India's Critical Minerals Challenge: A Mine-Sized Policy Gap
India is actively discussing critical minerals. However, a crucial question remains: does the country have a concrete plan? Experts point to a significant gap in India's mineral strategy. Policy changes following the 2012 Coalgate scandal continue to negatively impact the mining industry today.
Global Engagement and Domestic Realities
After a quiet period, India has joined the US-led Pax Silica initiative. This move aligns "friendly and trusted" partners in semiconductors, artificial intelligence, and critical minerals. India also participated in recent G7 critical minerals talks in Washington. These discussions aim to counter Chinese dominance in the sector.
While diplomatic efforts to reshape global supply chains gain momentum, India must urgently address internal challenges. Less than twenty percent of India's vast geological potential has been thoroughly explored. Government agencies like the Geological Survey of India (GSI) have conducted much of this work.
Realizing India's mineral resiliency goals presents an uphill battle. The International Energy Agency reports that the global average time from discovery to first production in mining projects exceeds sixteen years. Indian projects often face even longer timelines due to regulatory challenges, low private-sector investment, and numerous stalled projects.
Historical Context and Policy Evolution
India's current critical minerals efforts must confront the mining industry's deep-seated trust deficit and historical baggage. Following economic liberalization in 1991, the National Mineral Policy of 1993 and amendments to the Mines and Minerals Development and Regulation Act in 1994 sought to expand private sector participation and attract foreign direct investment.
A First Come, First Served (FCFS) policy was implemented to allocate mineral blocks. This period between 1998 and 2008 witnessed significant activity. However, a 2012 Comptroller and Auditor General report on coal block allocations between 2004 and 2009 cited substantial notional losses to the exchequer. The government's failure to employ competitive bidding triggered severe political backlash.
The Supreme Court's 2011 judgment on 2G spectrum license allocations declared the FCFS method prone to manipulation. The court cancelled 122 issued telecom licenses. While acknowledging auctions as preferable for revenue maximization, the court emphasized that the "common good" should guide resource allocation. The primary test required methods to be fair, transparent, and promote healthy competition.
Of 218 coal blocks allocated since 1993, 204 failed this test and were subsequently cancelled. The 2015 amendment to the MMDR Act replaced the FCFS method with an auction system. Approximately 66,000 pending applications with state governments from the pre-2015 regime were automatically cancelled. Additional contributions to the National Mineral Exploration Trust and District Mineral Fund levies were introduced.
Current Challenges and Auction System Flaws
Evidence clearly indicates detrimental effects from these changes. Auction data from 2015 to 2021 shows that auctions are also prone to manipulation. Auctions require upfront capital risk with no guaranteed returns, failing to meaningfully spur private sector investment or mining activity.
Several auctioned blocks were already operational rather than greenfield projects. Some saw extremely high bids exceeding estimated mineral reserve values. This skewed the bidder profile toward captive miners who could transfer mining losses to downstream activities, rather than merchant miners selling ores in open markets.
A decade later, India must shed this track record of predatory governance and tarnished reputation to unlock vast mineral reserves. The 2023 amendment emphasized critical minerals, with policies rapidly improving to streamline processes.
Recent Reforms and Remaining Bottlenecks
Six minerals were removed from the "atomic" minerals list, allowing private sector participation. The cap on open market mineral sales by captive mines has been removed. The rebranded National Mineral Exploration Trust now invests in international projects. These are positive changes, but several bottlenecks persist.
A separate exploration license regime was introduced for prospecting and reconnaissance. This aimed to attract junior explorers specializing in advanced technologies to feed into mining operations granted via auctions, while avoiding vertical integration. Many jurisdictions offer these firms tax rebates to offset exploration losses.
However, exploration activity is typically incentivized by preferential mining rights, which India's exploration license does not offer. The current system provides fifty percent cost reimbursement, capped at twenty crore rupees, split across six exploration stages. This amount is insufficient compared to exploration costs of approximately one hundred fifty crore rupees.
The long wait for production, upon which exploration license holders earn revenues, will deter prospects. One potential solution involves remodeling the current exploration license regime. Experts suggest approaching critical mineral extraction like semiconductor fab construction projects, providing upfront capital support on a pari passu basis.
Proposed Solutions and Taxation Concerns
Funding for this approach should be sourced without imposing additional burdens on mining firms. While corruption allegations in the Coalgate scandal may prevent reverting to the FCFS process that incentivized private sector participation, the two-stage bidding process could be converted to a single, sealed-bid system to avoid overbidding.
Finally, while royalties on several critical minerals have been rationalized to two to four percent, royalties on major minerals remain high. This results in an effective tax rate of sixty to sixty-five percent for mining companies in India, inclusive of other statutory demands. Consequently, this risks hindering mine operationalization or skewing downstream product costs for the economy.
The system should progress toward lowering this burden. However, the Supreme Court in 2024 held that mining royalty is not a tax and upheld states' power to levy additional taxes on mining activities, overturning a previous 1989 judgment. This extractive state characteristic needs revision, especially since royalty rates increased steeply after 1992 following the 1989 judgment.
India's critical minerals strategy requires comprehensive reform. Bridging the mine-sized gap demands addressing regulatory challenges, incentivizing exploration, and creating a favorable investment climate. The country's mineral future depends on balancing global engagements with robust domestic policy frameworks.
