US president Barack Obama’s second visit to India has resurrected hopes that the two countries will revive talks on the dormant but in-progress Bilateral Investment Treaty (BIT).
A BIT is being eagerly sought by both sides—from the US, to provide comfort to American companies that they will not be treated unfairly, and from India in the belief that it will help increase foreign investment inflows into India.
But negotiating the many tripwires of the BIT will take time and effort.
It may therefore be wise to rein in the optimism that is usually generated by high-profile state visits and the associated optics. More so because every significant India-US bilateral visit in recent times—by prime minister Narendra Modi to Washington DC in September 2014, by US secretary of state John Kerry to India in June 2014 and January 2015, and by US trade representative Michael Froman in November 2014—has rekindled expectations about the abandoned BIT.
Talks on a BIT between the two countries have been on hold since February 2014. Preparations to restart the conversation resumed in the backrooms soon after Modi’s swearing-in on May 26, 2014. Kerry discussed the pending BIT agreement with Modi on the sidelines of the Vibrant Gujarat Summit earlier in January.
However, many hurdles will have to be cleared before any real progress can be made. One of the obstacles is that India’s own BIT regime—the Bilateral Investment Promotion and Protection Agreement (BIPPA)—is in cold storage. India is currently reviewing the draft of the existing model agreement and is yet to produce a blueprint that is acceptable to all stakeholders, including different ministries (such as finance, commerce, law and external affairs). India has signed 83 BIPPAs since 1994 and enforced 72 of these agreements.
The existing text has been under review since early 2013 because many international companies have initiated overseas arbitration against the Indian government—17 new arbitration proceedings over issues as varied as Supreme Court’s cancellation of 2G licences and retrospective taxation notices were filed in the past two years alone. The companies which have sued the Indian government include Deutsche Telecom, Vodafone, and White Industries, under India’s BIPPAs with Germany, The Netherlands, and Australia, respectively.
Another speed-breaker is conflict within the government. The department of industrial policy and promotion (DIPP), in the commerce ministry, is opposed to BIPPAs in general. The DIPP is responsible for framing India’s foreign direct investment (FDI) strategy, as well as promoting, approving, and facilitating FDI. The DIPP believes that a conducive economic and legal environment is sufficient to attract foreign investments. It also believes that the existing BIPPAs are likely to result in increased lawsuits and has suggested that the sunset clause in these agreements be invoked to annul them. On the other hand, India’s finance and external affairs ministries are both in favour of an overhaul of the existing template, which will then have to be applied to all existing 83 agreements.
The conflict also arises from the government’s duality in matters of foreign investment—while the DIPP is responsible for FDI, the ministry of finance is responsible for administering the BIPPAs.
Talks could face headwinds due to certain new clauses in the draft model agreement. There is a proposal to dilute the “investor-state dispute settlement” (ISDS) system. Unlike the existing contract, henceforth foreign investors will not be able to take the Indian government to international arbitration unless they have first exhausted all legal and administrative options within India.
Clearly, this is a reaction to the spate of offshore arbitration proceedings. It is likely that this defensive move was inspired by external developments. Brazil has eschewed ISDS and South Africa is likely to follow. Australia is under pressure from its civil society to drop ISDS from all its agreements (especially the one with US) and not from a select few, as is the case currently.
The entire ecosystem of perverse incentives built around the international arbitration system could have also compelled the Indian government to dilute ISDS—armies of highly-paid, ambulance-chasing lawyers who have created an entire business model out of arbitrations and arbitrators who keep dragging cases on because they get paid handsomely by the hour—all operating in a highly secretive system. The reworked BIPPA draft tries to ensure a transparent arbitration system by stipulating certain conditions.
But a BIT bereft of ISDS is bound to be opposed by American negotiators and potential US investors. The popular narrative has portrayed the Indian judicial system as slow and inefficient. Indian authorities, on the other hand, are wary of biases in the overseas arbitration tribunals. Achieving a consensus between India and the US on this count is going to be tricky, but India seems to have global precedent set by Brazil, Australia and South Africa in its favour.
A deal-breaker could be intellectual property rights (IPR), a vexed issue on both sides. The US private sector has been persistently lobbying with its government for extracting concessions from India, with the National Association of Manufacturers even pushing the US trade representative to label India as a “priority foreign country,” an epithet reserved for the worst IPR offenders.
India’s counter-argument has been that its IPR regime is compliant with the World Trade Organisation’s TRIPS (Trade-Related Aspects of Intellectual Property Rights) multilateral agreement, and it considers the US Special 301 report unilateral. The report is an annual publication from the US Trade Representative (USTR) identifying trade barriers to US companies and countries which do not provide “adequate and effective” protection of intellectual property rights.
Several other prickly issues could sabotage talks—a proposal to drop the most favoured nation status from the agreement, re-phrased expropriation clauses, and re-worded text that ensures that the BIT/BIPPA does not end up favouring foreign investors while discomfiting domestic ones.
Negotiations are all about give-and-take, ceding some strategic space while appropriating critical concessions. This is, admittedly, a time-consuming process. A lot will, however, depend on American corporations and their attitude to doing business in one of the world’s biggest and fastest growing markets in the world.