India panel clears Posco plant of ecology threat

NEW DELHI (Reuters) - An Indian government panel has said there are no ecological concerns over a $12 billion steel mill planned by South Korea's Posco, a landmark project seen as a test of the country's business climate.

The panel said its recommendation was for initial capacity of 4 million metric tons per annum (mtpa), adding other studies were needed before approving expansion to 12 mtpa.

The report needs to be approved by Environment Minister Jairam Ramesh, who has promised a decision by end-January.

Posco, the world's third-ranked steelmaker, in 2005 signed the agreement for the Orissa mill -- billed as India's biggest foreign direct investment project. It was scheduled to begin production by end-2011.

The environment ministry in August asked Posco to halt work at the project, including land acquisition, while a panel looked into whether forest laws were being violated. Last month, the forest panel recommended the temporary withdrawal of permits.

In its report, accessed by Reuters, the government panel said: "(The environmental assessment) justifies the recommendation in 2007 for according approval to the project."

It recommended 5 percent of the project cost be spent on local communities and that Posco set up drinking water facilities for nearby villages.

Posco faces a separate hurdle in the form of a court case filed by a local firm against the Orissa state government, contesting its decision to grant a mining concession to the South Koreans. The local company had also bid for the project.

That decision lies with the Supreme Court.

Ramesh has hauled up or blocked several high-profile projects and his ministry has become more proactive in checking whether green guidelines are being followed.

(Reporting by Krittivas Mukherjee and C.J. Kuncheria; editing by David Hulmes)