If properly managed and regulated, India's vast, untapped mineral reserves could double the metals and minerals sector's contribution to GDP, to about 5 percent in ten years, and boost the economies of the country's impoverished eastern states. McKinsey research finds that India's annual coal, iron ore, and bauxite production alone could expand to three to five times current levels within a decade.¹ This prospect offers huge opportunities for both local and multinational companies, but bureaucracy, regulations, and poor infrastructure threaten the ability of India's metals and minerals sector to reach its potential.

By 2015 India could become one of the world's top five suppliers and top five markets for aluminum and steel (up from around tenth place today), putting these industries on par with India's coal industry. Employment in the sector could double to two million jobs, with India's eastern states in particular reaping the benefits (Exhibit 1). Furthermore, we estimate that these states could see $75 billion to $120 billion in private investment across the aluminum, coal, and steel industries (including investments in power).²

India's metals and minerals sector—rich in reserves³ and low in labor, capital, production, and operating costs (Exhibit 2)—is heating up, driven by surging domestic and global demand. We estimate that India's consumption of steel will grow by 8 percent annually, to 80 million tons by 2015. Over the same period, domestic demand for coal is likely to increase by 7 percent a year, and demand for aluminum by 10 percent. The sector should also profit from India's proximity to major emerging markets such as China, where demand for metals and minerals is also rising rapidly.⁴

Little is likely to happen, however, unless India and its states reduce bureaucratic delays, lift regulatory barriers, and improve infrastructure. Regulatory approval for mining projects, for example, takes three to seven years in India, compared with about 18 months in Australia. Such delays tie up capital, raise project costs, and increase uncertainty among investors. Local governments in some mineral-rich states claim to be developing policies that will streamline the approval process for such projects.

At the federal level, limits on private investment in the thermal-coal⁵ industry have left an unproductive state-owned monopoly unable to keep pace with rising domestic demand. The coal shortage has had a ripple effect on other important industries—such as power generation, steel, and aluminum—which rely on low-cost electricity from India's coal-fired power plants. Unless India opens the thermal-coal industry to private investment, within ten years the country may be forced to import as much as 40 percent of its requirements, up from negligible levels today.

Furthermore, inadequate infrastructure and inefficient rail service drive up India's freight costs, undercutting the natural advantage it should enjoy over faraway suppliers such as Australia and Brazil—particularly in selling to China. Inland freight and port costs for the best-run Indian iron ore mines are nearly $10 a ton, almost five times higher than those in Australia and Brazil. India's worst mines, which lack rail lines and use expensive trucks by necessity, lag behind even further (Exhibit 3).

The onus is not entirely on the government. Multinational companies could further their own cause by developing projects that better match India's economic-development goals. South Korean steelmaker Posco, for example, has proposed a $12 billion project that would combine iron ore mining with steel production in Orissa. Such a combination of downstream value and substantial foreign investment is clearly attractive to India, but few foreign companies have initiated such moves.

More obstacles may yet develop in the Indian market. Bureaucratic intransigence, protectionism, and even sociopolitical opposition may slow the efforts of the multinationals. Some foreign companies may choose to wait out the current regulatory uncertainty and forgo large investments. Others, however, may seek joint ventures with Indian incumbents: the Canadian aluminum maker Alcan has a minority stake in AV Birla's Utkal Alumina project, for example. Still others might pursue licenses for exploration. Foreign companies that take such low-risk approaches, however, could face steep premiums for deals later on or be locked out of the market entirely by Indian companies just now emerging on the world stage—a repeat performance, for some multinationals, of their recent experience in China.

Despite the challenges, many Indian companies aspire to become global players and are pursuing vigorous growth plans and placing substantial bets. AV Birla and Vedanta, for example, are proceeding with large-scale aluminum and alumina projects, while Tata Steel is building a $3 billion plant in Orissa. Foreign companies should take note. With government cooperation and additional investment, the sector's glittering promise could soon prove golden.