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India Worried About Declining Foreign Investment

  • Anjana Pasricha

An Indian worker hammers on a steel cupboard at a metal wardrobe factory in Mumbai, India, Oct. 12, 2012.

An Indian worker hammers on a steel cupboard at a metal wardrobe factory in Mumbai, India, Oct. 12, 2012.

Two foreign companies have recently canceled plans to build massive steel plants in India. Their pullout has led to fresh concerns about the country's ability to attract foreign investment and reinforces India's reputation as a tough place to do business.

Luxembourg-based ArcelorMittal, the world’s largest steelmaker, said huge delays in acquiring land due to local protests, and uncertainties over iron ore supplies compelled it to cancel its $8.5 billion steel plant project in Orissa state.

Posco, which shelved a proposed $ 5.3 billion steel plant in southern Karnataka state, cited similar hurdles.

The two mega plants were planned when India’s booming economy was expected to devour steel for infrastructure projects and an expanding manufacturing industry. But as India’s economy slows down, demand for steel has cooled.

“Cars are not selling, infrastructure projects are not taking off, the government is not spending as much on projects,” complained Nishith Sharma of SteelGuru in New Delhi.

According to economists, the cancellation of the projects highlights a bigger problem: ensnared in red tape for years, investors are getting disenchanted with Asia’s third largest economy.

Like Posco and ArcelorMittal, the main hurdles investors face are huge delays in acquiring land, onerous environmental regulations, and access to reliable supplies of power and key minerals such as coal and iron ore. It can often take a company eight to ten years to secure approvals to start operations. Worse still, investors have to grapple with frequent policy changes.

Economist Rajiv Kumar at the Center for Policy Research in New Delhi said India is losing its allure as a business destination.

“A risk is something companies can factor in, but uncertainty where you have changing goal posts, or when you can't predict any outcome for anything, that is the major hassle that not just the foreign but the domestic investors as well face in India," Kumar said. "This is a fact today in 2012-2013, more capital was invested from India abroad than the other way around.”

Last year, foreign direct investment in India fell to about $26 billion - down by nearly one third compared to the previous year.

The plummeting investment has prompted the government to announce more reforms to lure investors. The government decided in mid-July to ease ownership restrictions on several industries, including telecommunications.

But economists say these steps alone are unlikely to attract foreign investors. They point out that although the government relaxed barriers to foreign investment in retail, insurance and aviation sectors last year, hardly any investment has come in.

Chief economist D.K. Joshi at CRISIL in Mumbai said investors are looking for stable policies, faster project approvals and a turnaround in the economy.

“What matters for foreign investor is certainty of business environment," the economist explained. "What matters also is how fast you are growing, we have slipped a little bit on those fronts, so investment into India has become a little less attractive than it used to be.”

The country’s diminishing allure is not good news for India. It desperately needs foreign investment both to shore up its finances as it grapples with a large deficit and to boost an economy growing at its slowest pace in a decade. But there is a silver lining. Although Posco and ArcelorMittal have walked away from two large projects, they say they will pursue other projects planned in the country.

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