Impact of New Mining Levies on Consumer Power Bills and Industrial Margins: ICRA Analysis

Impact of New Mining Levies on Consumer Power Bills and Industrial Margins: ICRA Analysis

Sub: Eco

Sec: Fiscal  Policy

• Supreme Court Verdict and New Mining Levies:
  • The Supreme Court has enabled States to impose new mining levies, which could significantly impact various industries, particularly coal-fired thermal power producers and steel and aluminum manufacturers.
• Potential Increase in Power Tariffs:
• Impact on Coal-Fired Thermal Power Producers:
  • The new levies could lead to a 0.6% to 1.5% increase in costs for coal-fired thermal power producers.
  • This cost increase is likely to be passed on to consumers, potentially raising power tariffs.
• Impact on Steel and Aluminum Industry Margins:
• Margin Shrinkage:
  • The levies are expected to reduce the margins of domestic steel and aluminum producers.
• Specific Case of Odisha:
  • In mineral-rich Odisha, a 2004 law permits a cess of up to 15% on iron ore and coal mining.
  • If fully enforced, this could lead to an 11% rise in the landed cost of iron ore, reducing the competitiveness of steel firms.
• Case Study: Jharkhand’s Modest Levy:
• Minimal Impact from Jharkhand’s Levy:
• Jharkhand has imposed a modest rise of ₹100 per tonne on iron ore and coal.
• This increase is expected to have a minimal impact of 30-40 basis points (bps) on the operating margins of steel industries.
• Uncertainty from Potential Retrospective Application:
• Retrospective Cess:
• There is uncertainty regarding the possibility of States applying the cess retrospectively, which could burden firms with past tax liabilities.
• However, the Supreme Court has allowed staggered payments over 12 years starting April 1, 2026, with no interest and penalties for past dues.

Overview and Key Amendments: Mines and Minerals (Development and Regulation) Act, 1957

The Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) is a cornerstone legislation in India that governs the mining sector.

Primary Objectives of the MMDR Act:

• Development of the Mining Industry: To foster the growth and development of the mining sector in India.
• Mineral Conservation: To ensure the conservation of mineral resources for future generations.
• Transparency and Efficiency: To bring transparency and efficiency to the process of mineral exploitation.

Key Amendments to the MMDR Act:

2015 Amendment:

This comprehensive amendment introduced several key reforms to modernize the mining sector:

• Auction Method:
  • Mandated the auctioning of mineral concessions to enhance transparency in the allocation process.
• District Mineral Foundation (DMF):
  • Established the DMF to benefit areas and communities affected by mining activities.
• National Mineral Exploration Trust (NMET):
  • Created the NMET to boost mineral exploration activities across the country.
• Penalties for Illegal Mining:
  • Implemented stringent penalties to curb illegal mining activities and ensure compliance with regulations.

2016 and 2020 Amendments:

• These amendments addressed minor issues in the mining sector to ensure its smooth functioning.

2021 Amendment:

Introduced significant changes in the classification and management of mines:

• Distinction Between Captive and Merchant Mines:
  • Captive Mines: Operated by companies to produce minerals exclusively for their own use. The amendment allowed captive mines to sell up to 50% of their annual mineral production in the open market after meeting the needs of the end-use plant for which the block was originally allocated.
  • Merchant Mines: Operated to produce minerals for sale in the open market. The extracted minerals are sold to various buyers, including industries without their own mines.
• Auction-Only Concessions:
  • Ensured that all private-sector mineral concessions were granted through auctions, promoting transparency and fairness in the allocation process.

2023 Amendment:

The 2023 amendment was focused on strengthening the exploration and extraction of critical minerals:

• Focus on Critical Minerals:
  • Removed 6 minerals from the list of 12 atomic minerals previously limited to exploration by State agencies.
  • Empowered the government to exclusively auction mineral concessions for critical minerals essential for India’s economic development and national security.
• Exploration Licenses:
  • Introduced exploration licenses to attract foreign direct investment (FDI) and engage junior mining companies in exploring deep-seated and critical minerals.
  • Aimed at reducing dependence on imports and encouraging private sector involvement in the exploration and mining of critical minerals.
• Recognition of Strategic Minerals:
  • Recognized the importance of minerals like lithium, graphite, cobalt, titanium, and rare earth elements for future technologies and India’s commitment to energy transition and achieving net-zero emissions by 2070.