India's FDI Slowdown: The BIPA Regime Overhaul Story Is Only Half the Picture

Bilateral Investment Treaty (BIT)—formally called Bilateral Investment Promotion Agreement (BIPA) in the Indian foreign investment lexicon—is in the news again.In 2015, adopting a new 'template' for future investment treaties, India had scrapped its BIPA regime, along with some 70-odd treaties. Shaktikanta Das, then Secretary of the Department of Economic Affairs (DEA) and currently the Principal Secretary to the Prime Minister, had overseen the exercise of scrapping BIPA and adopting a new template. I joined the DEA in July 2017. The BIPA situation was a complete mess then. Only Bangladesh had continued with the old BIPA, signing a new joint interpretative agreement incorporating the provisions of the new template. Negotiations had been initiated with about 30 countries. None, except Brazil and Taiwan, were anywhere close to completion. I left the DEA in July 2019. The situation has stayed much the same for the last nine years.So, why did India decide to scrap BIPA and what did the new template provide? Why was no country willing to conclude BIPA with India on the new template terms? What were better alternatives then and now? Tax Cuts on Equities Was a Goldilocks Moment; Perversely, We Cut on Bonds!India started opening up foreign direct investment (FDI) in 1991. It had not joined any multilateral investment regime or entered into any bilateral investment treaty by then. Investment promotion, quite perfunctory, was done on an ad hoc basis. To actively promote inflow of FDI, the government formulated BIPA in 1993, modelled on the treaties the US signed with other countries. India’s BIPA model provided for protection of investments made by foreigners in India from expropriation; fair and equitable treatment to such investments; and grant of most favoured nation (MFN) treatment. This offered the investors a powerful remedy to take the Indian government to international arbitration for dispute resolution under its Investor State Disputes Settlement (ISDS) clause. India began signing these agreements in 1994. In all, 83 BIPAs were signed until 2014. Out of these, 74 had come into force. India’s BIPA regime was quite settled and working smoothly.There was a problem though. After 2010, there was a spurt in investors launching arbitration proceedings against the Government of India (GOI). More than 30 such arbitration cases were pending in different forums in 2015. The investors interpreted the BIPA provisions in an extensive manner, alleging non-protection of rights and/or unfair and inequitable treatment responsible for any loss of their investments. Even if a particular country’s BIPA excluded a certain type of right (say, MFN), its investor claimed the right if the GOI extended such a benefit in another BIPA. Retrospective tax amendments (Vodafone/ Cairns cases) were also challenged on the grounds of expropriation under BIPA.Though such cases were from a few BIPAs, it was a major irritant for the GOI. The irritation was compounded by the domestic dimension of BIPAs as well. Investors sought remedy against the GOI under the ISDS even if a state or a municipality did something in violation and wanted the GOI to defend and pay up. Fed up and feeling short-changed, the GOI decided to throw the baby with the bathwater.The Delhi-Shanghai Flight Is Back. The Trade Balance Isn’tThe GOI decided to replace the system. It approved a new BIPA template and built several safeguards against the 'potential misuse' of the international arbitration process. It required exhausting local remedies for five years before ISDS could be invoked. Replaced MFN with national treatment. Made investment protection specific to the enterprise. And some more.In terms of their currency, India’s BIPAs fell in two categories in 2015 and were dealt with accordingly.Most BIPAs had run their course (normal life 20 years) and were going on by sheer inaction. These were formally terminated after giving a notice. About five or six BIPAs had some life remaining. The GOI wanted these to be brought in line with the new template by signing a joint interpretive agreement, which only Bangladesh agreed to. Others lapsed as well in due course. The 2015 template was attempted to be sold to those countries that had BIPAs earlier. Very little success. Only three BIPAs could be concluded in four years until July 2019.Two treaties—one with Belarus and the other with Taiwan (not officially recognised as a nation)—got signed. Not much investment flows from Belarus. The Taiwan one was signed between the designated agencies: India-Taipei Association (Taiwan side) and Taipei Economic and Cultural Center (Indian side).Brazil, a major country, had similar concerns as India on ISDS. An agreement with Brazil could also be concluded. Unfortunately, for petty reasons, the Ministry of External Affairs (their advice was not fully accepted) kept