India-UAE: Bilateral Investment Treaty

General Studies Paper -2

Context: Recently, the Union Cabinet approved the signing and ratification of a Bilateral Investment Treaty (BIT) with the United Arab Emirates (UAE) to significantly boost bilateral economic engagement, including Foreign Direct Investment (FDI).

About the Bilateral Investment Treaty (BIT):

• It is an agreement between two countries that sets the terms and conditions for private investment by nationals and companies of one state in another.
• It is a part of the International Investment Agreements (IIAs)under the United Nations Conference on Trade and Development (UNCTAD).
• It is expected to improve investor confidence, increase foreign investments and overseas direct investment opportunities, and have a positive impact on employment generation.

India and BIT

• India has been actively negotiating Bilateral Investment Treaties (BITs) with various countries to boost foreign direct investment (FDI).
• India’s Position on BITs:Recent Interim Budget highlighted that India is negotiating BITs with trade partners to boost FDI inflow.
• It emphasised that these negotiations are being conducted from a position of strength.
• India’s Model BIT:India adopted the model BIT in 2016.
• The objective is to provide appropriate protection to foreign investors in India and Indian investors in the foreign country, while maintaining a balance between the investor’s rights and the Government obligations.
• India’s Economic Integration with Western Nations:India is pursuing economic integration with western nations such as the United Kingdom (UK) and the European Union through Free Trade Agreements and investment treaties.

Significances of BITs

• Investor Confidence: BITs can boost the confidence of investors by providing a level playing field and non-discrimination in all matters.
• They provide an independent forum for dispute settlement by arbitration.
• Foreign Direct Investment (FDI):BITs can help increase the inflow of FDI.
• For example, India is negotiating BITs with trade partners to improve its ease of enforcing contracts, which is currently a hurdle for FDI inflows.
• The FDI inflow during 2014-23 was $596 billion.
• Economic Growth: By attracting foreign investment, BITs can contribute to economic growth and employment generation in the host country.
• Legal Protection:BITs offer legal protection to investors, which can be particularly important for investments in countries where the domestic legal framework is unpredictable or unstable.
• BITs impose obligations under international law on host states to protect foreign investment from the other state.

Challenges associated with the BITs

• Unequal Distribution of Rights and Obligations: BITs often create an unequal distribution of rights and obligations between developed countries, which are the source of most foreign direct investment, and developing countries, which are mainly recipients.
• Risk of Litigation: BITs lead to an increased risk of litigation. Some developing countries have been sentenced by international arbitral tribunals to pay millions of dollars as a result of alleged violations to these treaties.
• Ambiguous Legal Standards: Most of these awards are based on expansive interpretations of ambiguous legal standards and concepts such as ‘fair and equitable treatment’ and ‘indirect expropriation’.
• Limitations in Addressing Issues:BITs can’t address every problem that companies face abroad.
• For example, American companies in China face challenges in protecting and enforcing their intellectual property rights (IPR).
• Loss of Policy Space: BITs can lead to a loss of policy space for the host country, limiting its ability to regulate in the public interest.
• Treaty Shopping:Investors might take advantage of the most favourable nation clause in BITs to sue a host country under a treaty to which it is not a party.

Conclusion and Way Forward

• Current trends in the world economy and global politics provide evidence that the global south is at ‘normal capitalism’, bringing with it new patterns of uneven development, inequality, and injustice.
• They are seen as a tool to boost the confidence of investors by assuring a level playing field and non-discrimination in all matters while providing for an independent forum for dispute settlement by arbitration.
• However, the negotiation and implementation of BITs can be complex and require careful balancing of interests.
• The challenges need for careful negotiation and implementation of BITs, balancing the interests of both the investing and host countries.