NEW DELHI: Moderating foreign direct investment (FDI) inflows and persistent external shocks are prompting India to make its template for negotiating bilateral investment treaties (BITs) more accommodating and investor friendly.
A review of the template is likely near conclusion and the Union Cabinet will soon deliberate on the revised framework, Department of Economic Affairs (DEA) Secretary Anuradha Thakur said at an event organised by the National Council of Applied Economic Research (NCAER) in the capital on Friday.
Net FDI inflows into India have slowed sharply over the past four years, falling from an annual average of around $40 billion between FY20 and FY22 to $7.65 billion in FY26, according to data available from the Reserve Bank of India.
Thakur said that the government was looking at the existing clause on dispute settlements, a contentious issue for investors, and a host of other provisions in the model BIT in light of its negotiating experience and global practices.
Attracting foreign capital has become a priority for the government. The BIT template revision comes after the Modi administration last month allowed full foreign ownership in inventory-based e-commerce specifically meant for exports. Earlier, FDI was meant only for marketplace models. The government is also amending the law to grant tax incentives to foreign companies supporting electronics manufacturing in India.
Thakur said consultations on the revised BIT are on, adding that the model “will probably be up for Cabinet decision soon.”
India’s current BIT framework, introduced a decade ago, requires foreign investors to exhaust local legal remedies for up to five years before seeking international arbitration. This condition was introduced after some of the investors resorted to international arbitration to settle tax disputes. Vodafone Group Plc won a favourable arbitration award against India in a tax dispute in 2020, which was eventually settled mutually.
However, the restrictive framework of 2015, including the requirement to exhaust local remedies before initiating international arbitration, made it difficult to conclude a broad set of new investment treaties.
Government officials have previously hinted that the mandatory period of exploring domestic legal remedies may be eased to two years under the revamped model.
Thakur said the review is also likely to aid Indian firms that have emerged as major overseas investors.
“Our own investors and our companies will also need protection,” she said, suggesting that some existing clauses might actually be useful to keep.
The updated BIT model is expected to help India close its ongoing negotiations with developed economies, like the United Kingdom (UK) and the European Union (EU), who also recently concluded free trade agreements with India.
Ajay Srivastava, founder of New Delhi-based Global Trade Research Initiative, said, “As India aims to become the third-largest economy, it needs to align its treaties with global investment practices, address the negative perception caused by the mass treaty cancellations and reflect on its negotiation skills. The new framework should ideally resolve these concerns.”
Besides attracting foreign capital, Thakur delineated three other priorities — deepening capital mobilisation, driving industrial dynamism, and innovation — to sustain India’s economic momentum at a time when “black swan events have become the new normal.”
Thakur flagged that private enterprise accounted for just 41 per cent of India’s gross research & development spending, against 75–79 per cent in advanced economies. Indian industry must fill this headroom, the policymaker said.
Thakur acknowledged that private investment has now been moving at a steady and stable pace upwards, with stalled projects at a decade low. The government has ramped up its own capital expenditure to induce a multiplier effect in the economy in the aftermath of the Covid-19 pandemic.
The Centre has nearly tripled its capital spending in the last five years.
She also said that there has been a revival in public-private partnerships, which had faded after 2012 amid India’s twin balance sheet crisis.
Thakur said that large and mid-sized firms are keen to partner with states, aided by new instruments like Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs).
Chairman of the Sixteenth Finance Commission Arvind Panagariya, who also addressed the event, argued that the next wave of reform lies mostly with the states, particularly on urban land.
“Urbanisation was the most critical next step,” he said, noting India’s urban share has crept to only about 35 per cent of the population.
“I do not know of a country that became rich without becoming substantially urban,” he said.
Panagariya called urban land scarce and “extremely expensive,” pointing to restrictive floor-space rules, difficult acquisition and idle public land.
He urged states to liberalise building norms, ease zoning and bring unused land to market, or carve out “special employment regions” with single-window powers over land and labour.
Source: Business Standard
