It's ironic, really. The government raises foreign direct investment (FDI) limits in various sectors, and in the two days after that, instead of a flood of dollars coming in, projects worth Rs 80,000 crores have been shelved, with Posco, the South Korean giant, and steel-maker Arcelor-Mittal calling it quits.
The economy struggling and the rupee weakening may have forced the central government into action, but the fate of many big infrastructure projects in India is in the hands of other powers: the state of the world economy and state governments, to name a few. Yong Won Yoon, Chairman of Posco, touched on two such factors in his statement. "With the given market conditions and significant delay in acquiring the required land in Gadag, we have decided to close our proposed steel plant in Karnataka," he said.
Demand for steel from the world's largest consumer, China, has fallen from the heights of 2010, when many of these projects were signed. Commodity prices were booming at the time. Given today's growth scenario, internal reviews on the viability of such major investments is natural. And for many companies such as Posco, the maths just doesn't add up anymore.
Add to that the state government machinery in many of the mineral-rich states such as Jharkhand, Odisha and Bihar. While they play a critical role in facilitating these projects, the states simply lack the capacity to cut through the red tape. Frustrated by such delays, investors have begun to question whether it is worth it.
Though the hurdles are many, one of the biggest and most controversial is land acquisition. And not just for foreign companies. Just ask Ratan Tata about the Singur affair. Vedanta's $9 billion investment aluminium project has been marred by the acquisition battle in the Niyamgiri hills of Odisha. Reaching a balance between the rights of land owners and needs of companies has so far eluded policymakers.
“Raising FDI caps alongwith streamlining the approval process and ironing-out stringent and complicated procedural matters is required,’ said Mr Chandrajit Banerjee, Director General, Confederation of Indian Industry, stressing that fixing the investment climate requires a multi-pronged approach which goes beyond tinkering with FDI limits. “Recent amendments to policies and tax structures, some retrospective, have detracted investors and are somewhat responsible for the slump in FDI inflows. A stable and predictable policy regime is essential to attract continuous investment flows,” he added.
Political instability: With the Central government relying on regional political parties for support in a shaky coalition, economics sometimes takes a back seat. Add to it corrupt and inefficient bureaucracy, and the poor accountability of politicians.
Infrastructure: The weakest link. Power cuts remain daily events, and transporting goods takes weeks. This bottleneck discourages foreign investors from putting their money in India.
Government regulations: The government has sent mixed signals to investors by changing it tax and tariff policies without notice. The retrospective tax amendment brought in the 2012 budget, and successive flip-flops, hurt investor sentiment.
Labour laws: Inflexibility in retrenchment policies has been a perennial sticking point.
Corruption: India is afflicted with a crisis in governance. Complex approval systems have made giving project clearances a fertile groud for corruption.