Critical Minerals and India

The criticality levels of 43 specific minerals for India are assessed in a recent working paper from the Centre for Social and Economic Progress (CSEP), expanding on the earlier examination of 23 minerals.

Based on their economic weight (demand-side variables) and supply risks (supply-side factors), which are assessed through the analysis of particular indicators, this is done.

Critical Minerals: What are they?

Modern technologies depend on critical minerals, which are vulnerable to supply chain interruptions.

Mobile phones, computers, batteries, electric cars, and green technology like solar panels and wind turbines all make use of these minerals.

Minerals such as antimony, cobalt, gallium, graphite, lithium, nickel, niobium, and strontium are among the 22 assessed to be critical for India.

Many of these are required to meet the manufacturing needs of green technologies, high-tech equipment, aviation, and national defence.

Why are these resources critical?

Clean energy transition: Critical minerals are essential to the ecosystem that fuels the world’s transition towards clean energy and digital economy.

Strategic nature: Any supply shock can severely imperil the economy and strategic autonomy of a country that is over-dependent on others to procure critical minerals.

Rare availability: Supply risks exist due to rare availability, growing demand, and complex processing value chain.

What is the China ‘threat’?

Dominant role: China is the world’s largest producer of 16 critical minerals, including cobalt and rare earth elements.

Monopoly in processing: The country has a strong presence across the board in processing operations, with a share of refining around 35% for nickel, 50-70% for lithium and cobalt, and nearly 90% for rare earth elements.

Control over offshore mines: China also controls cobalt mines in the Democratic Republic of Congo, from where 70% of this mineral is sourced.

Supply chain dominance: The country’s dominance in critical minerals production and processing raises concerns of a supply disruption in case of a geopolitical conflict.

Challenges in ensuring resilient critical minerals supply

Limited availability of critical minerals: The rare availability of critical minerals poses a challenge in meeting the growing demand for these minerals.

Geopolitical risks: Complex supply chains can be disrupted by hostile regimes or politically unstable regions, leading to supply chain disruptions.

Dominance of certain countries: A few countries, such as China, are the dominant producers of critical minerals, leading to concerns over supply disruptions in case of a geopolitical conflict.

Increasing demand for critical minerals: With the shift towards renewable energy technologies and electric vehicles, the demand for critical minerals such as copper, lithium, and rare earth elements is increasing rapidly.

Reliance on foreign partners: Countries with limited reserves and higher requirements for critical minerals may have to rely on foreign partners to meet their domestic needs, leading to supply chain vulnerabilities.

Environmental and social concerns: The extraction and processing of critical minerals can have negative environmental and social impacts, leading to challenges in meeting sustainability goals.

What are countries around the world doing about it?

Several countries are taking measures to ensure a consistent supply of critical minerals to their domestic markets.

India: It has set up Khanij Bidesh India Ltd. (KABIL), a joint venture of three public sector companies, to ensure a consistent supply of critical and strategic minerals to the Indian domestic market.

US: It has ordered a review of vulnerabilities in its critical minerals supply chains and shifted its focus on expanding domestic mining, production, processing, and recycling of critical minerals and materials.

Australia: Its Critical Minerals Facilitation Office (CMFO) and KABIL had recently signed an MoU aimed at ensuring reliable supply of critical minerals to India.

UK: It has unveiled its new Critical Minerals Intelligence Centre to study the future demand for and supply of these minerals, and its critical mineral strategy will be unveiled later this year.

What should India do to ensure resilient supply?

Developing domestic sources of critical minerals: This can be achieved by promoting exploration and mining activities, both by public and private sector entities.

Encouraging responsible mining practices: The Indian government should encourage responsible mining practices that minimize negative environmental and social impacts of mining activities.

Developing recycling capabilities: This can be achieved by promoting research and development in recycling technologies and incentivizing the adoption of recycling practices.

Promoting transparency in the supply chain: India should promote transparency in the critical minerals supply chain by ensuring the traceability of minerals from the point of extraction to the point of end-use.

Investing in research and development: India should invest in research and development to develop new technologies and processes for efficient extraction, processing, and recycling of critical minerals.

Developing a national critical minerals strategy: India should develop a national critical minerals strategy that identifies priority minerals, promotes domestic exploration and mining, and promotes sustainable and responsible mining practices.

The Indian Space Policy 2023 and The Role of Private Sector

The Indian Cabinet Committee on Security has approved the country’s space policy till 2023. The strategy has allowed for greater private sector participation in the Indian space industry, which will help the country’s space programme grow and become more competitive.

The essentials of the Indian Space Policy 2023

Roles and responsibilities are made clear in the Indian Space Policy 2023 policy for the Indian National Space Promotion and Authorization Centre (IN-SPACe), NewSpace India Limited (NSIL), and Indian Space Research Organisation (ISRO), as well as for the private players in the Indian space sector.

