Photo Credit: AFP/Getty Images/Raveendran
Two items of news highlight the polar forces pulling India in opposite directions over foreign investment. The government approved a report recommending 100% foreign direct investment in 12 sectors of the economy, including the politically sensitive ones of insurance and telecoms. The same day, South Korean steel giant Posco said it was scrapping a proposed $5.3 billion steel mill in the state of Karnataka after years of delays and local protests against acquisition of land for the plant.
Posco’s is a familiar story as Prime Minister Manmohan Singh’s coalition government remains desperate to push forward its economic reforms to boost sluggish growth. Opening the economy to foreign investment is a centerpiece. He now also needs to improve dollar inflows to shore up the rupee, which is requiring increasing support from the central bank, the latest prop being the unexpected tightening of monetary policy at the start of this week.
The government has made a succession of decisions to raise the caps on foreign direct investment, ease red tape and allow more investments to get automatic approval. Yet India’s small farmers and opposition politicians, both powerful forces at state level and below, have been able to stymie many potential multi-billion dollar investments by campaigning to save local farmland and woodland from industrialization.
In April, the finance ministry totted up 106 power, 79 road, 20 iron and steel, five cement and five port projects, collectively worth $125 billion, that were stalled due to difficulties in land acquisition and delays in receiving environmental clearances. It took Posco more than six years to assemble the land it needed for the biggest foreign direct investment in India to date, a $12 billion steel mill in Orissa. It clearly doesn’t think the effort worth it to go through that again in Karnataka.
It is not just foreign companies that have been affected. Tata Motors moved a proposed new assembly line for its Nano small car out of Singur in West Bengal in 2008 in the face of protests from local farmers and opposition parties. (Update: ArcelorMittal, the world’s biggest steelmaker, announced July 17 that it, too, was scrapping a planned Indian steel mill in Odisha state because it had failed to acquire the necessary land.)
Land acquisition is a particularly acute problem, given the lack of comprehensive national law on the compensation and resettlement of those who lose their land to industrial development. India still operates under colonial-era land requisition rules, now more than a century old. A land acquisition reform bill, which would make compulsory acquisition possible once 80% of landholders agree to sell, is stalled in parliament ahead of 2014 elections.
To get it passed, the government has conceded again and again amendments. The bill now offer smallholders generous compensation of two to four times the market value of their land and resettlement involving cash, alternative land and jobs for affected families. Investors are growing commensurately nervous about the additional costs this will impose on them, but the opposition parties are showing little interest in anything but stalling further ahead of what looks to be a close election. Meanwhile, central government reforms will continue to run into the stone wall of local politics.
