What’s at Stake in Calls for Revamping India’s BIT Framework
In his popular column, “BJP is winning the elections but losing the economy” (Indian Express, May 21), economist Surjit S Bhalla has put forth several claims regarding India’s existing bilateral investment treaty framework (specifically the Model BIT of 2015), which are based on his incorrect understanding of India’s BIT regime. Considering that his columns are widely read and that he held the position of executive director for India at the International Monetary Fund from 2019 to 2022, in addition to being a former part-time member of the Prime Minister’s Economic Advisory Council, his article on India’s BIT framework deserves a response.
This commentary focuses exclusively on his fallacious assertions concerning restrictive provisions in India’s existing BIT framework and their detrimental effects on foreign direct investment flows to India.
Some Misconceptions
Let’s begin with the basics. Dr Bhalla has mistakenly conflated the Model BIT with the bilateral investment treaties that India has signed. The Model BIT essentially serves as a non-binding, guiding framework for the Indian government to negotiate investment agreements with other countries. The Model BIT forms the basis for India’s future treaty negotiations under standalone BITs and the investment chapters of free trade agreements. It delineates the criteria for defining and protecting foreign investments, specifies the rights and obligations of both the investor and the host state, and outlines the mechanisms for resolving disputes.
Whereas the BITs are legally binding reciprocal agreements signed between two sovereign states to promote and/or protect investments made in one signatory state by nationals of the other. It is up to two sovereign states to decide the terms of investment and the rights of foreign investors to be incorporated under the BIT based on mutual understanding and negotiation. In recent years, the Indian government has frequently deviated from the 2015 Model text to render investment treaties more favourable to investors by granting selective concessions to key trading partners. For example, India did not adhere to its 2015 Model BIT in several recent investment agreements, with the India-UAE Treaty being a prominent example. Under the 2024 India-UAE BIT, foreign investors are required to exhaust local legal remedies for three years before initiating any Investor-State Dispute Settlement (ISDS) arbitration. In contrast, the 2015 Model BIT mandates a five-year period for local remedies.
Additionally, the India-UAE BIT extends protection to portfolio investments, which were entirely excluded from the 2015 Model BIT, and the stringent standards related to Fair and Equitable Treatment (FET) have been eased to prevent claims of regulatory expropriation. Conversely, India has introduced new safeguards, such as prohibiting third-party funding for arbitration claims, and has narrowed the scope of existing protections.
The 2015 Model BIT represents a revision of the preceding model treaty texts from 1993 and 2003. These revisions have been undertaken by successive Indian governments to align with the evolving bilateral and international investment regimes. More specifically, the 2015 Model BIT grew out of the first BIT ruling against India in the 2011 White Industries case, which later prompted several foreign investors (including Vodafone and Cairn Energy) to bring claims against the Indian government and raised concerns about the 2003 Model BIT’s ability to effectively balance investor rights with state obligations. Faced with a record number of ISDS claims, India decided to rebalance its investment treaty regime by unilaterally terminating most earlier treaties and updating its Model BIT.
Dr Bhalla seems to have grossly misunderstood both the intent and the scope of the 2015 Model BIT and investment treaties in general by arguing that “the revised 2015 BIT required that a foreign investor, before exiting their Indian venture, wait five years before proceeding to arbitration—and that the arbitration take place before an Indian judge”. As previously mentioned, bilateral investment treaties are agreements established between two sovereign states. These treaties aim to ensure protection against arbitrary state or regulatory actions, guarantee compensation in cases of expropriation, and provide mechanisms for dispute resolution between host and home states, as well as between a state and a foreign investor. BITs address disputes that emerge under public international law when a state violates treaty obligations, such as direct expropriation of assets without compensation. Simply put, a foreign investor can only invoke a BIT if the injury arises from a state or regulatory action.
BITs do not strictly cover pure commercial disputes between private investors (such as breach of contract or payment defaults). Such disputes are typically handled in domestic courts or through commercial arbitration. Nor do BITs address issues related to the exiting of foreign investors from their Indian ventures.