sitting on the BIT (their formal consent to international agreement was necessary before the Cabinet approval). It was finally signed in 2020 but came into force only in 2025. Everywhere else, including with major investor countries like the US, Canada, the UK and the European Union, the DEA faced complete non-cooperation (it still faces the same disengagement) as the Indian template was non-standard—and no country was ready to accept the 2015 template provisions on ISDS, non-MFN, exhaustion of domestic remedies, etc. In the last 11 years, the 2015 BIPA regime has been a complete failure. No firm status of how many countries signed is available publicly. It has possibly been signed with Uzbekistan, making it four countries.India’s BIPA regime is as good as dead.Jaishankar Unveils India’s ‘Humanity-First’ BRICS 2026 StrategyNo systemic study has been done in India to assess the performance or impact of these investment treaties on FDI inflows. It is probably difficult since the inflows depend on a multiplicity of factors.India has witnessed waxing and waning of FDI inflows. During 2003-2010, FDI flows surged, exceeding 5 percent of GDP in some years. During this time, there was no change in the BIPA regime. Thereafter, the FDI inflows slowed down until 2015. Again, the BIPA regime remained unchanged during this time. After the regime was abolished in 2015—and literally there was no BIT in place—FDI inflows were reasonably good (though not as robust as in 2003-2010) between 2015 and 2023. The primary factor which determines FDI inflows, in my judgement, is the attractiveness of available investment opportunities. Do foreign investors see excellent FDI opportunities for bringing new technologies or products for manufacturing in India for domestic and global markets or delivering services from India?If they see such opportunities, they come irrespective of whether the BIPA regime is in place or not—or whether India has a good ease of doing business ecosystem. Of course, a conducive BIPA regime and the ease of doing business ecosystem are both helpful in making investment decisions to seize such attractive opportunities.There are four options.First, India can retire the 2015 template and revert to globally standard BIT template, which is still much on the lines of BIPAs prevailing before 2015. Any tinkering will not help. Reducing five-year domestic remedies compulsion to two years (as informally suggested by officials) will not work. Accepting international standard BIT is politically tough for India. The efforts made in this direction in 2018, despite the finance minister’s approval, had to be abandoned. Second, adopt a sui generis law, that is, a law specifically enacted to deal with all FDI foreign and also portfolio investment matters. Such an attempt was also made in 2018. A draft was prepared with a standard template (improved from 2015 version) with flexibility for country specific exemptions/concessions to be granted by a committee headed by the Finance Minister. This was in the works when I left the Ministry of Finance. Nothing was heard about it thereafter. Third, enter into regional and bilateral comprehensive economic agreements (which covers trade, investments and other aspects) like the Regional Comprehensive Economic Partnership (RCEP), SAARC, etc. Unfortunately, India is too cautious about such agreements. In recently concluded agreements with the EU and the UK as well, there are no BIT provisions. Fourth, become part of the global (or plurilateral) investment promotion agreements. Here, again, India has adopted an obstructionist stance. India single-handedly blocked adoption of the Investment Facilitation for Development Agreement (IFDA), backed by more than 120 countries, as a plurilateral agreement under the World Trade Organisation (which would not have bound India). Can India’s Entrepreneurs Withstand the Free Trade 'Shock'?Our attitude towards international investment is highly cautious, bordering on complete lack of confidence. That results in India not being able to sign any BITs, making investment as part of comprehensive economic agreements bilaterally or regionally, enact a sui generis law or allow adoption of multilateral/plurilateral agreements like IFDA.In fact, we should buy in all four.As things stand, it would not be done. Dithering will continue. The hopeless 2015 BIT template will continue. We may also keep losing on gross and net FDI. (The author is economic and fiscal policy advisor, SUBHANJALI, former Finance & Economic Affairs Secretary, and author of 'The $10 Trillion Dream'. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)

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India's Cautious Approach to BITs Isn't the Only Reason FDI is Falling

For nine years now, no country is willing to conclude BIPA with India on its new terms, notes Subhash Chandra Garg.

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