How India lost $14 billion worth of foreign investment in two days

Try telling them that foreign investment is good.
Try telling them that foreign investment is good.
Image: Reuters / Stringer
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India’s hopes of attracting foreign investments has taken a $14 billion hit.

The world’s largest steel company, ArcelorMittal, abandoned plans on Wednesday to build an $8.5 billion steel plant in the eastern state of Odisha. That came just a day after South Korea’s Posco scrapped a $5.3 billion plan for a steel plant in the southern Indian state of Karnataka.

ArcelorMittal, controlled by Indian billionaire Laxmi Mittal, struggled to secure iron ore linkages and acquire requisite land for the steel plant. Posco also faced inordinate delays in acquiring required land, amid fierce opposition from local residents. Both companies have other ongoing projects in India.

The timing could not have been worse for the Indian government, which just this week liberalized foreign investment norms to attract long-term capital it desperately needs to get growth back on track. But the high-profile exits of the last two days demonstrate just how bleak economic sentiment is.

Land acquisition has been a prickly issue for projects ranging from factories to roads. In 2008, violent protests forced Tata Motors, India’s largest automotive company, to relocate the plant where it hoped to produce the world’s cheapest car, the Tata Nano. Concerns about the displacement of indigenous people has held up UK-based Vedanta’s bauxite mine project in Odisha. And it is not just the corporate sector that is struggling to acquire land. Four years after it set an ambitious target of building 20 kilometers (12.4 miles) of highways a day, the government is still averaging just 8 kilometers a day.

After years of heated political debates, there is finally consensus on a new land acquisition legislation that will replace the existing rules, which were drafted over a 100 years ago. The new law seeks to provide fair compensation for the land acquired from farmers for industrial projects, but industry bodies fear that the legislation will not ensure that land is available to industry at competitive rates, without delays and with certainty.

Protracted tax battles are also damaging business confidence in India. The income tax department has been aggressively targeting mergers and acquisitions and transfer pricing deals between multinational companies and their Indian subsidiaries. Some of the biggest foreign investors including UK’s Vodafone, Finland’s Nokia and US-based Microsoft are locked in tax disputes in India.

The cancelation of two of the biggest foreign direct investment projects should serve as a wake up call for India. If the administration doesn’t address red tape, clarify tax rules, and reform land acquisition legislations, the exodus of foreign investors will only continue.