Mining Royalties and Incentives for Security Operations: Evidence from India's Red Corridor

Can tax regimes shape the incentives of governments to engage in or support counterinsurgency operations? India's Maoist belt contains a large share of the country's most valuable mineral deposits. Indian mining royalties benefit the States, but they are set by the central government. States are largely responsible for counter-insurgency operations within their territory. Therefore, the royalty regime could shape the incentive of states to support counter-insurgency efforts ien mining areas. This paper exploits the introduction of a 10% ad valorem tax on iron ore that was responsible for a 10-fold increase in royalty collections by the affected State governments. In a panel of district-level violence outcomes between 2007 and 2011, I find that the royalty hike was followed by a significant intensification of State violence in those districts that contain deposits of iron ore. There is no such impact for the deposits of other key minerals that were not subject to the royalty hike: bauxite and coal. These results are consistent with states taking the fiscal value of districts into account when they decide on the intensity of security operations.