Why India Needs a Forward-Looking Approach to Bilateral Investment Treaties

Why in News?

• India's economic landscape is witnessing a pivotal moment as Finance Minister announced a strategic move to negotiate Bilateral Investment Treaties (BITs) during the presentation of the interim Union budget.
• This decision comes at a crucial juncture when the country grapples with declining foreign direct investment (FDI) and the aftermath of adopting the 2016 Model BIT.
• These developments make it important to delve into the history of India's BITs, the implications of the 2016 model, and the recent policy shift, evaluating its potential impact on FDI.

Evolution of Bilateral Investment Treaties (BITs) in India

• The Genesis of BITs in India (1990s)
  • The mid-'90s marked a pivotal moment in India's economic policy as the country-initiated BITs to create a favourable environment for FDI.
  • The primary objective was to signal a commitment to protect the investments of individuals and companies from partnering nations.
  • The signing of the first BIT between India and the UK in 1994 laid the foundation for a series of agreements that would become instrumental in India's global economic integration.
• The Proliferation of BITs as Economic Diplomacy (Late 90s to 2000s)
  • BITs in India evolved into strategic instruments that reciprocally promoted and safeguarded investments in each other's territories.
  • As India sought to position itself as a global investment destination, these treaties became crucial in signalling its commitment to protecting the rights and interests of foreign investors.
  • This period witnessed a surge in the number of BITs, reflecting India's recognition of the role foreign capital played in stimulating domestic industries and infrastructure development.
• Challenges and Disputes (2010s)
  • The significance of BITs came to the forefront in the year 2010with the settlement of the first-ever investor treaty claim in India.
  • Subsequent events, including the adverse award in the Australia-India BIT dispute (White Industries v Republic of India) in 2011, highlighted the complexities and challenges of managing disputes arising from these agreements.
  • By 2015, India found itself entangled in 17 known BIT claims, with the Cairn Energy Plc case standing out prominently.
  • These challenges prompted a critical revaluation of India's approach, leading to the adoption of the 2016 model BIT.
• Adoption of the 2016 Model BIT and Policy Shift
  • The adoption of the 2016 model BIT marked a significant shift in India's approach.
  • It was seen as a protective measure, resulting in the termination of a substantial number of existing treaties.
  • The 2016 model BIT, however, was criticised for its absence of key international law doctrines, such as ‘fair and equitable treatment’ and ‘most favoured nation.’
  • Additionally, it introduced a requirement for investors to exhaust local remedies before resorting to international arbitration, slowing down the dispute resolution process.

Problems Associated with 2016 Model of BIT and Implications

• Protective Nature
  • The introduction of the 2016 Model BIT marked a paradigm shift in India's approach to bilateral investment treaties.
  • Positioned as a protective measure, this model was a response to the challenges and adverse outcomes faced in earlier disputes.
  • It resulted in the termination of a significant number of existing treaties, signalling an intent to recalibrate the terms of engagement with foreign investors.
  • However, the protective nature of the model raised concerns about its impact on the overall attractiveness of India as an investment destination.
• Absence of Key International Law Doctrines
  • A notable criticism of the 2016 model BIT was its departure from established international law doctrines.
  • Key principles such as "fair and equitable treatment" and "most favoured nation" were conspicuously absent.
  • The omission of these principles raised questions about the level of protection and fairness afforded to foreign investors.
  • Investors and legal experts expressed apprehensions about the potential ambiguity in interpreting and enforcing investment agreements, further complicating the landscape for international investors.
• Requirement for Exhausting Local Remedies
  • One of the significant changes introduced by the 2016 model BIT was the requirement for investors to exhaust local remedies before resorting to international arbitration.
  • While this provision aimed to encourage the utilisation of domestic dispute resolution mechanisms, it also posed challenges in terms of delays and uncertainties.
  • Investors, faced with the need to navigate local legal systems, found the process time-consuming and, at times, ineffective.
  • This requirement added an additional layer of complexity to dispute resolution, potentially discouraging foreign investors.
• Adverse Impact on FDI and Renegotiation Challenges
  • The consequences of the 2016 model BIT were reflected in the decline of FDI in India.
  • According to government data, FDI equity inflows decreased by 24% to $20.48 billion in April-September 2023.
  • The termination of existing treaties and the challenges posed by the new model made it difficult for India to renegotiate terms with other countries, impacting its ability to attract foreign investments.
  • The Cairn Energy Plc case, resulting in a substantial award against the Indian government, became emblematic of the challenges faced under the 2016 model BIT.

Recommendations, Policy Reforms Outlined by the Government Post Challenges Faced by 2016 BIT Model

• Recognition of Limitations and Policy Shift
  • Acknowledging the limitations and challenges posed by the 2016 Model BIT, the Indian government has signalled a policy shift towards more flexible and pragmatic approaches.
  • The announcement during the presentation of the interim Union budget, emphasising the negotiation of Bilateral Investment Treaties with trade partners, indicates a departure from the rigid one-size-fits-all approach.
  • This recognition underscores the need for a nuanced strategy that considers the evolving dynamics of international investments and global economic trends.
• Parliamentary Standing Committee Recommendations
  • In 2021, the Parliamentary Standing Committee on External Affairs made several critical recommendations to revisit the existing BIT regime.
  • These recommendations aimed at addressing the challenges posed by the 2016 model BIT and fostering a more investor-friendly environment.
  • Among these recommendations, there was a strong emphasis on the timely settlement of disputes through pre-arbitration consultations and negotiations.
  • This proactive approach seeks to streamline the dispute resolution process and minimise the burden on both foreign investors and the Indian legal system.
• Recommendations to Address India's Ranking in Ease of Contract Enforcement
  • India's ranking in ease of contract enforcement, currently standing at 163 out of 190, remains abysmally low.
  • Recognising the correlation between an efficient legal framework and foreign investment attractiveness, the recommendations from the Parliamentary Standing Committee serve as a call to action.
  • Timely review of treaties and aligning them with global best practices becomes imperative to enhance the ease of doing business, reinforcing India's commitment to creating a favourable investment climate.
• Free Trade Agreement (FTA) with the UK
  • As part of the ongoing policy reforms, India is endeavouring to conclude a free trade agreement (FTA) with the UK.
  • This strategic move has seen over 14 rounds of negotiations. A major stumbling block in these negotiations has been related to the settlement of disputes.
  • The proposed FTA is likely to dispense with the requirement of exhausting local remedies, providing a mechanism for timely settlement of disputes through international arbitration.
  • This pragmatic approach recognises the importance of swift dispute resolution in fostering international trade relationships.

Conclusion

• Robust international trade and stable investments will be critical to India’s pursuit of a $5-trillion economy.
• A progressive approach to BITs will be an important component to attract and sustain long-term foreign investments and the government’s renewed push is a step in the right direction.
• However, it must do away with its one-size-fits-all approach, while paving the way for rapid yet sustainable growth in cross-border flows.

Q1) What is a Free Trade Agreement (FTA)?

A Free Trade Agreement is a pact between two or more countries to eliminate or significantly reduce barriers to trade, such as tariffs and quotas. The goal is to promote the free flow of goods and services between the participating nations, fostering economic cooperation and growth.

Q2) How do Free Trade Agreements benefit participating countries?

FTAs offer various benefits, including increased market access, lower costs for imported goods, job creation, and enhanced economic efficiency. By reducing trade barriers, countries can capitalise on comparative advantages, leading to mutual gains in trade and contributing to overall economic development.

Source: The Indian Express