Exhaustion of “Local Remedies”
Modern investment treaties increasingly stipulate the exhaustion of “local remedies” and adherence to a “cooling-off period”, with the duration of these periods potentially varying. These stipulations are designed to encourage foreign investors to address their grievances through the host country’s domestic judicial or administrative bodies before seeking international arbitration. This principle is crucial as it safeguards host states from infringements on their sovereignty, prevents the premature initiation of international legal proceedings, and saves taxpayer money by allowing domestic systems the initial opportunity to settle disputes.
However, the 2015 Model BIT also states that “the requirement to exhaust local remedies shall not be applicable if the investor or the locally established enterprise can demonstrate that there are no available domestic legal remedies capable of reasonably providing any relief in respect of the same measure or similar factual matters for which a breach of this Treaty is claimed by the investor”.
In any case, foreign investors are expected to conduct due diligence on the laws of the host state before investing. Savvy foreign investors also buy political risk insurance (from private entities and the World Bank’s MIGA) to cover a wide range of risks arising from the imposition of capital controls, expropriation through regulatory actions, and political turmoil in the host state.
Revamping BIT Framework to Attract More FDI
Dr Bhalla also argues that India’s 2015 Model text and entire BIT regime need drastic revamping to attract large foreign direct investment (FDI) flows, which, in turn, will bring foreign technology, capital, and linkages with global supply chains. Growing evidence from India (pre-2015 Model BIT era) suggests that investment treaties intentionally tilted towards foreign investors, granting them procedural and substantive rights that domestic companies and citizens do not enjoy, did not result in greater FDI flows. Since 1994, India has signed BITs with countries such as Mongolia, Serbia, Macedonia, and Iceland, but the two-way investment flows between India and these countries have remained negligible. In contrast, India receives substantial foreign investments from the US and Canada without any BIT. Leading American corporations (from Amazon to PepsiCo) have invested billions of dollars in India in the absence of an India-US BIT.
Furthermore, it would be erroneous to put the entire blame on declining FDI net flows on the 2015 Model text and India’s BIT regime at large. If one looks at the gross FDI inflows, they are at an all-time high, reaching $94.5 billion in the 2025-26 fiscal year. The real issue is with equally large FDI outflows, amounting to $86.8 billion in FY 25-26, which have led to a sharp decline in net FDI flows. These outflows are driven by various factors, including disinvestment following the launch of initial public offerings by foreign investors (particularly private equity funds), stake sales, profit repatriation, and outward FDI (ODI) by Indian firms seeking better investment opportunities abroad. Addressing this issue requires a different set of policy measures, as Indian BITs are not equipped to handle the substantial FDI outflows.
A 2020 meta-analysis examining the impact of international investment agreements on foreign direct investment, utilising 2,107 estimates from 74 studies, provided compelling evidence that the effect of such agreements is “so small as to be considered zero”. Notably, since the 1980s, China has attracted billions of dollars in FDI from U.S. corporations without a bilateral investment treaty with the United States.
Key Determinants of FDI
For most foreign investors, other determinants—especially market size, infrastructure, tax policy, rule of law, labour laws, business environment, and political stability—influence investment decisions more than a BIT between the home and host countries.
Most foreign investors prioritise the presence of robust national laws that protect investor rights, security, and property over the host country’s ratification of bilateral investment protection treaties. Empirical evidence from India also indicates that bilateral investment treaties do not contribute to the enhancement of the rule of law in host states.
As the outdated investment treaty frameworks from the 1990s are being gradually eliminated worldwide due to concerns over regulatory chill and costly ISDS cases (with average defence expenses and damages often surpassing $10 million per case), it is imperative that the Indian government refrains from reinstating privileges for foreign investors that could compromise its sovereign right to regulate in the public interest.
Instead of relying on an investment treaty-based approach and weakening the 2015 Model BIT framework, India should initiate domestic policy reforms such as strengthening the rule of law, speeding up judicial proceedings, enhancing regulatory quality, upgrading the skills of the workforce, and easing its business visa regime.
Kavaljit Singh works with Madhyam, New Delhi.
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