Not That Easy Doing Business in India

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Oct. 6 – Sure billions of dollars in FDI are poring into India, the economy is strong and the political structure is relatively stable, but the decision by Tata Motors to pullout from Singur in India's North-Eastern West Bengal state in the wake of violent protests may affect the broader investment climate in the country, deterring foreign investors and denting economic growth, analysts say.

Violent demonstrations by farmers whose land was taken by the state for the construction of the Nano car plant led Tata, the country's top vehicle manufacturer, to pull out of the project Friday after a last-ditch meeting with the state's chief minister.

Analysts told the International Herald Tribune that although the immediate economic fallout would be limited to West Bengal State, the pullout could have wider repercussions as more states could adopt a harder anti-industry tone for political gain.

In September, an Indian unit of Dow Chemical was asked to stop construction work in Maharashtra State, home of the country's financial capital, Mumbai. And Reliance Industries, one of the leading Indian companies, faced violent protests last year.

A South Korean steel company, Posco, is facing protests over the acquisition of forest land for a US$12 billion plant in Orissa. Goa State dropped plans to build special economic zones after protests by political parties.

Analysts said that Indian industrial activity, already slowing because of tight monetary policy and weaker economic growth, could be further harmed by such protests. A study in August by the country's central bank found that private Indian companies would invest 1.73 trillion rupees, or US$37 billion, in new projects in the 2008/2009 fiscal year, a 30 percent decline the previous year.

Industrial output in India is mostly for the domestic market and accounts for about one-fifth of gross domestic product, helping the economy expand at an average rate of 8.8 percent in the past five fiscal years.

But economists said that Tata's decision to abandon the Nano plant in West Bengal would be a severe setback to the development prospects of the state, which already languishes behind other states in terms of investment.

West Bengal attracted 60 billion rupees (US$1.2billion) in investments in 2007/2008, less than a tenth of the investments attracted by the leading state, Gujarat, according to a study by the Indian central bank.