Why India needs a forward-looking approach to Bilateral Investment Treaties

Last Updated12/02/2024

The Finance Minister recently announced that India aims to negotiate Bilateral Investment Treaties (BITs) with its trade partners to enhance foreign direct investment (FDI).
This move comes amidst a decline in bilateral treaties since the adoption of the Model BIT in 2016.

BITs are agreements between two countries for the reciprocal promotion and protection of investments in each other’s territories by individuals and companies.
India initiated BITs in the mid-1990s, aiming to provide favourable conditions and treaty-based protection for foreign investors.
The first BIT signed by India was with the UK on March 14, 1994.

India adopted the 2016 Model BIT, prompted by the burden on the public exchequer due to previous treaties.
This resulted in the termination of 68 of the 74 treaties India had executed until 2015.
However, this move was criticized for its protectionist stance and lack of key doctrines of international law, impacting India's ability to renegotiate terms with other countries.
- The 2016 model BIT provided that an investor must exhaust local remedies before taking recourse to international arbitration.
- The absence of well-established principles in public international law, such as "fair and equitable treatment" and "most favoured nation," was notable.
India's struggles in renegotiating BIT terms have contributed to a decline in FDI.
According to government data, FDI equity inflows in India declined 24% to $20.48 billion in April-September 2023.

India's decision to deviate from the 2016 model in negotiations with the UK for a free trade agreement (FTA) reflects a willingness to explore alternative approaches.
- These include allowing international arbitration for dispute settlement without exhausting local remedies.
In 2021, the Parliamentary Standing Committee on External Affairs has proposed revisiting the BIT regime.
- This included the timely settlement of disputes through pre-arbitration consultations and negotiations and the development of local expertise in investment arbitration.
India’s ranking in ease of contract enforcement is still abysmally low at 163 out of 190 countries.
Therefore, it is critical that these recommendations are implemented in letter and spirit.

India's aspiration for a $5-trillion economy relies heavily on robust international trade and stable investments.
A proactive approach to BITs is crucial for attracting and sustaining long-term foreign investments.
While the government's renewed push is commendable, it should adopt a more flexible approach tailored to diverse needs to facilitate sustainable growth in cross-border investment flows.