Interim Budget 2024-25: A turning point for investment treaties

A pragmatic realisation that the aspiration of growth for the current generation of the country must be matched with adequate financial resources, coupled with opening the doors to developed countries to participate in India’s growth story, seems to be the underlying rationale for the Finance Minister (FM) to officially set out the stance of the Government of India.  The FM stated that the government would be “encouraging sustained foreign investment” and, to this end, would be “negotiating bilateral investment treaties”. More critical was the assertion that such treaties would be entered into with the reclaimed bargaining power that India commands, with the aim of ensuring that the resultant investment is meant to redefine foreign direct investment (FDI) as “first develop India”. 
 

The Interim Budget began with an emphatic statement highlighting the robust economic growth over the last decade, driven by key economic drivers, including record tax collections, record FDI, and increased exports. The Indian economy has remained buoyant, despite global conflicts and economic slowdown in other large economies. According to the 2022 UNCTAD World Investment Report, India, with the third-highest FDI inflows into greenfield projects, has been a favoured destination for global investors. The last five years saw the highest FDI inflow in the year 2021-22 at $85 billion. The provisional figures for the current financial year 2023-24 (up to September 2023) have been reported at $33 billion.
 

Bilateral Investment Treaties (BITs) with other major trade partners contain safeguards for foreign investors and act as a catalyst in attracting FDI. However, a spate of adverse international arbitration awards against India forced the government to terminate all BITs with other countries. This began in 2011, when India received its first adverse award from an international arbitration tribunal in the case of White Industries under the India–Australia BIT. 
 

This judgment opened the floodgates, and various similar claims were raised against the government asserting the investor’s rights under other BITs. 
 

Vision begets excellence. India, in its quest to actively synergise its treaty obligations, true to the spirit of the Vienna Convention, has marched ahead. The government views the arbitral awards as an unnecessary fetter in its sovereign right to legislate taxation-related provisions. The government, accordingly, in 2016, decided to terminate almost all BITs with trade partners.  After this development, India initiated the process of renegotiating the BITs in line with its revised BIT model of 2015. 

The termination of BITs and delays in renegotiations were perceived as a bottleneck by various foreign investors who remain sceptical of investing in the country without the protection of BITs. The Budget announcement has underlined the renewed thrust in renegotiating the BITs. While making this announcement, the FM has highlighted that BITs shall be renegotiated in the spirit of “first develop India”. 
 

While renegotiating the BITs, the government must create an atmosphere of trust for foreign investors and clearly demarcate the investors’ rights. A quintessential aspect to note here is, most of the inflow has been from select nations and shall also act as an enabler to the sunrise sectors, such as renewable energy, green energy, and artificial intelligence.
 

India underwent its most profound economic reform in the early 1990s, and the liberalisation of foreign investment into Indian industry was a central component of its reform story. Since then, FDI inflows have shown an upward trend, increasing from $129 million in 1991 to $71 billion in 2022-23, which shows a spurt of 550 times. If India succeeds in renegotiating robust and effective BITs, it will create a multiplier effect and would be another watershed moment.

The writer is managing partner, BMR Legal