By Swaminathan S Anklesaria Aiyar

India’s exports have fallen 14 months in a row, hitting the balance of payments plus production and employment. Many ministries are pleading for additional export subsidies. Yet, one sector, far from getting a subsidy, is being taxed so heavily that its exports have crashed.

Exports of iron ore are down from 97 million tonnes in 2010-11 to less than five million tonnes this year. Stockpiles of iron ore at mines, ports and other places total over 100 million tonnes. But exports from most deposits have been made uneconomic by two imposts. One is export duty, which is 30 per cent for high-grade ores and 10 per cent for low-grade ores with under 58 per cent iron content. The second, the railway surcharge on iron ore exports.

Sharing the spoils

During the global commodity boom of 2003-11, iron ore shot up from $45 a tonne to almost $200 a tonne. It has now crashed back to $45 a tonne. During the boom years, it was logical for the taxman to mop up part of the windfall that miners were enjoying. So, an export duty of 30 per cent was imposed.

The railways also grabbed part of the windfall by imposing an export freight surcharge that added Rs 300-500 per tonne to the cost of transportation from mines to ports like Paradip and Visakhapatnam. Even before that surcharge, high rail fares had long been used to subsidise cheap passenger traffic, something the Rakesh Mohan Committee and others have long castigated as anti-export. After the export surcharge, the cost of transporting iron ore over 400 km rose to Rs 1,750 a tonne. The comparable cost in Australia is just Rs 410 a tonne.

In addition, royalty rates have been raised. More recently, the government enacted a new law levying a special impost on all mining (including iron ore mining), earmarked for the benefit of the communities affected by the mining areas. This was an overdue, important measure in making local communities partners in mining instead of victims. This impost must be maintained and used for local communities. But with the collapse of world prices, there is no case for continuing with export duties, or the railway surcharge.

An elementary principle of economics is that exports should not be taxed, save where sudden windfall gains arise. A major gain of a goods and services tax (GST) is supposed to be that it will clearly identify the total tax burden on exported items and enable full refunds.

Most minerals are subject to a multitude of levies at the central and state levels. In Karnataka, for instance, different levies add up to 42 per cent of ore value. Budgetary strains make the central and state governments reluctant to give up any revenue source. But taxing exports is among the worst ways to raise revenue.

High imposts have rendered the ore exports from most mines uneconomic. In Goa, the mines are close to the port, so exports are healthy. But exports from mines in Karnataka, Odisha and Chhattisgarh are uneconomic. Huge ore stockpiles lying at ports cannot be exported because of high transport costs already incurred. Abolition of export duties will facilitate the immediate export of up to $2 billion worth of stockpiled ore.

Electroplate evenly

Narendra Modi says he wants to be business-friendly, and attract foreign investment. Yet, in the case of iron ore, he is propping up the public sector as blatantly as in our socialist heyday. The National Mineral Development Corporation (NMDC), a public sector unit, supplies ore under longterm agreements to Japan and South Korea. To help cut losses, the export duty on high-grade ore has been cut from 30 per cent to 10 per cent for NMDC alone. How does this make either economic or moral sense?

Fairness demands that all players should be treated alike. This is also a basic market principle. Giving tax breaks to public sector units alone is unfair and anti-business. Modi travels the world promising fair treatment to all foreign investors. How does he reconcile this with partisan behaviour of this sort? Does it not violate his ‘maximum governance, minimum government’ slogan?

Again, why should low-grade ore attract only 10 per cent duty while high-grade ore attracts 30 per cent? Almost the only beneficiaries of the lower rate are Goan exporters. The finance ministry talks of ending exceptions and exemptions, yet continues with this irrational exception.

The Indian steel industry has long wanted to reserve high-grade ore for domestic consumption, exporting only low-grade ore. It claims this is in the national interest. But it simply represents the greed of steel companies to make extra profits at the expense of miners.

The case for conserving iron ore is bogus: India has enough for 100 years, after which steel may even be obsolete material. Denying our generation a guaranteed benefit to promote the profits of steel companies 100 years hence makes no sense. The steel ministry wants to protect the steel industry, and so objects to abolishing the export duty on iron ore.

But minimum import prices and safeguard duties are already protecting the steel industry. Modi must overrule the steel ministry and abolish all export levies on iron ore.