Background: 

• 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. This necessitates us to look into the issues with this Model BIT proposed by the Government.
• BITs are agreements between two countries for the reciprocal promotion and protection of investments in each other’s territories by individuals and companies. 
• The first BIT signed by India was with the UK on March 14, 1994. 
• There were many instances where India faced adverse awards in investor-state disputes, such as the case involving Cairn Energy Plc, leading to significant financial burdens on the government.
• Given the burden that was being levied on the 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.

Issues with use of Model BIT, 2016:

• Revisiting the Model BIT: The adoption of the 2016 Model BIT was seen as a reactionary move, lacking a nuanced approach to encouraging foreign investment. It resulted in the termination of many existing treaties, complicating renegotiations with other countries.
• Protectionist Measures: The adoption of the 2016 Model BIT is described as a “knee-jerk protectionist measure,” suggesting that it may not have effectively balanced the interests of foreign investors with those of the Indian government.
• Absence of Key Doctrines: The 2016 Model BIT was criticised for omitting well-recognized doctrines of public international law such as “fair and equitable treatment” and “most favoured nation,” potentially undermining investor protections.
• Impact on FDI: The difficulties in renegotiating terms with other countries have led to a decline in Foreign Direct Investment (FDI) inflows into India, impacting the country’s economic growth prospects.
• Contract Enforcement issues: 2016 Model provided that an investor must exhaust local remedies before taking recourse to international arbitration. India’s ranking in ease of contract enforcement is still abysmally low at 163 out of 190(World bank- Ease of Doing Business) and this complicates the situation further.
• Stumbling Blocks in Negotiations: Negotiations for free trade agreements, such as with the UK, have faced obstacles related to dispute settlement mechanisms, reflecting broader challenges in India’s approach to international trade agreements.

Solutions to address these issues:

• Revisiting Model BIT: Conduct a thorough review of the 2016 Model BIT to identify areas for improvement, ensuring that it strikes a balance between investor protection and national interest.
• Flexible Negotiation Approach: Adopt a more flexible approach to negotiation, taking into account the specific circumstances and priorities of each trade partner rather than pursuing a one-size-fits-all strategy.
• Incorporating Key Doctrines: Reincorporate essential doctrines of public international law, such as “fair and equitable treatment” and “most favoured nation,” into the revised BIT model to enhance investor protections and restore confidence.
• Enhanced Dispute Resolution Mechanisms: Strengthen dispute resolution mechanisms to provide timely and effective avenues for resolving investment disputes, possibly by establishing specialised arbitration panels or courts.
• Capacity Building and Expertise Development: Invest in training programs and capacity building initiatives to develop local expertise in investment arbitration, ensuring that India is well-represented in investor-state disputes and can effectively navigate complex legal issues.
• Continuous Learning and Adaptation: Establish mechanisms for continuous learning and adaptation by regularly reviewing and updating BITs to align with evolving global best practices and address emerging challenges.
• Legal and Regulatory Reforms: Undertake broader legal and regulatory reforms to improve the investment climate, including streamlining bureaucratic processes, reducing red tape, and enhancing contract enforcement mechanisms.
• Consultative Approach: Engage in constructive dialogue and consultations with trade partners to identify mutually beneficial solutions and address potential stumbling blocks in FTA negotiations effectively.

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.