By Matthias Williams
DHINKIA, India (Reuters) - For eight-year-old Rakesh Bardhan, it is protest time.
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Local people are protesting against the planned construction of a $12 billion steel mill by South Korea's POSCO <005490.KS> in the poor eastern state of Orisssa.
"If the company wants to set up its project, let them first kill us," Bardhan shouts over the speeches and slogans blaring out from loudspeakers to rows of protesters behind him. "If our land goes, everything will go. We will not get food, clothes or education."
The POSCO protests are another storm warning in an environment growing increasingly hostile to what many Indians see as a nexus of corrupt politicians and businessmen profiting from kickbacks and forced land acquisition as foreign firms vie for a place in the Indian market.
How the stand-off plays out will be closely watched at home and abroad for signs of how relations are changing between investors, the government, and Indians affected by big projects.
Farmers accuse the Orissa state government of being in cahoots with big business to trick them out of land their families have held for generations. They believe their best shot at a decent life is holding on to their farm incomes, and accuse police of beating up villagers and burning crops to force them to leave.
POSCO is the latest in a number of high-profile projects that have been held up by protests.
Tata Motors <TAMO.NS> said on Wednesday it was challenging in court a decision by the newly elected government in the state of West Bengal to reclaim land India's top vehicle maker owns but abandoned in 2008 due to violent protests.
Many say India urgently needs more POSCOs -- foreign companies pouring cash into one of the world's fastest-growing economies, revamping rusty infrastructure and providing thousands of new manufacturing jobs for a population of 1.2 billion people.
But the project has endured years of delays due to protests at the site as farmers, backed by activist groups and left-wing political parties, refuse to give up their land.
After weeks of agitation in which women and children like Rakesh formed human rings to block police, the state government was forced to suspend its land acquisition on Tuesday.
Only half of the 4,000 acres of land needed for the site have been acquired, though it was due to start pumping out 4 million tons of steel a year by 2011.
The project is a barometer for India's investment climate, as Prime Minister Manmohan Singh's federal government walks a tightrope between cultivating economic development and sustaining the livelihoods of the world's biggest number of poor, many of whom form his party's core vote.
Foreign direct investment (FDI) is key to providing the billions of dollars worth of new highways, ports and industrial plants India needs to maintain economic growth as it grapples with high inflation, rising interest rates and dampened investor confidence.
FDI fell 28.5 percent to $19.4 billion in 2010/11, the last fiscal year that ended in March, as foreign investors shunned India over policy paralysis from a series of corruption cases, regulatory hurdles and lack of reform.
Rival emerging giant China, by contrast, has seen booming FDI, with inflows up 23.4 percent year-on-year in the first five months of 2011 to $48 billion.
POSCO is only one of numerous high profile projects in the energy sector that have been held up by red tape, protests and fights between local and federal authorities. ArcelorMittal <ISPA.AS> and Tata Steel <TISC.BO> too have faced delays.
Investors are also concerned by how long the government is taking to rule on Vedanta Resources' <VED.L> plan to buy Cairn Energy's <CNE.L> Indian assets, a potential $9.6 billion deal the firms agreed last August but which has been held up by a dispute involving the state-run oil exploration firm.
Added to that are worries over the capacity of India's political class to implement reform, with a series of scandals, topped by allegations of kickbacks in the awarding of telecoms licenses that may have cost the state up to $39 billion, sapping confidence in Singh's reformist credentials.
With a quarter of its 42 million people illiterate and 40 percent of infants malnourished, Orissa needs investment.
Its roads are bumpy, and power cuts are common. Though rich in minerals such as bauxite and iron ore, wealth has not trickled down enough to millions of poor and tribal people, fuelling a Maoist insurgency across the state.
Orissa wants to use part of the land acquired from the landholders for POSCO to build a new port, but the protesters do not understand why it cannot be built elsewhere, or even done without.
Hundreds gathered at the protest site on Wednesday, sitting under a sea of black umbrellas to shield them from the baking sun as they listened to speeches. A man with a white beard, carrying a water container and a portable hose on his bare back, walked around spraying the crowd to cool them down.
The state government says its compensation package is one of the best in India: thousands of dollars in cash and a job for at least one member of each displaced family. Pro-POSCO activists say the mill will tackle youth unemployment.
The protesters are not convinced. Sisir Mohapatra, secretary of one of the activist groups, says similar promises were made for other projects that never materialized.
"We don't have any faith in the government," he says, adding that the mill should be moved to less fertile land.
Police have played down the protest's scale. "Only a few people with mala fide (bad faith) intentions are protesting," said deputy superintendent G. Pradhani. He said talk of police issuing threats and burning vines was "one thousand percent false."
The state government, which alleges children were forced to lie on the baking hot ground to act as human shields, says the project will continue, and that construction work has started on already acquired land.
"The government is committed to do this peacefully," said Vikas Saran, POSCO's India vice president, who is based in Delhi. "We are committed to this project. No force, nothing is being used. That is what I have heard. So it is all politically motivated, nothing else."
A new federal land acquisition law is due to be introduced in July's parliament session, but the activists have vowed to dig in until POSCO withdraws.
"We will fight the government until our last breath," said Somanath Samal, a protester who says police drove his family from his betel vines and then set them alight. "We will give up our lives but not our livelihood."
(Additional reporting by Jatindra Dash in Bhubaneswar, India and Annie Banerji in New Delhi; Editing by Paul de Bendern, Daniel Magnowski and Alex Richardson)