Foreign investors aren't buying the PM's reform claims

New York: Frustrated with India's policies, land acquisition problems, and slowing economy, foreign investors like US retail giantWal-Mart,insurerBerkshire Hathawayand steel companiesPosco and Arcelor Mittal all pulled back on Indian investment plans this week. It's ironical that the decision by foreign companies to pull back on investments came the same week that the government tried to juice the economy by relaxing foreign investment rules in nearly a dozen sectors.

"India wants foreign direct investment (FDI) but is unable to execute on its goals due to incompetence at the federal and local government level," said Westchester industrialist David Overton, who has India business interests.

Dealing a blow to India's struggle to attract foreign capital, South Korean steelmaker Posco said on Tuesday that it had given up plans to build a $5.3 billion factory in Karnataka because of delays in receiving iron ore mining rights. The Karnataka Industrial Area Development Board also failed miserably to deliver on promised land.

In yet another setback, ArcelorMittal on Wednesday dropped its plans to build a steelplant, worth $8.4 billion, in Odisha, over extended delays and problems in acquiring land. ArcelorMittal's decision is one of the biggest foreign investor exits from India and the company was upfront about why it decided to leave.

Manmohan Singh's claims of reforms haven't impressed foreign investors. PTI

Manmohan Singh's claims of reforms haven't impressed foreign investors. PTI

"ArcelorMittal has not been able to acquire the requisite land for the steel plant, nor has it been able to ensure captive iron ore security, which is a necessary requirement for the project. Therefore, taking into account the current economic climate, ArcelorMittal has concluded it will no longer be pursuing its plans for a steel plant in Keonjhar at this stage," the company said in a statement.

Forbes noted acerbically that almost each project has got "drowned in the politics of industrialization" and the government has failed to create a simple and clear policy foundation that would have sorted issues like mines allotment and land acquisition.

US retailer Wal-Mart had planned to open a string of stores in India, but now those plans are in doubt. On Thursday, the Economic Times reported that Bharti Retail Ltd., Wal-Mart's local joint-venture partner, returned to the previous owners the 17 plots of land that were to be used for new stores.

The Wall Street Journal reported that during a 27 June meeting between Wal-Mart and Commerce and IndustryMinister Anand Sharma, he had promised that the regulations governing investment in multi-brand retail would be amended to provide greater clarity on the policy.

Wal-Mart had been expecting an announcement liberalizing provisions regarding local sourcing and clarifying required investment in infrastructure, an official present at the meeting told the Journal. However, when the government announced on Tuesday its plans allowing more foreign investment in India, there was no mention of multi-brand retail.

Both Ikea and Tesco, which have expressed interest in opening stores across the country, have also yet to detail investment plans. Also this week, the media reported that US insurer Berkshire Hathaway had decided to close its business selling online insurance in India around two years after it was launched.

"The multiple foreign-investor pullouts suggest the government's policy changes may be too little, too late. India's rapid growth in recent years was luring investment, and it's hard for policy changes to overcome the markedly slower growth," noted The Wall Street Journal.

Most investors feel Singh's weak coalition government has struggled to push through reforms and has limited firepower for pushing through big bang reforms as it faces elections by May 2014. Lack of political consensus on previous FDI decisions has scared investors, who fear a change of guard in New Delhi could lead to a reversal in some of the decisions taken by the Manmohan Singh government, imperiling their investments.

Foreign direct investment slid about 21 percent to $36.9 billion last fiscal year compared with 2011-12. India needs durable FDI inflows which are preferable over short-term capital to fund the current account deficit.

Foreign institutional investors (FIIs) withdrew a net $1.76 billion from Indian stocks last month through June 27 due to the expected pullback in US Federal Reserve stimulus. We saw the rupee hit a record low of 61.21 to the dollar on July 8, as funds flowed out of emerging markets, rendering those with high current account deficits, like India, particularly vulnerable.

Chidambaram has been hoping to revive the economy's mojo by unveiling a slew of reforms to attract some $20 billion in new investment to fund the deficit without depleting India's $300 billion in foreign exchange reserves.

Updated Date: Dec 20, 2014 22:22 PM

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