Chhattisgarh the powers and functions over resources and resource develophas been particularly hard-hit, with the non-revision of rates result

    ment assigned among various levels of government? Do govern

    ing in revenue stagnation on this account and a potential loss to the

    ments at different levels respect the constitutional assignment of

    State. Non-revision of rates in a regular and transparent manner amounts to a discrimination against the States, which rely heavily on powers and functions or is there an encroachment into each mineral resources, which also happen to be the backward States. other’s domains? Does the functioning of the institutions of

    Economic & Political Weekly

    february 21, 2009 vol xliv no 8 57

    federalism in the context of resource development ensure the goals of economic efficiency, political participation and protection of rights? How can federalism be strengthened, given the current developments in the area of natural resource development? In this concluding section we bring together our observations on what we have learnt from this study and make some suggestions to strengthen resource federalism.

    Our key observations can be summarised as follows:

  • The Constitution while recognising the rights of states to regulate mines and mineral development does so with a rider – that it has to be in conformity with the centre’s power to do exactly the same through legislation. While states have the right to allow exploitation of minerals, they have to have the prior approval of the centre in the case of some major minerals specified by central legislation.
  • There is an encroachment into the states’ domain in the working of resource federalism through the MMDR Act. The sources of disagreement between the centre and states revolve around the following points: ƒ the manner of royalty fixation. ƒ delays in revising royalty rates for coal. ƒ control over minerals development by the centre which does not reflect states’ need for new investments. ƒ Matters of cess and other charges on mines and other minerals under Entries 49-50 of List II. ƒ Under the Indian Constitution, decentralisation until the level of the gram sabha is recognised. But most of this decentralisation is left to be defined by the states. All the powers, whether regulatory, administrative, or fiscal “may” be provided for by the states in their laws on panchayats. This is especially problematic in Schedule V areas (key to the mineral-rich states) where there are provisions under the PESA Act giving special powers to the gram sabhas in Scheduled Areas, The steps taken by the states have not been adequate in strengthening the concept of self-governance as envisaged by this legislation. ƒ• In general, the focus of institutions has been on pursuing economic efficiency goals, not the other goals of government such as ensuring greater political participation among the local people and protecting their rights. Mineral resource endowments are sources of wealth but also sources of social disruption, displacement, environmental degradation, health impacts, and potential sources of conflict and violence. Therefore, the distribution of benefits and costs of such development across and within states, should become key to the discussion on resource federalism.36
  • Resource federalism, we argue, can be strengthened through the creation of more independent bodies to determine issues related to centre-state interests, expanding the space for local governance; improved compensation and the sharing of resource revenues; and enhanced local institutional capacity. Based on our analysis, we would argue that control over decisions that relate to revenue augmentation for the states should be exercised by an independent body, such as the Finance Commission or some other third-party mechanism that is neither linked to the centre nor the states. Alternatively, a cooperative arrangement can be set up by the states, or collectives of states, for the purpose of setting common royalty rates across states, which better reflect their interests and needs.

    Compensation payments, however, need to go beyond being just for resource use and for incremental costs created by resource development, and should include both a share in economic rents and project benefits.37 Such payments cannot be just for restoring what is lost, but to create stakes in the project for those who contribute to it through loss of socio-cultural assets, livelihoods and land. We would argue that local people in mining regions should get a share of royalty payments, not directly, but through special dedicated expenditure programmes run on this share, that are aimed at teaching them new skills. The resource development process involves profound changes in the lives of people. A whole generation unlearns its skills and becomes dependent on the resource development. At the time of closing a project, if adequate planning has not been put in place, locals are left with few opportunities now that their key resource is depleted, and what were their traditional occupations before the resource development are lost. This cannot be acceptable in a true federation. It is important for federations to recognise that the finiteness of mineral resources and the profound changes they create in lives of local people during their development cycle give local people a moral right to a share in the depletion component of the royalty payment.

    Institutional strengthening is key to addressing externalities at the local level. It is true that states being the owners of minerals should have the power to manage their resources according to their needs and that includes raising revenue from them. However, it is equally important that the revenue so generated is put to use in a judicious manner. The states and local governments should be enjoined to have adequate mechanisms in place and the capacity to use the funds to deal with the adverse impacts of mining on both the environment and the people. Management of such revenues may often be inadequate, either because of corruption, low accountability, and/or inadequate implementation capacity. The negative aspects associated with resource development suggest that demands by resourcebearing states cannot be seen as just a centre-state issue, but one involving the sub-state, local level, where various groups have interests in the development of resources or their non- development. Resource federalism will need to reflect this inclusive governance.

