Rio Tinto (ASX: RIO) will make the largest investment by an Australian company in India through a $2 billion investment at the Orissa iron ore project in India. The project will supply iron ore to India and overseas with the steel making material.

Sam Walsh, Rio head of Iron Ore Division, said the investment is expected to boost production to 15 million tonnes yearly by providing technology and environment safety systems. He added Rio will hire locals in the project.

Mr Walsh made the announcement on Monday at the Australia-India Chief Executive Officers' Forum in New Delhi, India.

The Rio investment is expected to add to the total direct foreign investment (FDI) from Australia from April 2000 to December 2011 which hit $486.5 million. It is only 0.3 per cent of Australia's total FDI flows.

Mr Walsh said he expects Rio and its partners to overcome the many difficulties encountered by mining firms in securing approval for projects in India which is one of the reasons behind the wary outlook of foreign companies interested in investing in India. In 2005, South Korean firm POSCO announced a plan to construct a plant in Orissa, but the facility is suffering from widespread opposition by local residents who favour saving farmlands and forests. A similar problem was encountered by Indian steel giant, ArcelorMittal, which could not purchase a land for a planned facility.

"I am a very patient man.... We will go through all the (legal) processes. We are already working with the local community," Mr Walsh said.

To soften possible opposition from Orissa residents, he said Rio will bring its environment and safety systems and offer employment to locals.

Mr Walsh said despite the iron ore oversupply in the global market due to the slowdown of the Indian and Chinese economies, Rio's low-cost operations and its distance from China and the Asian market will provide it significant advantage.

China announced on Monday that it reduced its 2012 growth target to 7.5 per cent from 9.2 per cent in 2011 and 10.4 per cent in 2010.

In November, India's Steel Ministry estimated local demand would grow at 9 per cent yearly over the next five years. Among the likely buyers of the project's iron ore are Tata Steel, the Steel Authority of India and JSW Steel which purchase up to 80 per cent of their needs from Indian and overseas suppliers.

Federation of Indian Minerals Industries (FIMI) Secretary General R.K. Sharma forecast in January that the country's iron ore output may decline by up to 50 per cent in 2012 from 226 million tonnes mined in the past 12 months due to the hike in levies imposed by the Indian government. The Indian Bureau of Mines and FIMI estimated total recoverable iron ore reserves at 7.06 billion tonnes.

The planned Rio investment is the fruit of trade talks between India and Australia started in 2011. The free trade deal discussed is expected to widen the base of merchandise trade and remove barriers to services trade. In the past five years, bilateral trade between New Delhi and Canberra increased 20 per cent yearly and reached $23 billion.

By 2017, the two trading partners plan to double the value of goods and services exchange to $40 billion.

With the Rio investment, the company increased its stake to 51 per cent of the iron ore project. Its partner, Odisha Mining Corporation, holds 44 per cent and the remaining 5 per cent is owned by NDMC, the largest iron ore producer in India.

An Indian steel and mining expert said foreign firms are now looking ahead for opportunities to open in the country's mining sector due to the new mining policy in the blueprint stage.

RELATED STORIES