CAG Finds Odisha’s Mineral Foundations Spent ₹2,578.73 Crore Under a Category the Rules Never Created

The news

Bhubaneswar. The Comptroller and Auditor General of India (CAG) has found irregularities in how District Mineral Foundation (DMF) funds, meant for people and areas affected by mining, were spent in Odisha, The Hindu reports. A DMF is a trust set up in each mining district, financed by contributions from mining lease holders, to spend on the welfare of affected communities. The CAG’s performance audit, on the “Implementation of Pradhan Mantri Khanij Kshetra Kalyan Yojana, including the functioning of District Mineral Foundations in Odisha for the year ended March 2024”, said mineral-bearing districts had delayed identifying the people directly and indirectly affected by mining. Directly affected areas are those where mining happens; indirectly affected areas are those that suffer its economic, social or environmental consequences. Under rule 10(D) of the Odisha DMF Rules, 2015, not more than 40% of DMF funds may be used in indirectly affected areas. “Amount utilised for indirectly affected areas has increased beyond the stipulated limit to 45.68% in DMF, Keonjhar and 41.10% in DMF, Sundargarh,” the CAG said. It also reported that in Keonjhar and Sundargarh, 30.67% and 22.67% of the sanctioned amounts were shown as spent under a new category called “common affected areas”, and 19.86% of Jajpur’s DMF funds were spent under it. In the three DMFs of Jajpur, Keonjhar and Sundargarh, ₹4,541.66 crore was sanctioned for 1,114 projects in “common affected areas”, of which ₹2,578.73 crore was utilised “without any provision in the rules”. “This indicated that the creation of the new category was only to accommodate ineligible utilisation within the prescribed limits,” the report said. The same day, as our 25 September card on the Mines and Minerals (Development and Regulation) Amendment Act, 2026 anticipated, Biju Janata Dal (BJD) president Naveen Patnaik led a demonstration before the State Assembly, the party’s first protest on such a scale since the BJP ended its 24-year rule in 2024, The Indian Express reports. The protest targets a clause barring mineral-bearing States from taxing mining lease holders, though the Supreme Court in July 2024 had empowered them to levy such taxes and collect arrears from April 2005. Parties estimate a loss of ₹1 lakh crore in arrears and ₹12,000 crore a year; the State government is yet to assess the impact. Mr. Patnaik said the Bill was passed “without any discussion”, asked why Odisha’s 20 BJP Lok Sabha MPs stayed silent, and said his two letters to Chief Minister Mohan Charan Majhi went unanswered. BJD leaders plan to stop mineral transport from mines; the INDIA bloc called a demonstration for September 29. Syllabus: GS2 federalism and accountability; GS3 mining and inclusive growth.

Static syllabus linkage

1. The 2015 amendment to the MMDR Act created District Mineral Foundations. The Mines and Minerals (Development and Regulation) Act, 1957 was amended in 2015 to move mineral concessions to auction and to add Section 9B, which requires the State government to establish a District Mineral Foundation, as a non-profit trust, in every district affected by mining operations. Its object is to work for the interest and benefit of persons and areas affected by mining. Lease holders pay the DMF an amount linked to royalty, with a higher share for older leases than for auctioned ones. The same amendment added Section 9C, creating the National Mineral Exploration Trust, funded by lease holders, to finance mineral exploration.
2. PMKKKY sets national priorities for how DMF money should be spent. The Pradhan Mantri Khanij Kshetra Kalyan Yojana was launched by the Ministry of Mines in 2015 to guide the use of DMF funds, and its guidelines were revised in 2024. It divides spending into high-priority areas, such as drinking water, health, education, sanitation, the welfare of women, children, the aged and disabled, and skill development, and other priorities such as physical infrastructure and irrigation, with most of the money reserved for high-priority areas. It also distinguishes directly affected areas, where mining operations take place, from indirectly affected areas, which bear the economic, social and environmental fallout, and reserves the larger share for the former. States frame their own DMF rules within this framework, as Odisha did in 2015.
3. The CAG audits Union and State accounts and reports to the legislature. Articles 148 to 151 of the Constitution provide for the Comptroller and Auditor General, appointed by the President and removable only like a Supreme Court judge. His duties and powers are set out in the Comptroller and Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971. Under Article 151, reports on a State’s accounts are submitted to the Governor, who causes them to be laid before the State legislature, where the Public Accounts Committee examines them. A performance audit goes beyond checking whether money was spent legally and asks whether it achieved its purpose with economy, efficiency and effectiveness.
4. Mining areas are often Fifth Schedule areas, and the Supreme Court has separated royalty from tax. Much of Odisha’s mineral belt lies in Scheduled Areas under the Fifth Schedule, where the Panchayats (Extension to Scheduled Areas) Act, 1996 (PESA) gives gram sabhas a role in approving development plans and in consultation before land acquisition. In Orissa Mining Corporation v. Ministry of Environment and Forests (2013), the Niyamgiri case, the Supreme Court left the decision on bauxite mining to local gram sabhas. In Mineral Area Development Authority v. Steel Authority of India (2024), a nine-judge Bench held by 8:1 that royalty is not a tax and that States have the power to tax mineral rights and mineral-bearing land, which the 2026 amendment now restricts.