    Notes 1 See the discussion in “Rethinking Federalism”, Inman and Rubinfeld, 1997, Journal of Economic Perspectives, Volume 11, Number 4. Fall, 43-64, where they argue that the institutions of federalism need to balance competing goals of government: economic efficiency, political participation and protection of rights; also 2 Bagchi 2003, 37-38 for a discussion in the Indian context. Impacts from minerals development include land alienation and deterioration, loss of access to common property and services, loss of traditional livelihoods, the crowding out of agriculture, increased morbidity and mortality from environmental health impacts, human rights 3 infringements and displacement. MERN working paper series, G McMahon, ed. (1998); Cernea (2000); IIED-WBCSD (2002). Baviskar depicts the multiple affiliations well: “The adivasi fighting against displacement in the Narmada valley is simultaneously a tribal, a farmer, a collector of forest produce, a woman, a mother, a consumer of manufactured goods like fertilisers
    58 february 21, 2009 vol xliv no 8 Economic & Political Weekly

    and saris, a worker on state drought-relief projects…” (2003: 5052) 4 Data source: Indian Bureau of Mines; web site:

    5 pdf, jkhand. Pdf, memo_chattis. pdf

    6 Schedule VII of the Constitution of India, read with Article 246, in its three lists, union, state and concurrent, deals with this assignment. Broadly, List I or the Union list covers subjects that serve at a national level and List II, or the State List comprises those areas which are limited to a state’s jurisdiction, subject to other clauses. With regard to List III, both the Parliament and state legislatures can make laws but in the case of a conflict where there is no scope for a harmonious reading of the provisions, the law made by the parliament prevails. Only the Parliament has the residuary power to make laws on matters which are not included in any of the three lists.

    7 Regulation and development of minerals is a state subject also but it has to be in conformity with the central legislation.

    8 Minor minerals refer to building stones, gravel, ordinary clay, ordinary sand other than sand used for prescribed purposes and any other mineral which the central government may, by notification in the official gazette, declare to be a minor mineral. See MMDR Act sec 3 (e). They comprised

    11% of the total value of mineral production in the country in 2005-06.

    9 Cess Act 1880, West Bengal Rural Employment and Production Act, 1976, West Bengal Primary Education Act, 1973.

    10 State of West Bengal vs Kesoram Industries Ltd 1532-1533 of 1993.

    11 P A Chacko et al, “Enquiry Report – PUCL Dumka, Jharkhand Unit”, September 2003. URL: http:// ment/2003/pachwara.htm 12 Samatha vs State of Andhra Pradesh (1997) 8 SCC 191. 13 Scheduled Areas in Andhra Pradesh, Jharkhand, Gujarat, Himachal Pradesh, Madhya Pradesh, Chhattisgarh, Maharashtra, Orissa, and Rajasthan.

    14 Para 5 (2) of Schedule V, Constitution of India.

    15 Article 298, Constitution of India.

    16 Samatha vs State of Andhra Pradesh (1997) 8 SCC 191.

    17 The power of Parliament to legislate for two or

    more states by consent and adoption of such legislation by any other state. 18 2006e.pdf 19

    20 George Mathew, “Institutions of Self-Government in India: Towards a Multilevel Federalism”, Review of Development and Change, Vol II, No 2, 1997, Chennai.

    21 Entry 5, List II.

    22 Article 243.

    23 Article 243 A.

    24 Article 243M (4) and Article 243ZC(3).

    25 Committee to make recommendations on the

    salient features of the law for extending provisions of the Constitution 73rd Amendment Act, 1992 to Scheduled Areas.

    26 States with districts in Schedule V areas: Andhra Pradesh, Jharkhand, Gujarat, Himachal Pradesh, Madhya Pradesh, Chhattisgarh, Maharashtra, Orissa and Rajasthan.

    27 S 4 (d) of PESA. 28 Sanjay Upadhyay, “Tribal Self-Rule Law and Common Property Resources in Scheduled Areas of India – A New Paradigm Shift or Another Ineffective Sop?” International Association for the Study of Common Property (IASCP) (2004). 29 Odd-Helge Fjeldstad, “Intergovernmental Fiscal Relations in Developing Countries: A Review of Issues”, CMI Working Paper, WP 2001: 11. 30 However, these shares do not take into account the shares of states in the central tax pool and the

    redistribution that occurs to address vertical and horizontal fiscal imbalances.

    31 Pit mouth value in case of coal in India as declared by the coal companies covers costs of production, depreciation, plus return on investment. In many ways it approximates the Gross Sales Value minus transport, handling and insurance valuation basis used in other countries. But a full parity is difficult to establish.

    32 In the case of iron ore, dramatic price increases in the last few years have meant that the ad valorem incidence of specific rates fell to 1-2% in 2004-05 compared to 5-10% in the two preceding years.

    33 34; see also the views of Jharkhand and Orissa, jkhand.pdf; memo_ori.pdf 35 Section 9 (3) of the MMDR Act, however, stipulates that the central government shall not enhance the rates of royalty in respect of any mineral more than once during any period of three years. An expert group appointed for the purpose recommends the rates to the central government

    36 This is especially the case for hydropower projects. 37 See, Cernea 2007 for a detailed discussion on this issue.


    Sustainable Relationships: Financing and Monitoring Responsibilities.

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    List of Cases

    State of West Bengal vs Kesoram Industries Ltd, 15321533 of 1993

    Synthetics and Chemicals Ltd & Ors vs State of UP & Ors (1990) 1 SCC 109

    Samatha vs State of Andhra Pradesh (1997) 8 SCC 191

    List of Acts

    Cess Act 1880

    Land Acquisition Act of 1894

    West Bengal Rural Employment and Production Act, 1976

    West Bengal Primary Education Act, 1973

    Economic & Political Weekly

    february 21, 2009 vol xliv no 8

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