It was as if the real-life climax of the James Cameron blockbuster Avatar was being played out. In a nondescript village in the eastern Indian state of Odisha (Orissa), a tribal council last Monday voted against the plan by London-listed Vedanta Resources Plc to mine bauxite ore from “sacred” hills.
The assertion of community rights comes at a time when the Indian government is struggling to woo foreign investment to prop its fast-slumping economy.
Following protests by local residents, who had the support of civil society groups, India’s environment ministry banned mining in the Niyamgiri hills in 2010. The Supreme Court also ordered a referendum involving 12 village councils in the area on whether mining affected the individual rights of local forest-dwellers.
The last of those village councils voted last week against Vedanta’s plan to extract 72 million tonnes of bauxite to feed its $10-billion alumina refinery. The decision cheered environmentalists and social activists but it has undermined investor confidence and also cast doubts on the government’s will to push through reforms that could make doing business in India easier.
India is rich in mining potential. However, the country’s Forest Rights Act empowers the government to reject a business proposal even if one village council in a protected forest area raises objections.
In fact, the story of Vedanta is a replay of what two other foreign investors experienced earlier this month.
Luxembourg-based ArcelorMittal cancelled plans for a $12-billion steel plant in Odisha after farmers’ protests delayed land purchases. Similarly, South Korea’s Posco scrapped its $5.3-billion steel plant in the southern state of Karnataka after protests over its construction on farmland. Posco’s plant would have required around 1,600 hectares of land, and ArcelorMittal’s plant 2,800 hectares.
India’s current land acquisition law, which was enacted in 1894, is scheduled to be revised “soon” and will allow the government to buy land for investors.
“I expect the new land acquisition and rehabilitation law to remove any legitimate grievances of the people. Once it is passed, I would expect NGOs to give up extra-legal methods of expressing disapproval of government policies,” the government’s former chief economic adviser, Arvind Virmani, told Asia Focus.
But with public protests against similar projects continuing, Prime Minister Manmohan Singh, who leads a coalition government facing elections next year, is not in a position to take unpopular decisions, even if his economist’s instincts would advise him otherwise.
In retailing, Wal-Mart, which had pumped $100 million into its local partner Bharti Retail Ltd after the government opened up the sector, has now slowed down the pace of its investments, citing lack of clarity in FDI rules. Bharti has now returned 17 properties across the country to their original owners.
Resistance to opening up other sectors to foreign investment is also persisting as politicians keep an eye on their prospects at the polls next year.
Recently, the Parliamentary Committee on Commerce suggested a ban on FDI in domestic pharmaceutical units. Its members feared that the entry of foreigners would restrict the growth of the local industry even though India has the world’s largest generic drug industry.
And amid demands to raise the foreign investment cap in the insurance sector from 26% to 49%, Berkshire Hathaway, controlled by the American billionaire Warren Buffett, decided to close its online insurance business in India.
From a record $46.6 billion in fiscal 2011-12, FDI in India dropped to $36.9 billion in 2012-13. For the first time in history, investments by Indian businesses outside the country exceeded FDI, which helped push the current account deficit up to 4.8% of GDP.
Restrictive rules on land and mining rights, delays in acquiring permits and red tape have long been blamed for curbing investment opportunities in Asia’s third-largest economy.
Interestingly, the withdrawal of investments can be attributed to local issues stemming from the Indian economy’s fundamental weakness, and not as a result of the crumbling rupee or the strengthening US and European markets.
Investors still consider India a major investment destination, thanks to skilled manpower, the large population and rich natural resources. And even though global steelmaking capacity continues to exceed demand in 2013, India will be a favoured destination if the government can clear some sticky issues.
The investment climate for Indian industry has worsened in the last four years, agreed Virmani, but added that he expects the industry and FDI to improve when the global excess supply is eliminated and the domestic investment environment improves.
Meanwhile, Commerce and Industry Minister Anand Sharma told Parliament this month that the government had approved 18 single-brand retail FDI proposals worth $173 million between April 2010 and May 2013. But unless the government imposes some clarity on FDI rules and cuts red tape, it will be difficult for India to regain the allure it had in the early years of its opening up to the global market in the 1990s.
On Sept 5, the former chief economist of the International Monetary Fund, Raguram Rajan, who famously predicted the 2008 financial crisis, will take over as the governor of India’s central bank. Not being a career economist, he is expected to bring radical changes to the ways in which India conducts business.
In a speech at a function releasing a book of essays in honour of Prime Minister Manmohan Singh last April, Rajan said foreign investors eventually would want to be in India no matter how badly the country treats them.
However, the country cannot wait for that “eventuality”, and it needs FDI at a time when the economy is sluggish and not when growth recovers.
“Be kinder to foreign investors – they are not the enemy but a necessity,” Rajan added. Is the government listening?