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* Tax reduction aimed at narrowing current account deficit
* India iron ore exports seen at 20 mln T with tax cut
* Volume may spike if mining bans in Goa, Karnataka scrapped
By Manolo Serapio Jr and Krishna N Das
SINGAPORE/NEW DELHI, Aug 28 (Reuters) - India's potential tax cut on iron ore exports could double its shipments of the steelmaking ingredient in the current year compared with industry estimates, though volumes will be far off peaks hit four years ago as mining bans in key states remain.
An export tax cut would mark a shift in India's policy towards iron ore, a raw material it has so much of but has opted to conserve for its domestic steel industry.
India is likely to drop the duty on iron ore exports to 20 percent from 30 percent, government officials said, as Asia's third-largest economy exhausts ways to boost foreign currency inflows and arrest a steep fall in the rupee, which is hammered to new lows nearly everyday.
If that goes ahead, India's annual iron ore exports may rise to almost 20 million tonnes, even if mining remains banned in the state of Goa and parts of Karnataka state, said H.C. Daga, president of the Federation of Indian Mineral Industries.
Without the tax cut, India's exports are only forecast at less than 10 million tonnes for the year ending next March, said Daga.
With exports in major producing states Goa and Karnataka still banned amid a crackdown on illegal mining, volumes from India, previously the world's No. 3 shipper of iron ore, could remain well below the record high of more than 117 million tonnes seen in 2009-2010, limiting the impact on the global supply chain and on prices.
"Certainly volumes will rise. If the impediments to exports are softened or are done away with, then definitely it will improve the competitiveness of India's exports," said Daga.
"Once an international buyer gets an indication that the worst is over in terms of policy, more orders will happen."
India exported 18 million tonnes of iron ore in the year ended March 2013, down about 70 percent from a year ago. The massive drop followed a mining and export ban in Goa, the country's top iron ore exporting state, in September last year.
In Karnataka, the third-biggest exporting state, shipments had been banned since July 2010 and mining, which was banned by the Supreme Court in 2011, has only resumed in 13 of a total 115 mines.
The decline in India's exports allowed top suppliers Australia and Brazil and smaller producers from South Africa and Iran to sell more to China, the biggest market.
OVERSEAS VS DOMESTIC
Bulk of the exports may come from Odisha, India's eastern state that is the biggest producer of iron ore and whose output is forecast at 65 million tonnes for the current fiscal year.
In Odisha and eastern Jharkhand state, there are about 80 million tonnes of iron ore fines lying in mines, said Daga, some of which could be exported if the duty is reduced.
Current global iron ore prices were seen as supportive of exports.
"We have a good requirement of iron ore from the domestic market but with 20 percent duty and the current exchange rate and the fact that iron ore prices are on the $135-$140 level, there could be a momentum towards exports," said an official with an Odisha-based miner who declined to be named.
From about 1.5 million tonnes in July, iron ore exports from Odisha could rise to 2 million tonnes a month, or at an annualised rate of 24 million tonnes, estimates Gunjan Aggarwal, senior consultant at CRU in Mumbai.
At current global iron ore prices of around $120 a tonne, free on board, for the benchmark 62 percent grade .IO62-CNI=SI, exports fetch 2,600 rupees ($40) excluding the 20 percent duty and the railway freight cost, higher than the domestic selling price of around 2,200 rupees, said Aggarwal.
Goa, which produces mostly low-grade iron ore fines, exported nearly all of its annual output of more than 43 million tonnes before mining was banned. Karnataka exported about 25 million tonnes a year before the curbs were implemented.
An export tax cut would suggest the Indian government is bent on reviving exports after efforts in the past three years to keep more iron ore at home to boost its steel industry.
"Now that they're talking about a 10 percent cut in duty means that they are changing their thinking given the tough times that we're seeing," said CRU's Aggarwal. ($1 = 64.4850 Indian rupees) (Additional reporting by Jatindra Dash in BHUBANESWAR; Editing by Muralikumar Anantharaman)