Foreign direct investment into India fell by more than a third from April to September 2010, owing to hurdles in environmental clearances, problems in land acquisition and poor infrastructure, according to India's central bank.

The Reserve Bank of India, in its quarterly macroeconomic review published Monday, said foreign direct investment to India in the period was $12.6 billion, a 36% decline from the 2009 period.

The central bank report is in line with a recent U.N. Conference on Trade and Development estimate saying India's foreign direct investment for all of 2010 fell 32% to about $24 billion.

The RBI report noted that the sharpest declines were in the construction, mining and business-services sectors. It said a major reason was reportedly "environment sensitive policies pursued, as manifested in the recent episodes in the mining sector, integrated township projects and construction of ports, which appear to have affected the investors' sentiments."

While the Reserve Bank report didn't name specific projects, in recent years several foreign companies have been unable to start or expand their projects in India due to environmental issues or local opposition. These include South Korean steel giant Posco, which has been trying to set up a $12 billion steel plant in the eastern state of Orissa for nearly five years, and London-based Vedanta Resources PLC, which went to court recently to fight an order by India's environment and forests ministry to stop the expansion of its alumina refinery.

Steelmaker ArcelorMittal hasn't been able to acquire land for five years for its proposed plant in Orissa. Virbhadra Singh, India's steel minister, said at a conference recently that "once delays happen, it sets off a chain reaction among other investors."

The reserve bank report added that other reasons for lack of enthusiasm from foreign direct investors include persistent procedural delays, land acquisition issues and lack of availability of quality infrastructure. "The reform process needs to be expedited to address the impediments," the report said.

The drop in foreign direct investments to India comes even as it is increasing in other Asian economies. According to the U.N. estimates, Hong Kong received nearly 30% more foreign investment in 2010 from the previous year at $62 billion, Singapore got 122% more at $37 billion and China got 6% more at $100 billion. Overall, the United Nations report noted that FDI flows to South, East and South East Asia in 2010 were up by 18% to $275 billion, after a 17% decline in 2009.

Economists say that as some of these other Asian countries are welcoming to foreign investors, India's structural problems are likely making it less attractive. Also, India's "inflationary situation is creating a lack of business confidence," said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi.

Experts agree the government needs to step up reforms to avoid further declines. "FDI stands as the most preferred form of capital inflow which India wants," says Sujan Hajra, chief economist at Anand Rathi Financial Services in Mumbai. "Drying up for FDI should be an area of concern for policy makers."

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Picture: Associated Press