Overview of India's Bilateral Investment Treaty

What is the issue?

The economic condition of the country at present is less encouraging.
Given this, Indian bilateral investment treaties (BITs) need to strike a balance between foreign investor interests and those of the state.

What is the country’s present economic scenario?

The GDP growth rate is at a five-year low.
Domestic consumption is sinking, and the business confidence index has plunged.
India has recorded its highest unemployment rate in the last 45 years.
Foreign direct investment (FDI) equity inflows to India in 2018-19 contracted by 1%.
After an increase of 22% and 35% in 2014-15 and 2015-16, respectively, FDI equity inflows began tapering off since 2016-17.
The growth rate in this indicator has fallen to 9% and then to 3% in 2017-18.
To add to these is the claim made by Arvind Subramanian, India’s former Chief Economic Adviser, that India’s GDP has been overestimated.

What are the shortfalls in India’s approach?

China factor - The global supply chains are shifting base as a result of the ongoing trade war between the U.S. and China.
Many of these supply chains have relocated to Vietnam, Taiwan, Malaysia and Indonesia.
At this time, India has failed to attract firms exiting China.
India is clearly not the natural/first option for these firms for a host of reasons.
These may include poor infrastructure, rigid land and labour laws.
A deepening crisis in the banking sector and a lack of structural economic reforms are other reasons.
BIT - The well-advertised improvement in India’s ease of doing business rankings has not significantly contributed to any rise in FDI.
Notably, this coincided with India’s decision, in 2016, to unilaterally terminate bilateral investment treaties (BITs) with more than 60 countries.
This is around 50% of the total unilateral termination of BITs globally from 2010 to 2018.
Unilateral termination of BITs on such a mass scale projects India as a country that does not respect international law.
India also adopted a new inward-looking Model BIT in 2016 that prioritises state interests over protection to foreign investment.
It came as a reaction to India being sued by several foreign investors before international arbitration tribunals.
The government concluded that these claims were an outcome of India’s badly designed BITs signed in the 1990s and 2000s.

What were the drawbacks in India's BITs?

India’s BITs gave extensive protection to foreign investment with little regard for state’s interests.
This design flaw could have been corrected by India negotiating new balanced treaties.
It could have then replaced the existing ones with the new ones.
But now, the termination of BITs unilaterally has created a vacuum.
Importantly, even the design flaw was not the real reason for the increasing number of BIT claims.
A large number of claims arose as the judiciary could not get its act together; there were inordinate delays in deciding on the enforceability of arbitration awards.
Also, the judiciary ruled in certain cases without examining India’s BIT obligations.
E.g. the en masse cancellation of the second generation telecom licences in 2012
Likewise, the executive (Manmohan Singh government) got the income tax laws retrospectively amended in 2012.
This was to overrule the Supreme Court’s judgment in favour of Vodafone.
It then cancelled Devas Multimedia’s spectrum licences in 2011 without following due process, thus adversely impacting Mauritian and German investors.
All these cases indicate the less rationale state regulation.
They also reveal an absence of full knowledge of India’s obligations under BITs by different state entities.
In the process to correct the pro-investor imbalance in India’s BITs, India went to the other extreme and created a pro-state imbalance.

What lies ahead?

It is still unclear if termination of BITs and adoption of a state-friendly Model BIT adversely impacted FDI inflows.
But certainly, BITs positively impacted foreign investment inflows to India.
So an examination of the link between the two should be a high priority for the Ministry of Finance and Corporate Affairs (nodal body dealing with BITs).

The Ministry of Finance and Corporate Affairs should invest extensively in developing state capacity.
This will ensure that the Indian state starts internalising BITs and is not caught on the wrong foot before an international tribunal.
In this context, 'progressive capitalism' (channelling the power of the market to serve society) proves to be the right option.
Indian BITs should strike a balance between interests of foreign investors and those of the state.
Clarity, continuity and transparency in domestic regulations are essential.
A commitment to a balanced BIT framework would help India project itself as a nation committed to the rule of law and thus boost investor confidence.
Also, since India is fast becoming a leading outward investor, balanced BITs would also help in protecting Indian investment abroad.

Source: The Hindu