We have a model investment treaty. And are losing billions because of it

Why in the News

India’s bilateral investment treaties (BITs) in force fell from 73 in 2015 to eight by 2021 after the 2016 Model BIT tightened its terms for foreign investors. Eighteen months after the Finance Minister promised Parliament a revision, the model is unchanged and foreign investment stays weak.

What is the 2016 Model BIT, and why is it called restrictive?

1. What it is: A BIT protects one country’s investors in the other and lets them take disputes to international arbitration, a neutral tribunal. The 2016 Model is India’s negotiating template.
2. Five-year local litigation rule: A foreign investor must litigate in Indian courts for five years before arbitration. Indian courts rarely finish a case in that time, so the rule brought only delay.
3. Global norm: Other countries require only a three to six month consultation period, like a cooling-off period before a divorce, to try to settle.
4. Partial easing: Newer treaties with the United Arab Emirates (UAE) and Israel cut the wait to three years; proposals for two give no stated reason.
5. The takeaway: The model made arbitration hard to reach, so India’s treaty network shrank.

What has the 2016 model cost India?

1. Treaty network dismantled: The new model produced only six new treaties. None of the eight still in force covers a significant source of foreign capital.
2. Investment forgone: American investment is large even without a treaty; the cost is the extra investment a treaty would add.
3. Obstruction charge: India is described as the most obstructionist member of the World Trade Organization (WTO), with a matching treaty model. Deregulation and a US trade deal have also stalled.

Why does a record FDI inflow hide a weak picture?

1. Gross versus net: Net foreign direct investment (FDI) is money coming in minus money going out. Gross inflow hit a record, but net FDI was only $7.65 billion last year.
2. Money going out: Foreign investors took home or sold off $53.6 billion, and Indian firms invested $33.3 billion abroad.
3. Reinvested earnings: Profits foreign firms reinvest in India reached $25.6 billion, over three times net FDI. This is not a fresh commitment.
4. Older definition: Excluding reinvested earnings, as India once did, gives a net direct investment outflow of about $18 billion.
5. Portfolio exit: Indian shares trail other emerging markets by about 30 percentage points this year. Foreign investors have pulled out another $10.5 billion.

Is counting long-held portfolio investment as FDI a fix?

1. What separates the two: Direct investment is a stake large enough to give a say in running the business; portfolio investment is too small for that.
2. Reported proposal: Counting portfolio investment held over three years as direct investment, a reported plan, adds no new dollar and changes only the headline.
3. International standard: The Organisation for Economic Co-operation and Development (OECD) Benchmark Definition, the global rule for counting FDI, bars extra conditions. No country uses holding period.

Challenges

1. Arbitration exposure: Easier arbitration exposes India to treaty claims over tax. Eg. The Vodafone and Cairn Energy awards of 2020.
2. Slow commercial courts: Commercial case backlogs make local litigation a denial of remedy for investors.
3. Statistical credibility: Redefining FDI to flatter the headline would weaken trust in balance of payments data.

Way Forward

1. Revised model: The Department of Economic Affairs should publish a revised Model BIT replacing local litigation with a short consultation window.
2. Priority partners: India should first negotiate with its largest capital sources, such as the European Union.
3. Stake-based definition: The Reserve Bank of India (RBI) should keep FDI defined by size of stake, in line with the OECD standard.

Conclusion

India’s problem is not the headline inflow but whether foreign capital makes fresh, long-term commitments. Whether the promised revised model drops mandatory local litigation is the decision to watch.

Key numbers

1. Gross FDI inflow, 2025-26: $94.5 billion, a record.
2. Net FDI, 2024-25: 0.02% of GDP.
3. Net FDI, 2025-26: about 0.18% of GDP, the second-lowest in three decades.
4. Reinvested earnings: excluded from India’s FDI data until 2000-01.
5. BITs in force: 29 (2017) and 16 (2019).
6. Newer BITs: UAE (2024) and Israel (2025).

Government Initiatives on Foreign Direct Investment

1. Liberalised routes: Most sectors allow 100% FDI through the automatic route, without prior approval.
2. Invest India: The national investment facilitation agency since the Foreign Investment Promotion Board (FIPB) was abolished in 2017.
3. EFTA pact: The India-European Free Trade Association (EFTA) Trade and Economic Partnership Agreement commits $100 billion of investment over fifteen years.

Matching Previous Year Question

“[2022] Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India ? (a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment (b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment (c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India Answer: D”