Iron ore production by privately owned miners in Karnataka will likely resume in July, Mines Minister Dinsha Patel said on Tuesday, after what will have been a year's hiatus due to a government and judicial crackdown on illegal operations.

Patel said initial production from the state would go to local steel mills, but a resumption of mining means the world's third-biggest supplier of iron ore could hope to regain its $6 billion, 100 million tonnes average annual exports, mainly to China, in 2012/13.

"In two to three months mining should happen, I believe the problem will be resolved by July," Patel told Reuters in an interview, adding exports from Karnataka should then follow. He did not give a timeframe for such shipments.

Last week, the Supreme Court allowed mining to restart in mines of more than 50 hectares in Karnataka after their environmental plans are approved, potentially bringing 4.5 million tonnes per year to local steel producers. The state-run NMDC was earlier allowed to mine 1 million tonnes of ore every month by the apex court.

The union government has struggled to shape a mining policy balancing the drive by miners for exports with the need to ensure future supply to domestic steelmakers, who are ramping up production to supply India' economic expansion.

India's steel industry is aiming to produce between 100 and 110 million tonnes by 2020, up from existing capacity of 70 million, a target that would require almost all of the country's entire existing iron ore output.

Patel said India would continue to export iron ore until domestic steel companies adopted technology that would allow them to process ore fines.

"Right now about 70 percent of our exports is of fines. If we don't export then we have a storage problem," he said. "And even when Indian steel companies begin using fines, we hope to have added to our mining capacity. And as long as we have surplus we will export."

Just over half of India's annual production of 240 million tonnes of iron ore is of higher grade, coveted by both domestic steelmakers, who lack the technology to use ore fines, and exporters who get a better price for higher quality.

"Our policy is clear. We have to provide for our own industries," Patel said.

Illegal Mining

The government wants to conserve resources, but says it opposes a blanket ban on exports. Some state governments, such as Karnataka, want a ban. The uncertainty around export policy has hurt India's reputation as a stable supplier of iron ore.

Illegal sales have only worsened matters. Such mining in India is widespread and usually entails removing resources outside permitted zones. In an ongoing case in Karnataka, an anti-corruption ombudsman exposed an alleged $3.6 billion exports scam and described a "mafia-type of operation" with links between politicians and mining.

The Supreme Court has also cracked down, banning mining in Karnataka last year due to environmental concerns. The court is gradually lifting that ban.

It has also asked the state to resume exports of iron ore, but the state government has yet to approve any shipments.

Patel said the government was taking steps to rein in illegal sales, including setting up satellite tracking of consignments and electronic checkposts.

The government has also proposed a mining bill that will create an independent regulator, with the aim of improving transparency. The bill imposes profit and royalty sharing arrangements with villagers as well as encouraging foreign investment.

"I expect the bill to be approved by parliament around August when it convenes," Patel said.