Coal and Mining Sector

Issues with treating mineral sale proceeds as revenue or income

Note4Students

From UPSC perspective, the following things are important :

Prelims level : National Mineral Policy

Mains level : Paper 3- Issues with our mining policies and changes needed to make them sustainable

The rate at which we are extracting mineral and spending the proceeds from it without consideration for the future generation needs a rethink. The article deals with this issue.

The principle of Intergenerational Equity

  • We cannot compromise the ability of future generations to meet their needs, and this is reflected in the aim for the sustainable economy.
  • The principle of Intergenerational Equity would make it imperative for us to ensure future generations inherit at least as much as we did.
  • If we are successful in abiding by intergenerational equity, our children will be at least as well off as we are.

Issues with our mineral policy

  • India’s National Mineral Policy 2019 states: “natural resources, including minerals, are a shared inheritance where the state is the trustee on behalf of the people to ensure that future generations receive the benefit of inheritance.”
  • The extraction of oil, gas, and minerals is effectively the sale of this inheritance.
  • Unfortunately, governments everywhere treat the mineral sale proceeds as revenue or income which is basically a sale of inherited wealth.
  • This results in governments selling minerals at prices significantly lower than what they are worth, driven by lobbying, political donations, and corruption.

Error in accounting

  • Proceeds received by the government are treated as “revenue” and spent.
  • This is just not sustainable.
  • There is growing empirical evidence of large losses in mining from around the world.
  • There is also growing evidence from the International Monetary Fund that many governments of resource-rich nations face declining public sector net worth, i.e., their governments are becoming poorer.
  • Due to the high profits involved, the extractors are keen to extract as quickly as possible and move on.
  • More mining would make a bad situation significantly worse.
  • The Government Accounting Standards Advisory Board needs to correct this error in the standards for public sector accounting and reporting for mineral wealth.

Way forward

  • If we extract and sell our mineral wealth, the explicit objective must be to achieve zero loss in value; the state as trustee must capture the full economic rent.
  • Any loss is a loss to all of us and our future generations, and makes some rich; that is patently unfair.
  • India’s National Mineral Policy 2019 says: “State Governments will endeavor to ensure that the full value of the extracted minerals is received by the State.”
  • Like Norway, the entire mineral sale proceeds must be saved in a Future Generations Fund.
  • The Future Generations Fund could be passively invested through the National Pension Scheme framework.
  • The real income of a fund of this nature may be distributed only as a citizens’ dividend, equally to all as owners.
  • For the Indian economy, this is sustainable — capital has been maintained; the savings rate would rise, making available more long-term domestic capital; it diversifies risk while likely improving returns.

Consider the question “What are the issues with our mining policies? Suggest the changes to make it more sustainable.”

Conclusion

Through these changes, let us be the generation that changes the course of history for the better, not the one that consumed the planet.

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