The world’s largest steel producer, India-based ArcelorMittal, and South Korean steel major Posco have scrapped FDI projects in India worth a combined $17.3bn. Significantly, these decisions were taken just as the country's ruling United Progressive Alliance announced a flurry of FDI reforms that allow complete foreign ownership in the telecoms sector and foreign investments in the defence sector above the 26% limit, on a case-by case basis. Earlier, a panel headed by the prime minister sought to boost the manufacturing sector by targeting a trebling of existing steel capacity to 300 million tonnes by 2025.
ArcelorMittal has scrapped its $12bn steel project in the state of Odisha due to “significant external delays” in acquiring land and securing captive iron ore supplies after signing a memorandum of understanding with the state government seven years ago. Since then, the company had completed several milestones for the project, such as a feasibility report, environmental impact assessment and other relevant technical reports.
Posco backed off from its $5.3bn steel project in the state of Karnataka due to inordinate delays in securing iron ore mining rights and land acquisition.
However, the steel majors are not pulling out of India. ArcelorMittal is continuing with its two projects in Karnataka and Jharkhand. Posco remains committed to its 12-million-tonne steel project in Odisha, which still represents one of the largest FDI deals in the country. This project has had its share of problems getting off the ground, facing a protest movement that stalled land acquisition. But finally 50% of the land required (8 square kilometres) has been acquired and if a further 3 square kilometres are added this year, the company can begin ground-breaking operations for phase one of its project.
The decision to scrap two steel projects is a setback for India’s drive to attract more FDI to bridge its widening current account deficit and build infrastructure.
“Posco and Arcelor plants not going ahead is not a good sign for us. This would cause both in India and abroad an impression that in India we have many constraints for new manufacturing… We have to introspect,” minister for heavy industries and public enterprises Praful Patel said at a meeting of the Associated Chambers of Commerce and Industry of India. “We have to simplify processes, we have to make our systems in tune with the rest of the world,” he said.
More steel is needed if India is to return to a faster growth path of 8% to 9%. India may be the world’s fourth largest manufacturer of crude steel producing 77.6 million tonnes in 2012, but it also has considerable potential. India’s consumption of finished steel products was only 56.9kg in 2012, according to the World Steel Association, which is small compared with China’s 477.4 kilograms or Brazil’s 126.9kg. Such low levels of steel production and consumption can be raised not only by more FDI but also improvements in the business environment that enable domestic majors such as Tata Group and JSW Steel, among others, to also set up integrated steel facilities without long delays in acquiring land and environmental clearances.
This sector was headed for boom-times in 2005, when more than 200 memoranda of understanding were signed by both foreign and domestic steel companies involving an investment of $142bn. But what happened since then is a sorry saga of cancellations and postponements.
N Chandra Mohan is an economic and business commentator based in New Delhi.