Why UPSC loves this

1. GS2 and GS3 meet in mining governance. The syllabus covers the role of the CAG, Centre–State financial relations, the welfare of vulnerable sections and inclusive growth. Mains questions have asked about displacement, benefit-sharing with tribal communities and the resource curse. The DMF audit gives hard numbers on how benefit-sharing is actually working.
2. Prelims tests provisions of the MMDR Act and the CAG. Questions on constitutional bodies routinely test Articles 148-151, and the MMDR framework — DMF, NMET, auctions — is standard material after the 2015 reforms. The 2024 royalty judgment and the 2026 amendment make this a likely area.
3. Ethics and governance questions on accountability. GS4 case studies often involve funds spent outside their purpose to meet targets. Creating a new category to hide excess spending is a textbook example of rule-bending that an administrator must recognise.

Analysis

1. Renaming spending is a way of defeating a ring-fence. The 40% cap on indirectly affected areas exists to make sure the villages that bear the dust, blasting and lost land get most of the money. By creating “common affected areas”, district bodies could fund projects that did not qualify for either category while keeping the reported shares within limits. The CAG’s phrase, “only to accommodate ineligible utilisation”, is unusually direct. The design lesson is that a limit without a closed list of categories invites creative accounting.
2. DMF money is tempting as a substitute for the State budget. DMF funds are large in districts like Keonjhar, Sundargarh and Jajpur, and are controlled by district administrations. That makes them an easy source for roads, buildings and schemes that the State’s own budget should pay for, spread thinly over wider areas. The affected village then competes with the district headquarters for its own compensation. Unless spending is tied to plans made with affected gram sabhas, DMFs risk becoming a second district budget rather than a benefit-sharing fund.
3. Odisha’s case against the Centre is weakened by how it spends the money it has. The BJD’s protest is about the State’s right to tax minerals, which the Supreme Court upheld in 2024 and the 2026 amendment restricts. The federal argument is strong: minerals are a State’s natural capital, and the arrears at stake are large. But the same week, the auditor shows that mineral money already given for local benefit was misdirected. A State that wants more fiscal autonomy strengthens its case by showing it can account for what it has. The counter-view is fair too: the audit concerns district trusts, not the State’s tax revenue, and misuse at one level does not justify curbing powers at another.
4. Delayed identification of beneficiaries is the root failure. The CAG found that districts delayed identifying people directly and indirectly affected by mining. Without that list, every other rule is hard to enforce, because no one can say whether a project served the intended people. Identification is also where tribal and landless households are most easily left out. The fix is a published, village-wise list of affected areas and persons, updated as mines open and close, and verified by gram sabhas.
5. Audits matter only if the legislature acts on them. A CAG report becomes accountability only when the Public Accounts Committee examines it and the government files action-taken notes. Odisha’s politics is now focused on mineral revenue, which gives all parties an incentive to take up the report. Recoveries, disciplinary action where rules were knowingly bent, and a rule change closing the loophole would show that the audit worked. Otherwise the pattern of reports gathering dust will repeat.

Administrator's brainstorm