Today's Editorial

Today's Editorial - 10 February 2024

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

Relevance - GS Paper II & III

News Excerpt:

India's Finance Minister announced that the country will negotiate Bilateral Investment Treaties (BITs) with its trade partners to boost foreign direct investment.

  • This comes as India's bilateral treaties have dried up since adopting the Model BIT in 2016.

Beyond Editorial:

Bilateral Investment Treaty (BIT):

  • It is a legal agreement between two countries that establishes rules and regulations for private investment.
  • It aims to promote and protect investment by providing guarantees and protections, such as fair treatment, expropriation without compensation, and free capital and profit movement.
  • The treaty also includes provisions for dispute settlement between investors and host countries, allowing investors whose rights under the BIT have been infringed to go to international arbitration through the International Centre for the Settlement of Investment Disputes, known as Investor-state dispute settlement (ISDS).

Significance of Bilateral Investment Treaty:

  • BITs provide investors with assurance of protection for their investments in foreign countries, ensuring they are protected against economic, political, or social changes.
  • They offer a legal framework for dispute resolution, protecting against expropriation and discrimination.
  • BITs also benefit economic development by attracting foreign investment, accessing new markets, and modernising the economic infrastructure of involved countries.
  • They also strengthen bilateral relationships by fostering better cooperation and investor affiliation.
  • BITs are crucial for protecting foreign investors' property rights and interests, boosting confidence in investing even in unstable political situations.

Criticism of the Bilateral Investment Treaty:

  • The Bilateral Investment Treaties (BITs) have been criticised for undermining host countries' sovereignty by allowing foreign investors to challenge host country laws and regulations.
    • This can pressure the host country to reduce or repeal laws that conflict with their interests.
  • BITs primarily benefit foreign investors, providing limited benefits to the host country's economy.
    • They offer limited jobs and local taxes.
  • BITs include ISDS clauses, which allow investors to seek compensation for rights violations.
    • This mechanism favours foreign investors with more resources and knowledge, leading to increased litigation and legal costs.
  • BITs lack stringent standards for social and environmental responsibilities, potentially allowing foreign investors to exploit resources and the environment.
  • Additionally, BITs undermine the democratic process in host countries, as governments are reluctant to create new rules and regulations due to fear of foreign investors.

Impact of Termination of Bilateral Investment Treaty:

  • Cancellation of a Business Treaty (BIT) can significantly damage investor confidence, as it may suggest a lack of commitment to providing adequate protection for investments.
    • This loss of confidence can discourage new investments and even lead to the withdrawal of existing ones.
    • This lack of confidence can negatively impact India's ease of doing business.
  • In some cases, termination of a BIT may create barriers to entry for new investors, such as expiring or terminated foreign investor treaties.
  • If a BIT is replaced with a protectionist treaty, the level of protection provided to Indian enterprises abroad may be reduced, negatively impacting Indian businesses looking to invest overseas.
  • Terminating a BIT may also show a host country's reluctance to be held accountable for its regulatory actions under international law, forcing foreign investors to rely solely on domestic laws and courts.

Controversial nature of Bilateral Investment Treaties (BITs):

  • These are agreements between two countries for the reciprocal promotion and protection of investments in each other's territories by individuals and companies.
    • India signed the first BIT with the UK on March 14, 1994.
  • The BIT regime gained attention in 2010 with the settlement of the first-ever investor treaty claim filed against India, and in 2011, when India suffered its first adverse award in a dispute arising out of the Australia-India BITWhite Industries v Republic of India — where the government was ordered to pay $4.1 million by the International Chamber of Commerce.
  • By 2015, there were 17 known BIT claims contested by India, with the most prominent being the one involving Cairn Energy Plc, a British oil and gas company, which secured a $1.2 billion award against the Indian government in an investor-state dispute.

Adoption of 2016 model BIT:

  • The government was compelled to revisit the 1993 BIT model, leading to the adoption of the 2016 BIT model, resulting in the government terminating 68 of the 74 treaties it had executed until 2015 with a request to renegotiate terms based on the revised text.
  • The 2016 model was seen more as a knee-jerk protectionist measure rather than a nuanced and calibrated approach to encouraging foreign investment.
  • The absence of well-recognised doctrines of public international law such as “fair and equitable treatment” and “most favoured nation” and the requirement for investors to exhaust local remedies before taking recourse to international arbitration has made it difficult for India to re-negotiate terms with other countries, creating an impact on FDI.

Impact on FDI:

  • According to government data, FDI equity inflows in India declined 24% to $20.48 billion in April-September 2023.
  • The total FDI — which includes equity inflows, reinvested earnings and other capital — contracted 15.5% to $32.9 billion during the period under review against $38.94 billion in April-June 2022.

Shift in approach:

  • India is making a significant departure from the 2016 model as it endeavours to conclude a free trade agreement (FTA) with the UK, which has now seen over 14 rounds of negotiations.
  • A major stumbling block in these negotiations has been in relation to the settlement of disputes.
    • The proposed FTA is likely to dispense with the requirement of exhausting local remedies by providing a mechanism for the timely settlement of disputes through international arbitration.

Recommendations by Parliamentary Standing Committee:

  • In 2021, the Parliamentary Standing Committee on External Affairs made several recommendations to revisit the existing BIT regime.
  • The timely settlement of disputes through pre-arbitration consultations and negotiations.
  • Development of local expertise in the field of investment arbitration to not only ensure good representation in investor-state disputes but also to ensure timely review of treaties to align with the global best practices.

Way forward:

  • India’s ranking in ease of contract enforcement is still abysmally low at 163 out of 190. Therefore, it is critical that the recommendations of the Parliamentary Standing Committee on External Affairs are implemented in letter and spirit.
  • 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.
  • The government’s renewed push is a step in the right direction.


India's ambition to become a $5 trillion economy would depend heavily on secure investments and robust international trade. In order to draw and maintain long-term foreign investments, BITs will require a progressive strategy, and the government's renewed drive in this direction is a positive beginning. It must, however, abandon its one-size-fits-all strategy and provide the conditions for a swift yet steady increase in cross-border flows.

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