Focusing the budget on BITs is good for the Indian economy

A key element in Union Finance Minister (FM) Nirmala Sitharaman's Budget speech was that India negotiates bilateral investment treaties (BITs) – treaties that mutually protect and promote foreign investment under international law – to encourage the inflow of foreign investment into India. A key component of BITs is the Investor-State Dispute Settlement Mechanism (ISDS), which allows foreign investors to sue states for treaty violations. The Foreign Secretary's statement assumes significance as it comes at a time when India is negotiating BITs with countries like the United Kingdom and the European Union. The statement also notes that the government rightly views BITs as a crucial tool in its bid to make India an even more attractive destination for foreign investment.

Foreign direct investment inflows depend on a variety of dynamics

Globally, empirical evidence on the relationship between BITs and foreign direct investment (FDI) inflows is mixed. However, in the case of India, there is overwhelming evidence of a positive relationship between BITs and FDI inflows. This empirical evidence can be divided into two parts. The first set of studies shows that India's signing and ratification of investment treaties positively influenced FDI flows. Niti Bhasin and Rinku Manocha, in their 2016 paper, look at the impact of BITs on FDI inflows in India from 2001 to 2012 and conclude that “BITs contributed to increasing FDI inflows by attracting foreign investors who Consider investing in India, have provided protection and commitment”. Likewise, Jaivir Singh et al. (2021) found that although individual BITs did not positively influence FDI inflows to India, the cumulative effect of Indian BITs with ISDS protection significantly increased FDI inflows.

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Instead of examining the impact of signed BITs on FDI, the second set of studies examines the impact of BIT terminations on FDI inflows to India. It is important to remember that India has unilaterally terminated most of its BITs since 2016. Simon Hartmann and Rok Spruk, in their 2022 paper, examine 44 unilateral terminations of BITs by India from 2013 to 2019 and their impact on FDI inflows to India. The study finds “a significant decline in FDI inflows to India in response to BIT terminations of more than 30% compared to countries without terminations.” Their research also shows that while foreign investors are not necessarily abandoning India due to the termination of the BIT, they are redirecting their investments to India through the countries with which India continues to have a BIT. This shows the importance that foreign investors attach to BITs when investing in India. Another recent study by Elena Kotyrlo and Hryhorii Kalachyhin also finds a significant negative impact on FDI inflows, averaging between -64.2% and -56.3% per quarter, as India terminates the BITs.

It is undeniable that BITs are the only factor determining FDI inflows. Foreign direct investment inflows depend on a variety of dynamics. However, as the Parliamentary Foreign Affairs Committee noted in its report on India and BITs, BITs have the potential to attract foreign direct investment by providing a higher level of confidence to foreign investors. Therefore, one cannot deny the importance of BITs and ISDS for India in terms of attracting foreign investments.

India has successfully attracted foreign direct investment on a large scale over the last decade. However, there was a significant decline in FDI inflows in the first two quarters of the current financial year. While this decline could be due to various reasons such as geopolitical challenges, as the empirical studies show, the absence of BITs has also contributed. Therefore, India's move to sign BITs is a welcome step.

Moreover, it is not just about the impact that BITs and ISDS have on foreign investment inflows into India. BITs and ISDS are also important because they represent an integral part of the international legal infrastructure regulating the global economy. They are essential for the legalization and legalization of international investment relationships. While the contours of this legalization and legalization can be debated, one cannot miss a crucial component of the regulation of the global economy. A rules-based international investment order that BITs can help build will be good for everyone, including India.

Prabhash Ranjan teaches at the Faculty of Law, South Asian University. His forthcoming book focuses on India and ISDS. The views expressed are personal