The approval for India`s biggest foreign direct investment after long delays follows a year in which the outspoken Environment Minister Jairam Ramesh has blocked several projects, raising criticism he was jeapordising India`s growth story.
The mill in Orissa has been delayed by criticism it would ruin lives of thousands of poverty-stricken people, who say the plant will disrupt their betel leaf plantations and forest-based livelihoods.
India, one of the world`s fastest growing major economies, needs foreign capital to boost infrastructure and allow its economy to grow at near double digits. But projects have met with protests from local farmers in this densely-populated country.
A government panel had earlier said there were no ecological concerns over the plant and the final decision was with Ramesh. Posco is among several corporations, including Vedanta Resources, which have come under scrutiny from Ramesh, putting his ministry in conflict with others in the government who are pushing for rapid industrialisation.
A series of corruption scandals has shaken the government of Prime Minister Manmohan Singh and a recent minor cabinet reshuffle saw several ministers` portfolios change, but Ramesh stayed on as environment minister, indicating his influence.
The ruling Congress party head, Sonia Gandhi, is keen to win over farmers hit by big projects at well as ensuring industrial jobs are created -- a fine line that may have helped create regulatory uncertainty before state elections this year and a general election in 2014.
While investors tend to shrug off corruption scandals as a risk of emerging markets, regulatory uncertainty threatens to taint India`s attractiveness as a destination for foreign firms eager for a slice of its booming $1.3 trillion economy.
In October, Ramesh threw out plans by London-listed Vedanta to expand its alumina refinery over worries it would destroy a "sacred" hill for tribal peoples, but this month Ramesh said he was willing to conditionally reconsider Vedanta`s expansion plan.
That remark came soon after the ministry said it could consider approving Hindustan Construction Co`s ambitious Lavasa project, a massive new town in a forested area near the city of Pune being built at a cost of $31 billion.
A back-and-forth on whether to ban iron ore exports in Karnataka has also worried investors. ArcelorMittal, the world`s top steel maker, has also had faced years of delays in building several plants in India.
Approval for the Posco mill would see the Orissa government immediately starting to acquire land for the world`s third-largest steelmaker`s project.
Posco still faces a series of hurdles that could delay the project, such as a court case filed by a local firm against the Orissa government, contesting its decision to grant a mining concession to South Koreans.
India, which has not yet been able to exploit its potential as a natural resources-rich country, is keen on boosting its trade and political ties with South Korea while Seoul looks to tap into the $150 billion Indian nuclear power market.
Direct investors -- companies building factories or power plants or buying local firms -- often have less flexibility and more to lose than fund investors and are especially sensitive to regulatory uncertainty.
Leading global companies such as Wal-Mart Stores, Vodafone and Posco have been frustrated for years in their efforts to negotiate regulations in a promising but perilous market, and foreign direct investment has suffered.
Vodafone, India`s biggest foreign direct investor to date, is fighting a Rs 12,000 crore ($2.6 billion) tax bill in a court battle and has complained about a telecoms regulatory structure that it said allowed too many players into the market.