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David Caploe PhD

David Caploe PhD

David is a writer for the popular economic news site Economywatch.

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Growing Hunger for Iron Ore Upends Indian Politics

In the global rush to industrialize, and above all, make steel, the imperative element in manufacturing, iron ore has suddenly become a key element of global economics.

As noted below, the price per metric ton has soared from about $17 to about $130 today. In so doing, it has also transformed politics all over the world.

The most prominent example of iron ore’s new international significance is the rollicking relationship between China, the world’s number one steelmaker, and Rio Tinto, the Anglo-Australian mining giant, which is simultaneously China’s top supplier of iron ore, and its own largest customer, creating a dynamic relationship that has had both significant downs and some relatively recent ups, both of which we have noted in some detail.

But the rush for iron ore is not limited to China – it is also a key factor for its fellow Asian economic powerhouse India. And unlike China, which must import most of its iron ore, there is a great deal of it in India, so much, in fact, that it has also become an exporter of the key global commodity.

India’s opening up of iron ore mining – which was closely controlled by the long-time ruling Congress Party has, literally, upended the internal political situation in that country.

So while iron ore has become a vital factor in China’s foreign relations, it has become an equally crucial aspect of India’s domestic politics. And as is often the case whenever it comes to commodity politics, the sight is not a pretty one, drawing into visibility people who, just a few years ago, were barely known to the Indian public, but are now among the most well-known in the country.

Janardhana Reddy, for example, insists he is not a king. No, no, no, he protested, as a servant trotted across the courtyard to deliver a cup of cooled water. Men with machine guns stood outside. An architect waited to discuss the new mansion, while another man hovered nearby, sitting in the grass.

“He’s the state minister of health,” Mr. Reddy said of the man in the grass, who stood up, made a little bow and hurried away. Mr. Reddy may not be a king, but he does represent a new phenomenon in the political economy of India:

He and his brothers are the country’s most powerful mining bosses at a time when illegal mining has become a national scandal, amid accusations that billions of dollars of publicly owned minerals have been stolen, often by people holding public office.

For decades, moneyed interests have bankrolled India’s political parties, but nouveaux mining magnates like the Reddy brothers have conflated money and politics in far more naked fashion, as the thirst for iron ore in India, and more so in China, has created huge fortunes.

Mining scandals have emerged in at least five Indian states, with more than 20,000 complaints of illegal mining filed nationally in the past three months.

Politicians in several states are accused of enriching themselves or their friends, including a former chief minister of the state of Jharkhand, who is charged with extorting huge bribes in exchange for granting mining leases.

In August, the Indian media reported that the central government would form an inquiry to investigate illegal mining across the country, a move regarded as a first step in reversing past failings in regulation.

Here in the southern state of Karnataka, the controversy surrounding the Reddy brothers has become a national political melodrama, threatening at different times to bring down the state government, while also throwing global markets for iron ore into turmoil.

The Reddys, who say they are innocent of claims of illegal mining, have transformed themselves in less than a decade from obscure activists for the Hindu nationalist Bharatiya Janata Party, or B.J.P., into political bosses who directly or indirectly control three state ministries and dominate local government in the Bellary district, which holds the state’s richest iron ore deposits.

“You’ve never had mining dons entering politics and controlling government,” said Ramachandra Guha, a historian who lives in the state capital of Bangalore. “They are more or less uncrowned kings in their district. There is a level of brazenness that even by the standards of Indian politics is new.”

What prompted the change, and the rush by political figures into mining, was the steady rise in iron ore prices during the past decade. India relaxed its export restrictions at roughly the same time that China was in the throes of the biggest construction boom in history, culminating with the 2008 Olympics in Beijing.

Technical advances allowed more types of ore to be exported, and the price per metric ton soared. Where once it had brought about $17, today the price is about $130.

“It encouraged practically everybody who was somebody to come into this business,” said N. Santosh Hegde, a former justice on India’s Supreme Court who is leading an official corruption investigation into illegal mining in Karnataka. “People who had no knowledge of mining but who had money power or muscle power - either would work - they came into mining. It really became sort of a rat race.”

