India’s foreign direct investment (FDI) inflows have seen a marked improvement in the last couple of years. In 2014-15, FDI inflows jumped 25 per cent to $45 billion. The following year saw FDI inflows rise by another 22 per cent to $55 billion. The first half of the current financial year also has maintained healthy growth, though the rate of increase at 19 per cent seems to be a little slower. Compared to $24.4 billion in April-September 2015, FDI inflows in the same period of 2016 are estimated at $29 billion.
There is yet another development on the foreign investment front that needs to be appreciated. The share of reinvested earnings in total FDI flows has seen a steady decline. In other words, more FDI is coming to India by way of either fresh investments or through acquisition of shares in existing companies. Reinvested earnings by foreign investors used to be about 28 per cent of total FDI flows four years ago, but today they have come down to about 18 per cent.
However, in spite of such healthy numbers on FDI inflows, foreign investors in India are not too excited about prospects of investing more in this country. What is bothering them is the government’s unilateral termination of bilateral investment protection treaties with all the member-states of the European Union (EU). Indeed, the Indian government has told as many as 57 countries that it would terminate or not renew its bilateral investment treaties with them.
India has similar bilateral investment treaties with another 25 countries, which would expire next year. An exercise has now been initiated to redefine the various clauses under the treaties and bring them in line with a new set of investment protection agreements, which it wishes to sign with all countries. A model bilateral investment treaty was framed in 2015, which seeks to align India’s domestic investment policies with the global investment realities. Sufficient safeguards have been incorporated in the model treaty to make sure that foreign investors cannot easily drag the Indian government to international arbitration platforms to seek compensation.
The government has internally argued that India continues to be a favoured destination for foreign investment as reflected in steady year-to-year growth in FDI inflows. So, the fear that the proposed bilateral investment treaty of 2015 will scuttle foreign investments is exaggerated. Another point raised by the finance ministry is that the arbitration procedures under the existing investment protection treaties are often biased against India or the Indian parties. Often, India has got a raw deal at many arbitration forums, which operate like a closed club and do not always take Indian sensitivities on board while resolving disputes. India is also not the only country that has unilaterally scrapped investment protection treaties — Brazil and Indonesia, too, have similarly extinguished these arrangements and India’s stance on this matter has received favourable response from many other developing countries.
In sharp contrast, developed countries including the EU have pressed hard for a proper investment protection treaty with India. The EU, in particular, is keen on fast-tracking a modern bilateral investment protection treaty as part of the current negotiations for a foreign trade agreement with India. No foreign investor likes a unilateral scrapping of a treaty and uncertainty over the nature of the new agreement. The Indian government’s argument that foreign investors under the proposed treaty will have recourse to Indian courts for redressing their grievances does not wash with them. The Indian legal system is robust, but it takes inordinately long to resolve disputes and this delay can be costly for businesses, foreign investors point out.
So, what is the way out? The EU and other developed countries have made representations to the Indian government urging that the unilateral termination of the bilateral investment treaties be put on hold till a new pact is finalised. A vacuum as far as an investment protection regime is concerned can turn off potential foreign investors. The absence of an investment protection regime may not deter the large multinationals, although it does give rise to avoidable uncertainties. But it can certainly scare away a large number of small and medium-size industrial enterprises in developed countries that wish to invest in India.
For the Indian government, it becomes imperative to at least discuss with representatives of developed countries and the EU and quickly come to an understanding so that their grievances do not affect sentiment and hurt fresh FDI inflows. The FDI climate in India today is favourable, but it does not take long for that to change. It is important to continually nurture it through engagement with foreign investors and their representatives.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
