Profit-sharing policy for coal

Apolicy can be shoddy even if the underlying principle is sound. The group of ministers (GoM) approval last week for 26% profit-sharing by coal mining companies with local people is glaringly anomalous. It would be perverse incentive to fudge accounts, routinely prone to misinterpretation by all and sundry, and hugely problematic to implement as well. As many as 148 coal blocks have been identified for captive mining, for instance, and the notion of profit for such blocks would be wholly flawed. We certainly need to specifically earmark funds from mining for development purposes.

For far too long mineral concessions have remained quite unrevised, thus depriving mineral-rich states of substantial funds for poverty alleviation. But the way ahead is to set aside funds from mineral output and sales, rather than link them to net profits which can dip and vary, be diverted via special purpose vehicles or simply go unreported by way of creative accounting. Instead, we need to value domestic minerals at globally traded prices, levy royalty at ad valorem rates, along with cess and other mining charges, and earmark a part of the corpus accruing to the states for local area development and compensation of those dispossessed.

The 13th Finance Commission did explicitly call for a share of royalty for mining areas, and it would make eminent sense to earmark funds upfront. The profit-share route for coal companies would be thoroughly questionable on other grounds, too. Consider the latest annual results of Coal India Ltd, the anachronistic public-sector monopoly. Its net is about Rs 10,000 crore, so a 26% profit share comes to Rs 2,600 crore. But CIL already spends a similar amount on social overhead. So would the 26% rule be over and above this expenditure? If yes, it would be cripplingly large. The Cabinet needs to nip the coal profitshare rule in the bud. Thankfully for minerals other than coal, the GoM wants development funds linked to royalty accruals, which is sound. But here again the levy ought to be transparently imposed on export prices of ore and not questionable (local) market prices that generally quote at a deep discount to the cross-border rates.