Two chief ministers have been brought down by mining scandals in the past few years. First, it was Madhu Koda, chief minister of Jharkhand in 2009. Now in July 2011, it is BS Yeddyurappa, Chief Minister of Karnataka. The mining sector symbolizes all that is wrong with un-reformed India--massive corruption; nexus between politicians, officials, police and big business; labour mafia; disenfranchisement of local residents; and damage to the environment. The answer is not to ban mining as the Supreme Court has done but to do more reform.

Mining, like defense contracts, is prone to corruption. Extracting resources from the ground does not lend itself to the usual rules of market competition. A mine is a natural monopoly and the state, which gives the right to mining, is also a monopoly. When the two come together in the backroom, you get ‘crony capitalism’.

The answer is not to focus on individuals—they are merely creatures working rationally in a corrupt system. Nor is the answer to close down mines as the environmentalists would like to. Nor ban the movement of iron ore as the Supreme Court did last week in Bellary District of Karnataka. A developing nation needs steel, aluminum and power, all of which depend on raw materials from mines. Environmentally conscious countries like the US and Australia continue to operate mines responsibly, without scandals.

The mess in India’s mining sector has its roots in half-a-century of terrible governance, going back to the 1957 Mines and Minerals Development and Regulation (MMDR) Act. This bad law is a typical example of licence raj that existed for 40 years before the 1991 reforms. For an honest businessman, this law was a nightmare. With overlapping authority between the Central and state governments, the honest mine operator was bounced around from office to office for years. It was a perfect recipe for a corrupt neta, babu and businessman who colluded to manipulate the system resulting in huge losses to the government, excessive exports of unprocessed ores, and unauthorised production and smuggling. Unlike other countries, where royalties are levied based on price of the commodity, the Government of India persisted until recently with arbitrary, administered rates. Invariably, due to lobbying, these low rates deprived state governments of thousands of crores of rupees in revenue over the years.

The situation has become much worse in the past decade because of a huge rise in commodities prices. High prices and easy profits have attracted even more unscrupulous businessmen, who are even more adept at colluding with corrupt netas and babus. Since the legal ways of doing things are so cumbersome, involving years of wrangling, there has been a sharp rise in unreported production and smuggling. This involves a complex web of unscrupulous mine owners, contractors, corrupt officials, political patrons, who together comprise the mining mafia.

What is to be done? Since a mine is a natural monopoly, the answer is to simulate competition. This means having open, transparent bidding under a firm regulator (like an auction). The regulator evaluates the quantity and quality of coal in a mine, sets a minimum price (to keep out frivolous bidders and cartels) and offers the mine to the highest bidder. This would replace the present corrupt system of leases and licences, of monitoring production at each mine, checking each truck to ensure the operator does not clear 100 trucks and records only 30.

There is some good news. In 2010, an amendment was enacted to the 1957 MMDR Act, which now provides for auctioning of new coal blocks. But there is more to be done, and it important that the new 2011 MMDR Act should reflect a similar spirit of reform. It must continue to simplify procedures to acquire and operate mining leases, replacing discretionary powers with transparent procedures, like auctions and market-linked royalties. Furthermore, the laws in associated areas like land acquisition and environmental compliance need to be revamped. All this will only work if there are stiff penal clauses for violations, but worded in simple terms, without loopholes, for easy implementation.

It is also important to break the monopoly of Coal India and de-nationalize coal mines which were nationalized by Indira Gandhi in 1973. India is the third largest producer of coal in the world but we have suffered immensely in the past 36 years from the lack of competition. ‘Power plant shut down because of lack of coal’ is a common headline in our local papers. Madhu Koda was a creation of this system. Efforts to undo it--Coal Mines (Nationalisation) Amendment Act 2000—remain stuck because politicians in the mining states do not want it.

The most urgent need, however, is for the Supreme Court to lift the blanket ban on mining of iron ore in Bellary district of Karnataka. While the Lok Ayukta of Karnataka should be commended for bringing to light the Rs 12,000 crore scam by politicians, bureaucrats and businessmen, the ban penalizes those companies who did nothing wrong. Over 40% of India’s iron ore deposits are in Bellary; 20,000 persons are employed by the Bellary ore mining industry; this ore feeds the steel industry, which in turn feeds the automobile and many other industries. As a result, lakhs of jobs are affected by the blanket ban. The government stands to lose Rs 10,000 crore in revenues and commercial banks could suffer an asset deterioration of Rs. 50,000 crore. While the Court has given some respite allowing the public sector to continue, it will do more harm than good if it allows the ban to persist. 

In imposing the ban, the Supreme Court is presumably acting on the basis of its past experience. The Court saved Delhi from choking to death from noxious transport exhaust fumes by insisting on a cut-off date for the introduction of CNG in public transport vehicles. This created a mini-crisis with Delhi's transport system grinding to a halt for a few weeks. The necessary executive action then followed. The Court, therefore, realizes that in India, we follow the practice of ‘management by crisis!' But surely, this is not the right way to do it. In this case, the ban is too high a price for the innocent to pay. The economic loss to India from a continuing ban on private sector units can be enormous and aggravate the slowdown that has already gripped the economy.

It takes courage and strength to reform because you have to counter the powerful lobby of business interests, state politicians and bureaucrats. The proposed overhaul of the MMDR Act has been going round and round for years, with intense, behind-the-scenes lobbying. Apart from the usual industry-related lobbying, many state governments have also been speaking out, asserting their rights under the Constitution. The bureaucrats in Delhi are perhaps the most-guilty for wanting to hang on to their discretionary powers. They were behind the U-turn by the mines ministry in June 2011 on the draft bill, which would have resulted in new simplified procedure for state governments to auction mining leases. They are insisting on retaining powers of prior approval.