FDI in Indian economy

[op-ed snap] Why High-Profile Foreign Investors and Multinational Companies Sue India


Mains Paper 2: IR | Bilateral, regional & global groupings & agreements involving India &/or affecting India’s interests

From the UPSC perspective, the following things are important:

Prelims level: Bilateral investment treaties

Mains level: India’s new model BIT and inherent flaws in it


Legal cases arising out of BITs

  1. Ever since foreign investors started bringing cases against India under different bilateral investment treaties (BITs), the focus on the so-far neglected area of international investment law has increased
  2. BIT disputes against India, involving billions of dollars, revolve around measures triggered “by public health emergencies, economic crises or other matters directly involving public welfare — which would, therefore, be permissible under the Constitution, but which a corporation believes have negatively impacted its financial interests”

How do BITs work?

  1. Signing a BIT, like entering into any treaty, is in itself a sovereign function
  2. By signing, states voluntarily accept certain restrictions on the exercise of their sovereign public power
  3. If a state adopts a public measure which is not in accordance with these accepted restrictions, the multinational corporations, subject to jurisdictional requirements, are very much within their right to challenge such measures as breaches of the BIT
  4. Whether such measures are permissible under the state’s constitution or not is immaterial as regards that state’s international law obligations are concerned

Are MNCs wrong in bringing these claims?

  1. Contrary to popular perception, none of these claims have been brought because India exercised her sovereign public power to attain an important public welfare objective that allegedly hurt the financial interests of a foreign investor
  2. If the judiciary cannot get its act together; if the executive, Central and state, behaves in a manner that disregards due process, or goes back on the assurances and promises that lured foreign investors to invest; if the legislature amends laws retrospectively ignoring the decision of the apex court of the country, then what is a foreign investor expected to do?
  3. To bemoan these claims suggests not accepting to be governed by rule of law (but by the rule of whims and fancies) and telling foreign investors to accept whatever treatment is dished out to them in the name of third world sovereignty

India’s new model BIT

  1. The new model BIT is a major departure from earlier models (1993 and 2003) as it provides protection to foreign investors in limited circumstances
  2. Under the new Model, controversial clauses such as most favoured nation have been completely dropped while the scope of national treatment and fair and equitable treatment clauses has been considerably narrowed down
  3. Although investor-state dispute settlement (ISDS) mechanism – which allows investors to initiate international arbitration against states and thereby bypass domestic courts entirely – has been retained but access to ISDS mechanism has been made conditional on the exhaustion of local remedies
  4. In simple words, foreign investors will have to first approach the relevant domestic courts for the resolution of an investment dispute before commencing an arbitration case
  5. Besides, the new model provides an exhaustive list of economic, environmental and social measures, which shall be exempted under the treaty
  6. This includes taxation matters, intellectual property rights and measures to protect macroeconomic stability

Redrawing BIT

The redrawing of BITs should be based on two factors

  • First, there has to be a recognition that BITs are an integral element of the legal infrastructure necessary for the functioning of the global economy based on rules, not power politics
  1. Looked this way, BITs are an important component of international rule of law holding states accountable internationally for the exercise of their public power vis-à-vis foreign investors
  • Second, the functioning of the international investment relations between countries, under a rule of law framework, has to be informed by the normativity of ‘embedded liberalism’
  1. ‘Embedded liberalism’, different from the laissez faire liberalism of the 19th century, focuses on shaping an economic order that represents a compromise between free markets and States intervening in favour of their regulatory goals

Flaws in model BIT

  1. It significantly dilutes international scrutiny of India’s exercise of public power
  2. It undermines international rule of law and is divorced from the conception of ‘embedded liberalism’
  3. It takes India back to the pre-economic liberalisation era by giving a new template of the old-fashioned economic nationalism prioritising Indian government’s interests over foreign investors

Way forward

  1. The BIT cases against India should have triggered an introspection of the overall governance and decision-making processes
  2. Instead, India has used these cases to play the victim
  3. This victimhood narrative has ignored the fact that these cases deserved to be brought due to India’s poor governance and abuse of public power

Original article: Why High-Profile Foreign Investors and Multinational Companies Sue India

With inputs from the article: Remodeling India’s Investment Treaty Regime

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