On Bilateral Investment Treaties (BITs) – A turning point for investment treaties

Source: This post on Bilateral Investment Treaties (BITs) has been created based on the article “A turning point for investment treaties” published in “Business Standard” on 2^nd February 2024.

UPSC Syllabus Topic: GS Paper 3 Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

News: The article discusses the importance of foreign investments and the issues with Bilateral Investment Treaties (BITs).

A detailed article on Bilateral Investment Treaties (BITs) can be read here.

Background:

Finance Minister (FM) set out the government’s official stance on “encouraging sustained foreign investment” and for this, “negotiating bilateral investment treaties”.

Bilateral Investment Treaties (BITs) contain safeguards for foreign investors and act as a catalyst in attracting FDI. It was asserted that such treaties would be revised according to the changing bargaining power of India.

Why is foreign investment needed?

1. Growth of the country requires adequate financial resources.
2. Opens the doors to developed countries to participate in India’s growth story.
3. Investments also support sunrise sectors, such as renewable energy, green energy, and AI.

What is the status of FDI?

Since the economic reforms in 1990s, FDI inflows have shown an upward trend, increasing from $129 million in 1991 to $71 billion in 2022-23, which shows a jump of 550 times.

According to the 2022 UNCTAD World Investment Report, India received the 3rd-highest FDI inflows into greenfield (new) projects.

The last five years saw the highest FDI inflow in the year 2021- 22 at $85 billion.

What was the issue with Bilateral Investment Treaties (BITs)?

Unfavourable international arbitration awards against India forced the government to terminate all BITs with other countries, starting from 2011.

India received its first adverse award from an international arbitration tribunal in the case of White Industries under the India–Australia BIT.

This judgment led to various similar claims raised against the government, asserting the investor’s rights under other BITs.

What was the government’s reaction?

The government, in 2016, decided to terminate almost all BITs with trade partners as it saw these awards as a challenge to its sovereign right to legislate taxation-related provisions.

After this development, India initiated the process of renegotiating the BITs in line with its revised BIT model of 2015.

What should be done?

While renegotiating the BITs, the government must create an atmosphere of trust for foreign investors and clearly demarcate the investors’ rights.

If India succeeds in renegotiating robust and effective BITs, it will bring in investments and create a multiplier effect.

Question for practice:

What is the importance of foreign investments? What are the issues with Bilateral Investment Treaties (BITs)? How is the government tackling these issues?