While presenting the interim Union budget, Finance Minister Nirmala Sitharaman stated that India will be negotiating Bilateral Investment Treaties (BITs) with its trade partners to boost the inflow of foreign direct investment. This announcement comes at a time when India’s bilateral treaties have dried up, more so, 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. It was in the mid 90s that BITs were initiated by the Indian government. The pretext was to offer favourable conditions and treaty-based protection to the foreign investors and investments.

The first BIT signed by India was with the UK on March 14, 1994. The BIT regime gained attention in the year 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 BIT - White 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 which were contested by India. The most prominent of these claims was 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.

Given the burden, which was being levied on public exchequer, the government was compelled to revisit the 1993 BIT model. This led to the adoption of the 2016 model BIT 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 adoption of the 2016 Model was seen more as a knee-jerk protectionist measure rather than a nuanced and calibrated approach to encouraging foreign investment. The well recognised doctrines of public international law such as “fair and equitable treatment” and “most favoured nation” were conspicuous by their absence. Moreover, the 2016 model BIT (Chapter IV) provided that an investor must exhaust local remedies before taking recourse to international arbitration.

Given the extant situation, it is not surprising that India is finding it difficult to re-negotiate terms with other countries which is creating an impact of FDI. According to government data, FDI equity inflows in India declined 24 per cent to $20.48 billion in April-September 2023. The total FDI - which includes equity inflows, reinvested earnings and other capital - contracted 15.5 per cent to $32.9 billion during the period under review against $38.94 billion in April-June 2022.

It is not without reason that India is making a significant departure from the 2016 model as it endeavours to conclude a free trade agreement (FTA) with the UK - an endeavour 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 and the proposed FTA is likely to dispense with the requirement of exhausting local remedies by providing a mechanism for timely settlement of disputes through international arbitration.

In 2021, the Parliamentary Standing Committee on External Affairs had made several recommendations to revisit the existing BIT regime. This included the timely settlement of disputes through pre-arbitration consultations and negotiations. It has also called for the 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. India’s ranking in ease of contract enforcement is still abysmally low at 163 out of 190 and therefore it is critical that these recommendations are implemented in letter and spirit.

Robust international trade and stable investments will be critical to India’s pursuit to attaining its target 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. 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.

By - Arush Khanna