Mr. Hegde’s investigation has discovered that at least 10 members of the Indian Parliament or the Karnataka state assembly control leases in the Bellary region.

By 2004, when the Reddys got their first lease, they had emerged as political players. The sons of a police constable, Janardhana Reddy and his two brothers had been key supporters of a B.J.P. candidate, Sushma Swaraj, in a local parliamentary race in 1999 that became a national showdown against Sonia Gandhi, the scion of the governing Indian National Congress Party.

Ms. Gandhi won the race, but the Reddys would steadily turn the Congress Party stronghold toward the B.J.P. Ms. Swaraj, now the leader of the opposition in Parliament, became their patron.

To get rich, however, the Reddys transcended partisanship and allied themselves with the Congress Party’s Y.S.R. Reddy (who is no relation), the powerful chief minister in the neighboring state of Andhra Pradesh.

Iron ore deposits straddle the border of the two states, and the Reddys obtained leases on the Andhra Pradesh side. The Reddys got richer, bought a helicopter and are believed to have bankrolled numerous political campaigns.

In 2008, they financed B.J.P. victories that helped the party to take over the Karnataka state government. As his reward, Janardhana Reddy became the state’s minister of tourism; his brother Karunakar became minister of revenue; his brother Somashekhar became president of the state’s powerful milk federation; and their close ally, B. Sriramulu, became the health minister.

Last year, when the state’s chief minister, B.S. Yeddyurappa, tried to levy a fee of about $21 per truckload of ore, the Reddys led an internal party revolt, rallying loyal legislators and threatening to withdraw support for the government.

Faced with the potential collapse of his administration, Mr. Yeddyurappa relented on the levy, fired two close allies who had opposed the Reddys and wept during a news conference.

Meanwhile, Janardhana Reddy’s portfolio also included the post of minister in charge over the Bellary district.

“The entire government machinery is under his belt,” complained Raghavendra Rao, a spokesman for the Baldota Group, a mining conglomerate at odds with the Reddys.


Now, though, the Reddys’ power is being tested. Last year, their patron in Andhra Pradesh, Y.S.R. Reddy, died in a helicopter crash. Without his political protection, the Reddys were subjected to notices for illegal mining, building illegal roads, and moving state boundary markers to expand the reach of their mine.

In the interim, their mining in Andhra Pradesh has been suspended.

At the same time, Mr. Hegde, the corruption investigator, is looking into claims that the Reddys have been secretly controlling mining on the Karnataka side of the border by illegally operating leases held by other people — and taking the majority of the ore.

With bad publicity mounting, the B.J.P.’s national leadership has appeared divided over the Reddys. The Congress Party, sensing opportunity, held a 190-mile protest march from Bangalore to Bellary.

The B.J.P. held a counter rally.

Under pressure, the Karnataka chief minister recently acknowledged that illegal mining was rampant and blocked exports from state ports, a move that contributed to a spike in prices of about 4 percent on global markets.

Yet the chief minister has still protected the Reddys by blocking an investigation by India’s Central Bureau of Investigation and saying no wrongdoing had been proved against them.

Sipping his cup of water, Janardhana Reddy seemed unconcerned about the growing uproar. Asked about the investigations, and about whether he controlled the state and local governments, Mr. Reddy blamed partisan politics, saying the Congress Party was determined to smear him to win back Bellary.

“Go and ask any common man and they will tell you that I don’t act like a king,” he said in this article from the New York Times. “God is great. And God has been giving me these beautiful mines.”

Well, however he got those mines, they are clearly a source of immense power. And as the industrialization of India, China and other “emerging” / “frontier” markets continues, there is little doubt the politics EVERYWHERE iron ore exists will continue to arouse passion and a struggle for power – as if the world needs any more reasons for that.

David Caploe PhD
Chief Political Economist
Economy Watch

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