Nandy The Covid-19 pandemic, which led to a protracted lockdown policy, has raised the spectre of an impending economic recession in India. Prior to the pandemic, key macroeconomic indicators were estimated to fall to multi-year and decadal lows anyway. The suspension of economic activities due to the unprecedented 82-day lockdown has accentuated the economic deceleration.

Members of the Monetary Policy Committee (MPC) of the RBI have expressed concerns that real as well as the nominal GDP growth may slip into the negative territory for the first time in 40 years, driven by worsening private consumption and investment demand. The severe impact on global incomes imply that external demand for India’s products shall also remain muted in the times to come.

The fiscal and monetary measures have primarily aimed to ease the terms of credit for consumers and investors. The government’s response has arguably been constrained by the lack of fiscal headroom to augment real budgetary support to households. As household consumption expenditure drives almost three-fifths of the aggregate demand, and is now a necessary prerequisite to kickstart investment demand, the extent to which these measures might help revive domestic demand is uncertain.

Call for self-reliance

In the above context, notwithstanding the potentially ambiguous message conveyed to the global community by the Prime Minister’s clarion call for self-reliance (Vocal for Local), India can ill-afford to lose the emergent opportunity to tap into foreign direct investments (FDIs) looking to relocate away from China. The objective of making domestic firms competitive and upwardly mobile in the value chain, as envisaged in the Atmanirbhar Bharat package, will need to be complemented by a more welcoming stance on FDIs.

Though India ranked among the top 10 global destination for FDI in 2019, and has leapfrogged 79 places from 142 in 2014 to 63 in 2020 in World Bank’s ‘Ease of Doing Business’ rankings, the inflows have remained at sub-2 per cent of GDP, despite the enormous resources expended on attracting FDI. FDI-equity inflows to India during 2019-20 were $49.9 billion, substantially lower than the annual flow of remittances of $83 billion in the same period.

One way to understand such sub-optimal flows is to look at the lacunae afflicting India’s Bilateral Investment Treaties (BITs). BITs typically serve to protect investments made by investors on a reciprocal basis, specifying conditions on regulatory oversight of the host state and limiting interference with the rights of foreign investors. Since signing the first BIT in 1994 with the UK, India has inked 86 such bilateral treaties, the latest being with Brazil in 2020.

BITs have been one the major drivers of FDI inflows into India. A 2016 study by Niti Bhasin and Rinku Manocha suggests that by providing substantive protection and commitment to foreign investors, BITs indeed contributed to rising FDIs in the 2001-2012 period.

However, the penalty awarded by an Investor-State Dispute Settlement (ISDS) tribunal in the White Industries case in 2011, and subsequent ISDS notices served against India in a wide variety of cases involving regulatory measures (for example, imposition of retrospective taxes, cancellation and revocation of spectrum and telecom licences) led to a review of the BITs.

New treaty

India framed a Model BIT in 2016, moving away from an overly investor-friendly approach to a somewhat protectionist approach concerning foreign investments. Since its adoption, India has unilaterally terminated 66-odd BITs between 2016 to 2019, sending negative signals to the global investor community. This is evident as no country has shown an inclination to re-negotiate based on the Model BIT. Since 2016, India has signed just three treaties, none of which is in force yet.

So, what ails the Model BIT? First, it heavily narrows down the definition of “investment” needed to qualify for BIT protection — from an asset-based to an enterprise-based one. The definition contains vague criteria such as the requirement of enterprises to satisfy ‘certain duration’ of existence without specifying how much, or, investments having ‘significance for development of the party in whose territory the investment is made’ without specifying what amounts to ‘significant’ contribution. These render invoking BIT protection an arduous task for foreign investors, as well as leave room for uneven interpretation by judicial bodies.

Second, in what appears to be based on the White Industries experience, it contains a clause mandating exhaustion of domestic remedy prior to initiating international arbitration proceedings. According to the ‘Ease of Doing Business 2020’ report, India currently ranks 163 out of 190 countries in ease of enforcing contracts, and it takes 1,445 days and 31 per cent of the claim value for dispute resolution. This surely does little to evince confidence in foreign investors.

Third, the Model BIT has done away with the ‘Fair and Equitable Treatment’ clause and has included a detailed ‘Treatment of Investments’ clause with a broadly-worded undertaking that neither party shall subject investments to measures that are manifestly abusive, against norms of customary international law and to un-remedied and egregious violations of due process. While this appears to have been designed keeping investors’ fears in mind, in the backdrop of the exhaustion of domestic remedy clause, having not specified the yardstick for assessment of violation of “due process”, or what amounts to “manifest arbitrariness” as well as the marked absence of a clause on “legitimate expectations”, the Model BIT simplistically assumes that a foreign investor shall have complete confidence on domestic judicial interpretations and mechanisms.

Need to attract FDI

The looming economic recession triggered by the Covid pandemic has made attracting FDI an urgent imperative for improving economic outcomes. While initiatives such as Make in India 2.0, and liberalisation of FDI caps across sectors are steps in the right direction, unless the Government adopts a more balanced approach in the 2016-Model BIT on the lines of the US-Korea BIT, CPTPP, CETA, MERCOSUR Protocol to name a few, no matter how many sectors are opened up for FDI, a rational investor would be reluctant to buy that one-way ticket for their investments into India.

Regulatory activism might not only repel any rational investor willing to invest in India, but being a reciprocal arrangement, can concomitantly reduce protection for Indian companies exporting capital abroad. As global companies contemplate moving their investments away from China, it is an opportune time to review and revise the Model BIT from the present inward-looking protectionist approach, to a more pragmatic one.

Sen is co-founder and partner at Seven Seas Partners LLP., and Nandy is Assistant Professor at IIM Ranchi. Views are personal.