Opportunities for private sector players: One of the key aspects of the new policy is to open up the Indian space sector to provide opportunities for private sector players to play an active role in augmenting the development and competitiveness of the Indian space program. This will allow ISRO to focus on non-commercial missions, such as research and development of advanced space technologies and space exploration.

Enhance overall ISRO missions: The policy is expected to enhance overall ISRO missions with greater participation of non-government entities, including academia, the research community, startups, and industry.

Institutional setups: Strategic activities within the space sector will be handled by NSIL, an institutional set up within the Department of Space that will address these activities in a demand-driven mode. The other recent institutional set up that will be critical in coordination between the public sector and the private players is IN-SPACe.

Framework for use of ISRO facilities: The policy outlines a framework under which the private sector can use ISRO facilities for a small fee.

Making Indian space programme competitive: The private players are also expected to create new infrastructure in the space sector. This will be critical in ensuring that the Indian space program becomes more competitive and developed.

ISRO will focus on research and development: In a significant move, ISRO has stated that it will not do any operational and production work for the space sector and will instead focus its energies on developing new technologies, new systems, and research and development. This essentially means that the routine production and launches that the ISRO was involved in until now will be handled by the private sector completely.

What is mean by Open Space Policy?

An Open Space Policy refers to a policy that allows for open and transparent participation in space activities.

It involves the collaboration between public and private entities in the exploration and use of space.

The goal of an open space policy is to promote innovation, competition, and the growth of the space industry while ensuring the safety and security of space activities.

This policy allows for the development of new technologies, research and development, and increased cooperation and collaboration between different countries and organizations.

Indian Economic Growth Prospects: A Comprehensive Analysis

With an average annual GDP growth of 6.6% in the ten years before to the Covid-19 outbreak, India had a proven track record of rapid growth. India is predicted to have the largest and fastest-growing big economy in fiscal 2023, with growth of 7%. The economy is anticipated to slow down and grow at 6% in fiscal 2024, however, due to the impending global downturn and the full manifestation of the lag effect of interest rate hikes since May 2022.

Indian economy’s potential for growth

Growth accounting: By breaking down medium-term prospects’ drivers into the contributions of capital, labour, and efficiency, growth accounting offers a valuable framework for analysing such prospects.

Economic growth next five years: Indian economy expected to grow at 6.8 per cent per year for the next five years with 52 per cent of it from capital, 38 per cent from efficiency and 10 per cent from labour.

Changing growth model: The growth model is changing to an infrastructure and manufacturing-driven one.

Capital spending: The Union Budget has raised capital spending by almost a third in high-multiplier infrastructure segments. But such support to capex will moderate in the years to come, given fiscal consolidation pressures.

Investment ratio: Investment as a percentage of GDP has already touched a decadal high of 34 per cent in fiscal 2023. So far, the onus to lift the investment ratio has been shouldered by the government. The contribution of the private sector to investments is set to improve, primed as it is with healthier balance sheets, cash reserves and low leverage.

Contribution of productivity to growth: The creation of physical and digital infrastructure in conjunction with efficiency-enhancing reforms will raise the contribution of productivity to growth. The economy is expected to continue seeing efficiency gains from reforms such as GST and Insolvency and Bankruptcy Code (IBC).

What is holding back a swift and broad-based lift in private investments?

Economic uncertainty, primarily, and geopolitical events to a lesser extent.

Sustainability challenge looms for the manufacturing sector as manufacturing and infrastructure growth are carbon-intensive.

Low-quality skilling of the workforce is holding back its contribution to growth.

Quality and the skilling of the workforce

Falling labour force participation of women

What is holding back in Labour’s contribution to growth?

Labour’s contribution to growth is likely to be low not because India does not have sufficient people in the working-age group, this cohort is 67 per cent of the population and is set to expand by 100 million over the next decade. It is the quality and skilling of the workforce that is holding it back.

Why private investment is essential for Indian economic growth?

Capital formation: Private investment helps in creating capital formation, which is essential for economic growth. It helps in building infrastructure, creating jobs, and generating income, which in turn drives consumer spending and boosts economic growth.

Innovation: Private investment is often associated with innovation and technological advancements. Companies that invest in research and development (R&D) can develop new products and processes that can boost productivity and create new markets. This, in turn, can lead to increased profits and more investment in R&D, creating a virtuous cycle of innovation and growth.

Employment: Private investment creates jobs, which is critical for economic growth and development. When companies invest in new projects or expand their operations, they often need to hire additional workers, which reduces unemployment and boosts consumer spending.

Foreign investment: Private investment is also an important driver of foreign investment. When companies invest in India, they often bring new technology, skills, and expertise that can help boost local industries and drive economic growth.

