News / Economy

India Worried About Declining Foreign Investment

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.
Anjana Pasricha
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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Comments
     
by: Yoshi from: Sapporo
July 24, 2013 5:32 AM
Where are BRICS countries going ? India and South africa are going to drop out from them first ? How about Brasil?, Russia?
China is the only one which is exceptionally keeping growth ?

I heard Japanese motor industry Suzuki has been doing well in India. Its president recently said that he will continue to produce cars in India employing local residents eventhough weakened Yen urges Suzuki costly to transfer factories from overseas back to Japan. I suppose there is some merit for Suzuki to keep running factories in India even taking accout of bribery and corruption et cetera.


by: Mehtasaab from: Washington, DC
July 23, 2013 1:33 PM
I agree with Davis. It is a dangerous zone to invest money in India.
Politicians are in competition to increase their foreign reserve in swiss bank accounts. There is a bill for anti corruption on the floor,
but politician want sign. They know that they will lose. If Modi's government win next election then he will do better. He is not corrupted and a business man. Modi put state of Gujarat on fast track. India needs leader like Modi.


by: Davis K. Thanjan from: New York
July 23, 2013 9:50 AM
Even thinking of doing any construction project is dangerous because of bureaucracy, nepotism, bribery, political protests, environmental regulations, problems of acquisition of land for projects, and barriers for foreign investment. Even if all the above hurdles are overcome, political parties are waiting for labor strikes to shut down any manufacturing company, especially if it is foreign owned manufacturing plant. Beware of foreign investment in any manufacturing projects in India.

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