India-EU free trade agreement: Why we need to change our approach to negotiations

Source: The post is based on an article “India-EU free trade agreement: Why we need to change our approach to negotiations” published in The Indian Express on 26^th December 2022.

Syllabus: GS 2 – International Relations

Relevance: India – EU Free Tarde Agreement

News: India-European Union (EU) are negotiating an Investment Protection Agreement (IPA) in their third round of Free Trade Agreement.

What is IPA?

It will contain investment protection standards and an independent mechanism to settle disputes between investors and states under international law.

Why is the EU negotiating IPA with India?

Previous Experience: Previous experience of India with investors such as Vodafone, Cairn Energy, etc. has not been good. India has been sued by investors for enforcement of their right under Bilateral Investment Treaties (BITs).

Lack of trust on Indian laws: EU investors can rely on Indian laws. However, there are concerns that Indian laws can be changed anytime. Thus, harming the investors.

Slow Indian judiciary: Indian judiciary is slow in resolving disputes. Therefore, a separate mechanism is needed.

However, there will be concerns with the IPA due to India’s inward-looking approach to investment protection under international law as given in India’s 2016 Model BIT.

What will be the concerns?

First, India wants to make tax-related regulatory measures non-justiciable but the EU has problems accepting this due to the previous tax-related investment disputes of India with Vodafone, Cairn Energy, and Nissan.

Second, the EU wants to create an investment-court like system to resolve treaty disputes between investors and the state. This is in line with the EU’s proposal for creating a multilateral investment court (MIC) for which negotiations are going on at the United Nations Commission on International Trade Law (UNCITRAL).  However, India does not have experience with this kind of court system.

Third, the EU wants to include the Most Favoured Nation (MFN) provision in its treaty to eliminate discrimination against EU investors. However, India is against it due to misuse of MFN clause by indulging in disruptive treaty shopping. Therefore, it would be better for India to negotiate for a qualified MFN provision rather than completely excluding it.

Fourth, the EU contains a fair and equitable treatment (FET) provision which is missing in the Indian 2016 Model BIT. FET provision protects foreign investors and makes states liable if it goes back on the specific assurances made to an investor to bring investments.

How will IPA benefit India?

The overall FDI to India has stagnated for the past decade at around 2 percent of the GDP.  Even though the EU share in foreign investment stock in India has increased, it is below the share of EU investment in China and Brazil.

Further, India’s decision to unilaterally terminate BITs has negatively impacted FDI inflows to India. Therefore, India needs the IPA with the EU to attract FDI for becoming a $10-trillion economy by 2030.

However, India should review the 2016 Model BIT, evolve a clear position on MIC and maintain high transparency in negotiations.