NATURAL RESOURCES = NATIONAL TREASURES?

It was a class which had nothing to do with mining or exploiting natural resources or any such related topic where a question was raised, “Do you think the private sector companies should be allowed to mine coal and use it or sell it in the market?” I was ready with the answer but realized the next moment that the question was rhetorical. It was answered by the lecturer who had asked it with an air that suggested that he was sure the answer was an axiomatic and unanimously agreed “no”.

This was enough provocation for me to delve into the topic and ponder about the pros and cons of allowing private participation in this sector. My views on this were not linear but surely in the opposite direction with respect to those of the lecturer. The question here was not whether the private participation model (PPM), as I shall call it from here on, will work or not, rather, what is the harm. It will surprise me if most people are not of the opinion that it is criminal to use the natural resources; and that’s the school of thought which I wish to contest against.

So, those who oppose the auction of mines to private players for consumption or sale, in my opinion, may present the following arguments:

1. Natural resources are depleting and the demand is increasing. The irrational auction of mines to private players may cause mass exploitation and depletion of already scarce natural resources.
2. The private players may be tempted to sell the mined raw material in the international market if they get higher rates from foreign entities. It is important that these raw materials remain in India to aid sustenance of the current national growth rate.
3. India has had a history of exporting raw materials and importing finished goods. This obviously had come at a steeper price than what it would have if India could produce finished goods of the same quality, in the same quantity. Now that the trend is changing, it is important that the finished goods manufacturing industry be promoted and it be supplied with cheaper domestic raw material compared with the more expensive imported raw material. In such a case, it would be criminal to export raw material if your own industry has a shortage of the same and is compelled to either import it or buy mines abroad.

The above arguments present a pretty strong case against the PPM and I shall address them one by one.

1. Sure the natural resources are depleting but if they were meant to be kept preserved and not allowed to be used, they wouldn’t hold much value. The market value of these resources is determined by the supply, demand and the use. In fact they wouldn’t be called ‘resources’ in the first place if they did not have any market value. On one hand the country aspires to grow at a phenomenal rate and on the other, raw material supply is being purposefully bottle-necked. These are conflicting ideas. Sure there need to be proper regulations on the use of the resources but outright insulation of the private sector from raw material is not the answer.
2. What really is the need of the hour is a gradual shift towards a more capitalistic socialism where the interests and welfare of the public is the governments’ prime concern. This would ensure free market participation, and price moderation due to competition, with restricted participation and more of a regulatory role played by the government. The idea of restricted trade is against the principle of free market operation and price determination through market forces. If companies want raw materials from domestic suppliers, they should use efficient methods and achieve economies of scale so that they are able to quote competitive prices for the raw material. Conversely, they should also have the capability to import the raw materials if they get cheaper raw material from abroad. This would pinch the domestic suppliers and compel the domestic suppliers to achieve certain efficiency levels and economies of scale too.
3. India is a raw material rich country. There are many countries which earn huge profits out of exporting raw material and many of them don’t even have as many reserves as India. Export of raw material is out of question if the domestic suppliers get better rates for their produce from domestic consumers. The consumers’ concern usually is (i) quantity, (ii) price and (iii) quality. The biggest weakness of the Indian raw material suppliers is not the price but the other two. They (mostly Govt. companies) are not able to supply the right quantity of the right quality of raw material. This only compels the consumers to consider foreign sources. If the Indian raw material suppliers use better production and SCM techniques, in my opinion, the problem should be solved. Ideally, an equilibrium condition would prevail between the imports and exports which would only aid the growth of the country without much loss of the treasured resources.

I must add that my brain is subject to extreme volatility and this article is meant to be more argumentative than descriptive. Hence, I shall allow myself to state another point which, in fact, counters the PPM model that I suggested above.

The drawback of the argument that I presented above is that I assumed that India needs a gradual shift towards capitalist-socialist-democracy. This is the pivot about which I made my recommendations and this itself is subject to debate. We have already seen what happened to the US during recession and in contrast what happened in India. Although, India also suffered from deep gashes, but not as much as the US did. A market economy would strengthen the inter-dependence of all the players of the market. This would mean that a few bad areas or sudden spikes in the performance of one section of the market would affect the entire market. The economy of a country might go spiraling down and collapse as a result of a domino effect.

We have been able to maintain a near perfect balance of freedom and restriction in the market which has helped us shape the economy. It is hard to imagine that we could have reached where we are, had the government not maintained its stronghold on the economy all this time. The Indian economy was like an infant in 1947 and it has come a long way under the care of the government. Whether the economy has matured enough over the years; enough that the government, leaves it to its own destiny ( just like every responsible parent someday has to offer their child the independence), is anybody’s’ guess.

The Verdict:

The question still remains; should the natural resources of a country be treated like its national treasures?

Afterthought:

Some privately owned thermal power plants have been allowed to use mines for their own use. The concept of captive coal mines is not new in India but is usually subject to great controversy. Sale of domestic coal is still under the stronghold of CIL, owned by the government.

Lanco Infratech has acquired two Australian coal mines with total reserves of 1.2 BT and 700 MT extractable for A$ 730 million. The annual production of coal from these mines would be around 4MT which can be increased to 15 MT. Lanco is in the process of increasing its generation capacity from about 2100 MW to 15000 MW by 2015. These mines will meet around 30% of the coal requirements of the company. Lanco is not the first company to acquire coal mines from Australia. Last year Adani, Reliance and several other private players acquired coal mines in Australia and Indonesia. This was the second biggest acquisition after Adani's A$ 2.7 billion deal to buy the Australian mine.

Surely, the Indian private players are ready to shell out a little extra to generate enough power and earn more revenue.

It is seen that these companies pay a royalty of around A$ 2 per tonne to export the coal out of Australia.