The cabinet has approved a bill calling for funding local schools, hospitals and roads using profits and royalties from reluctant mining firms, a move that may kickstart stalled projects and boost rural support for the government.
The bill, which must now win parliamentary approval, calls on coal miners to share a maximum 26 per cent of their profits with local communities and for other miners to pay an amount equivalent to royalties, government ministers said on Friday.
The bill has been watered down under pressure from industry. The initial proposal said all miners should give 26 per cent of profits to local communities where land acquisition is a touchy issue and many oppose natural resources being carted away by outsiders.
"All coal mining companies have to share 26 per cent of their profits," Coal Minister Sriprakash Jaiswal told reporters after a cabinet meeting.
A part of government moves to expand social programmes for the poor, the bill seeks to simultaneously please the core support base, block flows of new recruits to a Maoist insurgency and balance modern lifestyles with traditional ways.
India's mining sector has among the worst regulatory environments and is a source for some of the country's biggest corruption scandals, at least one of which has now swept in top regional leaders of the BJP.
The proposed legislation, spearheaded by ruling Congress party leader Sonia Gandhi and her son Rahul, is seen as crucial for a government campaign against graft and could help the party reap political benefits in national elections in 2014.
The government has been paralysed by the issue of corruption since last year, a trend capped by a nearly two week hunger strike in August by 74-year-old social activist Anna Hazare that brought the nation to a standstill until parliament agreed to tough anti-corruption legislation.
The bill is likely to be presented in the session of parliament in December and approved, though the opposition could seek changes.
It will create an independent regulator for the sector.
The government is hoping to double its revenue from royalties after the bill becomes law, Mines Minister Dinsha Patel told reporters.
Government revenue from mining royalties now stand at 40 billion rupees ($817 million).
India's mining sector has only opened up fully to private investors in recent years and state-run companies have lacked the funds and expertise to probe deeper than the top 50 metres or so where its iron ore and coal reserves are found.
Global mining giants BHP Billiton and Rio Tinto have only small ventures in the country. In Orissa, Rio Tinto has been negotiating since 1995 with the state government to develop iron ore deposits in a joint venture.
While industry bodies are reconciled to sharing some profits, they have baulked at 26 per cent, saying that will raise business costs too much and deter investors.
The mining ministry says that profit-sharing should make it easier for mining projects to win local approval and accelerate the pace of developments.
Shares of Coal India, the world's biggest coal miner, were down by about five percent at 0850 GMT, falling more than the broader market which was down 1.5 per cent.
Years of protests, sometimes violent, have delayed many industrial projects, including South Korean steel maker POSCO's plant in Orissa, the biggest foreign direct investment in India at $12 billion.
Protests against big industrial projects are a phenomenon of the developing world from Brazil to Indonesia, and making investors plough back a portion of their income into development of local communities has been one way of dealing with resentment.
India is also trying to replace a century-old land acquisition law that seeks to placate a rural voter base worried it is being short-changed in the country's rush into modernisation.