NEW DELHI—Jairam Ramesh, India's environment minister, will make a decision in the next week that could define the future of the country: whether to approve a $12 billion South Korean-owned steel plant, the largest potential foreign direct investment ever on the subcontinent.

The plant, proposed by South Korea's Posco, has been in the works for years. It already has been cleared by the environment ministry, which Mr. Ramesh runs, and endorsed by the prime minister's office.

But...