India reviewing bilateral investment treaty overhaul to boost foreign investment: Official

The proposed review of the Bilateral Investment Treaty (BIT) framework is a strategic move to address India's declining net Foreign Direct Investment (FDI) inflows. The article notes India received $7.7 billion in the recent financial year, significantly trailing Vietnam ($20.2 billion) and Indonesia ($24.2 billion). BITs are crucial for establishing the terms and conditions for private investment by nationals and companies of one state in another state. They are designed to protect foreign investments and provide a mechanism for dispute resolution. The current 2016 model, implemented after India faced several arbitration losses (like the White Industries case), adopted a more protectionist stance. It shifted from the broad 'fair and equitable treatment' standard to a more restrictive approach. The overhaul aims to find a balance between protecting sovereign regulatory space and offering sufficient comfort to foreign capital, which is essential for funding India's infrastructure and manufacturing ambitions under initiatives like Make in India.

The central issue in the current BIT framework is the dispute resolution mechanism, specifically the requirement to exhaust local remedies. The 2016 Model BIT mandates that foreign investors must exhaust domestic legal remedies for a period of five years before they can seek international arbitration. This Exhaustion of Local Remedies (ELR) clause has been a major sticking point in negotiations with developed nations like the UK. From a governance perspective, this clause reflects India's intent to uphold the primacy of its domestic judicial system and prevent parallel proceedings. However, given the well-documented delays in the Indian judicial system, foreign investors view this requirement as a significant deterrent. The review suggests the government is reassessing this 'red flag', potentially moving towards a system that allows faster access to Investor-State Dispute Settlement (ISDS) mechanisms. This highlights the ongoing tension between preserving national sovereignty in legal matters and the practical necessity of providing swift arbitration to attract global capital.

BITs are a fundamental component of India's economic diplomacy and its broader bilateral relations. The stalled progress in negotiations with the UK underscores how domestic policy frameworks can impact international agreements. India's decision to terminate older BITs and negotiate fresh ones based on the 2016 model has led to a transition period where many investments lack treaty protection. While India has successfully concluded recent treaties with Israel and the United Arab Emirates (under the CEPA), negotiating with developed nations requires navigating complex provisions regarding expropriation, taxation (which the 2016 model largely excludes from BIT purview), and ISDS. The overhaul signifies a pragmatic shift in India's negotiating stance, moving away from a rigid defensive posture towards a more accommodating approach to secure Free Trade Agreements (FTAs) and investment pacts, which are vital for integrating India into Global Value Chains (GVCs).