Gold nuggets and forcing Orissa and Jharkhand to remain poor
[0a] Pages 1-28 of Hoda committee report (2 MB)
 Dang Committee report (7 MB) (see page 223)
November 7, 2006.
Consider a very poor family who finds a lot of gold coins in their ancestral hut left from their ancestors. The local laws say that the gold belongs to that poor family. The family is very happy; finally it has a chance to get out of poverty. However the local government says that you can sell it at the price I tell you. The gold coins have some impurity that needs cleaning up and it costs Rs 250 to Rs 325 to do that. The market value of cleaned up Gold is Rs 2000. But the government says that the family can only sell it at Rs 27. Thus the family is forced to only make Rs 27 while the buyers, taking into account some travel costs, make close to Rs 1500.
Let us add another dimension to the above story. The government had set the price at one time at Rs 24.5 and the market value was in several hundreds. In a short period of time the market value went up by five times becoming thousand plus several hundreds. The family begged the government to allow it to sell its gold nuggets at a higher price now. The government now showed off its generosity by allowing the family to sell at an increased price of Rs 27.5 instead of the initial Rs 24.5? What would you think of the government?
Would you believe that, that is almost the same as what is happening with respect to iron ores in India? States like Orissa and Jharkhand, which are among the poorest and backwards in almost all indices, have a lot of iron ore. They would like to sell the ore and establish industries that use this ore, to get out of backwardness. However, as mentioned in an article in Hindu Businessline (Dec 2005)  and quoted in an article in the OECD workshop (May 2006) , it only takes Rs 250-Rs 325 per tonne to extract the ore from captive mines and the market price is around Rs 2000 per tonne. But the Indian government has set the lease rate (on an average) to be around Rs 27 per tonne. Now I hope you understand why with all that you read in your high school geography about large deposits of minerals in Orissa and Jharkhand, both states are poor and are not able to get out of it.
There is a finer issue regarding the number Rs 250-Rs325 and the Rs 2000 as the later is the FOB (free on board) price which includes cost of transportation from mines to port, loading and unloading charges, chemical analysis, port charges etc. This number is not specifically mentioned in various articles on the topic and thus makes the calculation incomplete. But one can still make sense of the situation through the following statement made by the Orissa government, in its plea to the  (page 223) chaired by R. K. Dang, "during a short period of time when the lease rate went up from Rs 24.5 to Rs 27.5 there was a five fold increase (on an average) in iron ore price."
Various committees have been formed and at times they have recognized the above situation. Some of the central government’s ministries have also recognized this situation. But, while Orissa and Jharkhand are losing crores of potential revenue every day, no concrete action, beyond making committees, has been taken. In recent years, the Orissa government has begged the central government to let it set its own price, or allow other alternatives such as to get a share of the profit. But for inexplicable reasons the Indian government has so far preferred that the mining companies, the steel producers and their shareholders make lots of money and has prevented its poorest states to get out of their poverty by selling the ores at a real market based price.
Why is that? Why should the steel producers and its shareholders make a lot of money at the cost of keeping Orissa and Jharkhand poor? Are Orissa and Jharkhand not part of India? Who counts more to the Indian government? The 6.5 crores of people of Orissa and Jharkhand or the steel producers! If there is a bigger dimension behind this, which is sometimes mentioned, such as some national priority with respect to making adequate amount of steel for India as a whole, then the subsidy should come from the Indian government and not by taking money away from poor Orissa and Jharkhand's possible revenue and forcing them to remain poor. Why should Orissa and Jharkhand be at the suffering end?
It is likely that the steel producers make the point that if they are forced to buy the ores at market value then they will incur heavy losses. But, by definition, market value means that there are buyers at that price. If our steel companies can not compete with others who can make profit by buying at the market value, should the burden fall on Orissa and Jharkhand to prop them up at the cost of remaining perpetually poor.
Yet another dimension to this story is that, forced by the Indian government's very low lease rates states like Orissa and Jharkhand decided to at least get some benefit by preferring steel makers – for iron ore leases – who set shop in their states. That made too much sense! How dare Orissa and Jharkhand make policies that help their people? So it is reported that the recent Hoda committee has not been [6 a, b, c] fully supportive of this policy and has recommended some conditions that negatively affect this strategy.
In particular, if the Hoda committee recommendation [0, 0a] is adopted, states like Orissa can not wait for the right deal to come along. The central government will then be an enforcer telling the Orissa government that we fix the price, and whether you like it or not if someone wants to buy, you have to sell it at that price. You have no right to hold on for a better deal.
We urge the Indian government, which is at present deliberating on the Hoda committee recommendations, to think of the harm its past policies and lease rates have done to states like Orissa and Jharkhand, and to listen to the desperate pleas, suggestions and [6 a, b, c] objections of the Orissa and Jharkhand government and their people. They support some of the Hoda committee recommendations and oppose others. The central government should either allow Orissa and Jharkhand to sell the iron ores in those states at a price they set based on market conditions, or change the royalty calculation methods (to ad valorem or profit based royalty) or create conditions that allow Orissa and Jharkhand to share the profit that the mine leasing and steel making companies are now making because of the low lease rates set by the central government. That would give both states a fair chance to catch up with rest of India. However, based on the past record of Indian governments (such as the length of time the freight equalization policy – that greatly harmed states like Orissa, Chhatisgarh and even West Bengal -- lasted), and the powerful steel and mining lobbies, I am worried that yet again Orissa and Jharkhand’s interests will be sacrificed and they will be forced to remain poor despite having rich deposits of minerals that have high market value.
Acknowledgements: Thanks to Purna Mishra for his feedback on an earlier draft. In response to his feedback I added paragraph four, but unfortunately Indian Express edited it out. Thanks to XYZ for providing me the first 28 pages of the Hoda committee report.