Mining the Divide: Fiscal Federalism and India’s Centralising Mineral Policy

The constitutionally enshrined federal structure of governance in India, which represents the distribution of legislative and fiscal authority between the centre and the states, has long been at the centre of political debate in the country. Although India's constitutional framework is designed to promote federal cooperation, the actual distribution of power between the centre and states remains deeply contested.

Illustration by The Geostrata

The tension has surfaced again with the passing of the Mines and Minerals (Development and Regulation) Amendment Bill, 2026. The amendment by Parliament reconfigures the existing distribution of fiscal and regulatory authority between the Union and the States.  This article examines the underlying constitutional basis for the Centre-State division of authority over mineral resources and addresses a critical and timely question: how far can the Union centralise mineral policy in pursuit of national objectives without eroding a state's fiscal autonomy, which gives India's federalism practical meaning. 

INDIA'S MINERAL GOVERNANCE (A COMPLICATED FEDERAL ARCHITECTURE)

India's Constitution deliberately creates a dual structure for mineral governance. The Seventh Schedule of the Constitution distributes legislative powers between the Union and the States. Under Entry 54 of the Union List, Parliament can regulate mines and mineral development when it declares such regulation and development “to be expedient in the public interest”. On the other hand, Entry 23 of the State List gives State legislatures the power to regulate mines and mineral development subject to the provisions of List 1. 

The MMDR Act, 1957 operationalised the Union’s authority through Section 2, which declared it necessary for the Union to take under its control the regulation of mines and development of minerals to the extent provided by the Act.

Thus, while the Union exercised substantial regulatory authority over mineral development, States retained constitutionally recognised powers, particularly in relation to taxation of mineral rights. In July 2024, the Supreme Court in Mineral Area Development Authority (MADA) v. Steel Authority of India Ltd. (SAIL) delivered a landmark judgment by an 8:1 majority upholding the legislative competence of States to tax mineral rights under Entry 50 and mineral-bearing lands under Entry 49 of the State List. The Supreme Court in 2024 also held that “royalty was not equivalent to tax”. It was only a payment for the use of mineral-bearing land. All in all, the judgment essentially reinforced state fiscal autonomy in relation to mineral rights. 

THE 2026 SHIFT (REWRITING THE BALANCE) 

The 2024 MADA judgment appeared to strengthen the fiscal position of States in relation to mineral rights. Two years later, however, the Union government's proposed amendments to the MMDR framework seek to alter this balance. The amendment inserted section 9D in the MMDR Act, which provides that “no tax, cess or such other levy shall be imposed by the State Government on mineral rights or mineral-bearing lands, either based on mineral quantity, mineral value, royalty or otherwise, except in accordance with such conditions or restrictions as may be prescribed by the Central Government”.

By amending section 2 of the principal Act, the amendment brings the "mineral-bearing lands" under the regulatory control of the Central Government. The Act also retroactively invalidates all unpaid or unrecovered historical tax demands raised prior to this amendment. However, under the “no refund proviso, any tax, cess, or levy paid by companies remains non-refundable. 

Justifying the amendment, the government, under the Statement of Objects and Reasons of the Bill, mentions several drawbacks of a decentralised policy framework. The Ministry of Mines pointed out that States had levied up to 14 diverse local taxes, transit fees, and environmental cesses. The diverse policies, varying from state to state, create a complicated operating environment for investment by private companies. This domestic cost inflation forces downstream manufacturing industries to abandon local reserves and rely heavily on foreign mineral imports.

To put it in figures, the Ministry of Mines highlighted that in FY 2025–26 alone, India imported minerals valued at a staggering ₹10,12,529 crore.  

The government's rationale also targets the commercial unpredictability caused when states impose new levies after the mining leases become operational. This post-commencement tax volatility, along with retrospective tax claims, brings instability and affects long-term investment. The government has also placed "domestic mineral security" at the centre of India's “Viksit Bharat” campaign. Therefore, the bill, by guaranteeing a uniform, predictable national supply chain, seeks to lower extraction costs and restore investor confidence in the sector.

THE RESISTANCE OF INDIA'S MINERAL BELT

Mineral-producing states depend heavily on the mining sector for revenues from royalties and other payments. The loss of fiscal agility due to centralised control over mineral royalties and the prohibition of independent cesses by the centre has invited scrutiny from these states.

The Union government counters that the Mines and Minerals (Development and Regulation) Amendment Bill, 2026 does not reduce states' rights over land, minerals ⁠or mineral taxes, with states continuing to receive about 90% of mining-related taxes and payments. However, the foundational argument raised by states like Odisha and Jharkhand is that, while they are legally entitled to collect mining royalties, they possess zero authority to alter the royalty rates.

Under Section 9(3) of the principal MMDR Act, the power to amend the Second Schedule (which sets royalty rates) rests exclusively with the Central Government.

With such a framework, the mineral-rich states can no longer resort to their most lucrative source of revenue, even in times of financial crisis. States have also shown serious concerns over the centre's routine delays in the revision of such rates for nearly a decade, which can allow private mining conglomerates to pocket global commodity super-profits while local state budgets remain entirely flat. Furthermore, states argue that by extending Union control to cover the regulation of entire "mineral-bearing lands," the 2026 amendment directly encroaches upon their constitutional right to tax lands and buildings under List II, Entry 49.

Another immediate flashpoint is the financial wipeout of the retrospective windfall. Following the Supreme Court's July 2024 verdict, states had the legal authority to claim arrears back to 2005. The new amendment directly wipes out cumulative revenues worth ₹1.5 lakh crore to ₹2 lakh crore for mineral-rich states. Jharkhand Chief Minister Hemant Soren has publicly termed this a direct "assault on federal rights," arguing that the centre seeks to prioritise private corporations over the welfare of tribal populations in the mining districts. 

THE NATIONAL IMPERATIVE AND THE FEDERAL BALANCE 

The debate surrounding the 2026 amendment reflects a larger tension between two equally important objectives. The Centre’s justification of “domestic mineral security” and the states’ rationale for the loss of fiscal agility both remain valid. By using Parliamentary supremacy to override a 9-judge Constitution Bench judgment, the current framework forces a critical re-evaluation of where the line between national interest and regional autonomy should be drawn.

The answer lies in figuring out the thin line of balance between central frameworks for efficiency and ensuring that the federal provision for states does not remain limited to the Constitution. The challenge is to create a framework that gives investors predictability and the Union sufficient room to pursue national mineral security, while also preserving meaningful fiscal space for the states that bear the economic, social and environmental consequences of extraction.

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BY KAVYANJALI S TOMAR

TEAM GEOSTRATA

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