Budget focus on BITs is good for the Indian economy

BITs and ISDS are significant because they constitute an integral part of the international legal infrastructure regulating the global economy.

An important element in the budget speech of Union finance minister (FM) Nirmala Sitharaman was that India is negotiating bilateral investment treaties (BITs) — treaties that reciprocally protect and promote foreign investment under international law — to encourage foreign investment inflows to India. A quintessential component of BITs is the investor-State dispute settlement (ISDS) mechanism that allows foreign investors to sue States for treaty breaches. The FM’s statement assumes importance as it comes at a time when India is negotiating BITs with countries including the United Kingdom and the European Union. The statement also indicates that the government, and rightly so, in its quest to make India an even more attractive destination for foreign investment, is looking at BITs as a critical instrument.

FDI inflows depend on a variety of dynamics

Globally, the empirical evidence on the relationship between BITs and foreign direct investment (FDI) inflows is mixed. However, in the case of India, there is overwhelming evidence demonstrating a positive relationship between BITs and FDI inflows. One can divide this empirical evidence into two parts. The first set of studies shows that India’s signing and ratifying of investment treaties positively influenced FDI flows. Niti Bhasin and Rinku Manocha in their 2016 paper, consider the impact of BITs on FDI inflows in India from 2001 to 2012 and conclude that “BITs have contributed to rising FDI inflows by providing protection and commitment to foreign investors contemplating investment in India”. Likewise, Jaivir Singh et al (2021) show that while individual BITs did not positively influence FDI inflows to India, the cumulative effect of India’s BITs containing ISDS protection significantly boosted FDI inflows.

Instead of investigating the impact of signed BITs on FDI, the second set of studies examines the influence of BIT terminations on FDI inflows to India. It is important to recall that from 2016 onward, India has unilaterally terminated most of its BITs. Simon Hartmann and Rok Spruk, in their 2022 paper, examine 44 unilateral terminations of BITs by India from 2013 to 2019 and their impact on FDI inflows to India. The study finds “a significant reduction in FDI inflows to India in response to BIT terminations by more than 30% compared to countries without terminations”. Their research also discovers that while foreign investors do not necessarily junk India due to BIT terminations, they reroute their investments to India via those countries with whom India continues to have a BIT. This shows the significance that foreign investors attach to BITs while investing in India. Another recent study by Elena Kotyrlo and Hryhorii Kalachyhin also finds a significant negative effect on FDI inflows, ranging from -64.2% to -56.3% per quarter on average, due to India terminating BITs.

It is no one’s case that BITs are the sole factor determining FDI inflows. FDI inflows depend on a variety of dynamics. However, as the parliamentary committee on external affairs in its report on India and BITs said, BITs have the potential to attract FDI by providing foreign investors a higher degree of confidence. Therefore, one cannot negate the significance of BITs and ISDS for India from the point of view of attracting foreign investment.

India has successfully attracted high levels of FDI in the last decade. However, there has been a significant drop in FDI inflows in the first two quarters of the current financial year. While this drop could be due to various reasons like geopolitical challenges, the absence of BITs, as the empirical studies show, has also contributed. Thus, India’s striving to sign BITs is a welcome step.

Moreover, the moot point is not just about the influence that BITs and ISDS have on foreign investment inflows in India. BITs and ISDS are also significant because they constitute an integral part of the international legal infrastructure regulating the global economy. They are essential in the legalisation and judicialisation of international investment relations. While one may debate the contours of this legalisation and judicialisation, one cannot wish away a critical component of regulating the global economy. A rules-based international investment order that BITs can help erect will serve everyone well, including India.

Prabhash Ranjan teaches at the faculty of Legal Studies, South Asian University. His forthcoming book is on India and ISDS. The views expressed are personal