FDI in Indian economy

[op-ed snap] Building confidence, BIT by BIT

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : New model of bilateral investment treaties should balance state and investor's rights

CONTEXT

Indian bilateral investment treaties need to strike a balance between foreign investor interests and those of the state .

Current  Economic scenario

  •  The GDP growth rate is at a five-year low, domestic consumption is sinking, the business confidence index has plunged, and India has recorded its highest unemployment rate in the last 45 years.
  • To add to this list of woes is a claim made by Arvind Subramanian, India’s former Chief Economic Adviser, that India’s GDP has been overestimated.
  • Foreign direct investment (FDI) equity inflows to India in 2018-19 contracted by 1%, according to the government’s own data.

Lost opportunity

1.Shifting base of global supply chains –

  • This contraction in FDI inflows comes at a time when global supply chains are shifting base as a result of the ongoing trade war between the U.S. and China. India has failed to attract firms exiting China.
  • Many of these supply chains have relocated to Vietnam, Taiwan, Malaysia and Indonesia.
  • India is clearly not the natural/first option for these firms for a host of reasons, such as poor infrastructure, rigid land and labour laws, a deepening crisis in the banking sector and a lack of structural economic reforms.

2. Termination of bilateral investment treaties  –

  • The decline in the FDI growth rate, despite the well-advertised improvement in India’s ease of doing business rankings, interestingly, has coincided with India’s decision, in 2016, to unilaterally terminate bilateral investment treaties (BITs) with more than 60 countries; this is around 50% of the total unilateral termination of BITs globally from 2010 to 2018.
  • Unilateral termination of BITs on such a mass scale projects India as a country that does not respect international law.
  • India also adopted a new inward-looking Model BIT in 2016 that prioritises state interests over protection to foreign investment.

Impacts of BITs

Studies have shown that BITs positively impacted foreign investment inflows to India.

Bad regulation in previous BIT

  • True, India’s BITs gave extensive protection to foreign investment with scant regard for the state’s interests — a characteristically neoliberal model.
  • This design flaw could have been corrected by India negotiating new balanced treaties and then replacing the existing ones with the new ones instead of terminating them unilaterally, which has created a vacuum.

Reasons for increased BIT claims

  • Importantly, the design flaw was not the real reason for the increasing number of BIT claims.
  • Judiciary’s interference – A large number arose either because the judiciary could not get its act together (an example being inordinate delays in deciding on the enforceability of arbitration awards) or because it ruled in certain cases without examining India’s BIT obligations such as en masse cancellation of the second generation telecom licences in 2012.
  • Executive interference – Likewise, the executive — the Manmohan Singh government — got the income tax laws retrospectively amended in 2012 to overrule the Supreme Court’s judgment in favour of Vodafone and cancelled Devas Multimedia’s spectrum licences in 2011 without following due process, thus adversely impacting Mauritian and German investors.
  • In correcting the pro-investor imbalance in India’s BITs, India went to the other extreme and created a pro-state imbalance as evident in the Model BIT.

Way Forward

  • Indian BITs should strike a balance between the interests of foreign investors and those of the state.
  • A certain degree of arrogance and misplaced self-belief that foreign investors would flock to India despite shocks and surprises in the regulatory environment should be put to rest.
  • Clarity, continuity and transparency in domestic regulations and a commitment to a balanced BIT framework would help India project itself as a nation committed to the rule of law, both domestically and internationally, and thus shore up investor confidence.
  • As the 2019 World Investment Report confirms, since India is fast becoming a leading outward investor, balanced BITs would also help in protecting Indian investment abroad.
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