Tax revenue: Private investment can also help increase tax revenues, which can be used by the government to fund public goods and services such as education, healthcare, and infrastructure.

Steps taken by the government to encourage private investment

Investment-Friendly Policies: The Indian government has launched several investment-friendly policies, such as Make in India, Start-up India, and Digital India, to encourage private investment in the country.

Infrastructure Development: The government is investing heavily in infrastructure development, including roads, railways, airports, and ports, to create a conducive environment for private investment.

Tax Reforms: The Indian government has implemented several tax reforms, such as the Goods and Services Tax (GST), to simplify the tax structure and make it more investor-friendly.

FDI Liberalization: The government has liberalized foreign direct investment (FDI) norms in several sectors, including defense, insurance, and retail, to attract more foreign investment.

Insolvency and Bankruptcy Code (IBC): The government has implemented the Insolvency and Bankruptcy Code (IBC), which has made it easier for businesses to exit, and has increased investor confidence in the Indian economy.

Production Linked Incentives (PLI): The government has launched the Production Linked Incentives (PLI) scheme to encourage manufacturing in India and make it more competitive globally.

Easing of Business Regulations: The Indian government has eased several business regulations to improve the ease of doing business in the country and attract more private investment.

Skill Development: The government has launched several initiatives, such as Skill India and Pradhan Mantri Kaushal Vikas Yojana, to develop the skills of the Indian workforce and make it more attractive to investors.

Windfall Tax back on local crude oil

A windfall tax on locally produced crude oil has been altered by the government. An official announcement states that the windfall tax rate is Rs 6,400 per tonne.

 Windfall Tax

Windfall taxes are intended to tax the gains a firm receives from an outside, occasionally unforeseeable occurrence, such as the increase in energy prices caused by the conflict between Russia and Ukraine.

These are gains that can’t be directly linked to something the company actively did, like an investment plan or a corporate development.

A windfall is described as a “unearned, unanticipated gain in income through no additional effort or expense” by the US Congressional Research Service (CRS).

Oil markets, where price volatility results in unpredictable or volatile profits for the business, are one area where such levies have frequently been suggested.

Features of Windfall Tax

Imposed on unanticipated and unearned gains: Windfall tax is imposed on the profits or gains that a company earns from external events or factors beyond their control, which they did not actively seek or pursue.

One-time tax: It is typically imposed as a one-time tax retrospectively, over and above the normal rates of tax, and is not a regular or ongoing tax.

Imposed on specific sectors or industries: Windfall taxes are usually imposed on specific sectors or industries where there is a significant increase in profits due to external factors such as price fluctuations, supply disruptions, or changes in regulations.

Rationale for imposition: The imposition of windfall taxes is based on the rationale of redistributing unexpected gains, funding social welfare schemes, and creating a supplementary revenue stream for the government.

Design problems: Introducing windfall taxes may suffer from design problems, given their expedient and political nature.

Potential impact on investment: Windfall taxes may lead to uncertainty in the market and negatively impact future investment, as companies may feel uncertain about investing in a sector with an unstable tax regime.

When did India introduce this?

In July 2022, India announced a windfall tax on domestic crude oil producers who it believed were reaping the benefits of the high oil prices.

It also imposed an additional excise levy on diesel, petrol and air turbine fuel (ATF) exports.

Also, India’s case was different from other countries, as it was still importing discounted Russian oil.

How is it levied?

Governments typically levy this as a one-off tax retrospectively over and above the normal rates of tax.

The Central government has introduced a windfall profit tax of ₹23,250 per tonne on domestic crude oil production, which was subsequently revised fortnightly four times so far.

The latest revision was on August 31, when it was hiked to ₹13,300 per tonne from ₹13,000.

Reasons for re-introduction

There have been varying rationales for governments worldwide to introduce windfall taxes like:

Redistribution of unexpected gains when high prices benefit producers at the expense of consumers,

Funding social welfare schemes, and

Supplementary revenue stream for the government

Issues with imposing such taxes

Design problems: Windfall taxes may suffer from design problems, given their expedient and political nature. There is also the issue of determining what constitutes true windfall profits and who should be taxed, which raises questions about the threshold for exemption of smaller companies.

Potential impact on investment: Windfall taxes may lead to uncertainty in the market and negatively impact future investment, as companies may feel uncertain about investing in a sector with an unstable tax regime.

Internalization of potential taxes: Introducing a temporary windfall profit tax may reduce future investment since prospective investors may internalize the likelihood of potential taxes when making investment decisions.

Threshold for exemption of smaller companies: Determining the threshold for exemption of smaller companies raises questions about which companies should be taxed and what level of profit is normal or excessive.

Difficulty in determining true windfall profits: There is also the issue of determining what constitutes true windfall profits, as it may be challenging to differentiate between profits attributable to external events versus those attributable to a company’s active investment strategy or business expansion.