The bilateral investment treaty (BIT) between India and the Netherlands will expire this month. Over the next two years, the remaining BITs India has with the other 22 members of the European Union (EU) will follow suit. If not renewed or replaced, the result will increase the cost of investing in India, crimping FDI flows into the country.
New Delhi hopes to replace this cluster of 23 treaties and merge it with a single India-EU free trade agreement. But these negotiations show no signs of closure. EU officials say they do not mind if the present Netherlands treaty is simply extended until the FTA talks are complete. Otherwise, said EU vice-president Jyrki Katainen while in New Delhi a fortnight ago, “the present Netherlands treaty will expire as there is no clause for continuing existing investment protections.”
New Delhi has shown no signs of even recognising the damage this could have on India as an FDI destination. And that indifference existed even before demonetisation was announced.
The lapse of this and other BITs will not necessarily have any visible impact on capital flows into India. Existing investments will retain the past protections. There are countries, notably the United States, which have no BIT with India and continue to put their money in the country.
However, the lack of a BIT means the present FDI flows are certainly less than they could have been. That even existing ones are being allowed to die severely undermines Prime Minister Narendra Modi’s claims he is making India an easier place to do business.
New Delhi may be suffering from a degree of hubris. Even when it is trying to renegotiate all of its existing BITs and allowing existing agreements to expire, India pulled in a record $40 billion plus of FDI. But these figures are fragile. Nearly a quarter of this came from e-commerce, a feeding frenzy that is now over. Subtract this and telecom and India’s FDI numbers have stagnated. Worse, the sort of long-term investment in infrastructure and manufacturing that India craves the most is the most desirous of the protections that BITs offer.
A combination of BIT cloudiness, uncertainty following demonetisation and the new general sales tax (GST), and world interest rates rising could expose India to a sharp drop in FDI in the coming years. In any case, at a time when as much as $50 trillion in investable capital is sloshing around the world, that India got only $40 billion is not a good sign.
India’s BIT problems have only just begun. In 2015, as part of a process begun by the finance ministry during Manmohan Singh’s second term, India served notice to 57 governments that it wanted to terminate and renegotiate its existing BITs. Some of India’s requested changes actually bring India’s BITs in line with global norms like reducing the extent of most-favoured nation status and national treatment clauses.
The most contentious change, however, is New Delhi’s insistence that foreign firms can turn to investor-State dispute settlement mechanisms — in other words, outside arbitration — only after exhausting local judicial remedies.
Finance ministry bureaucrats say this is necessary to stop the hundreds of arbitration cases filed against the government by foreign firms. Foreign firms say the cases are filed because the government is filing taxation and other cases against them (and domestic firms) without much thought as to whether there is a genuine case or not. As a former cabinet secretary admitted, “New Delhi loses over 80% of such cases, a clear sign that something is wrong on our side.” Turning to India’s famously slow and overworked judiciary would only further increase the cost of investing in India.
There is also a geopolitical cost as well. Moving away from international arbitration is the exact opposite of what is happening in most multilateral fora. Most new free trade and investment agreements actually strengthen arbitration clauses. This means India will find it almost impossible to get into existing trade groups like the Asia Pacific Economic Cooperation forum as such clauses are already embedded in their text.
Unsurprisingly, India’s attempts to join APEC are going nowhere. Also, none of India’s major trade and investment partners have accepted its new model BIT and some, like the US, have all but given up taking such an agreement with India.