India is contemplating changes to its investment policies to encourage foreign inflows into its manufacturing and industrial sectors, according to sources within the Department for Promotion of Industry and Internal Trade (DPIIT). These changes are expected to be part of the ongoing discussions for Free Trade Agreements (FTAs).
A Shift in Policy
The proposed modifications represent a departure from India's previous policy stance. Since 2015, the country has refrained from offering 'pre-establishment' protections to investments in the non-services sector. The 2015 Model Bilateral Investment Treaty (BIT) explicitly limited treaty protections to investments made after the ventures had been established within the territory.
The planned policy changes could involve a chapter specifically focused on 'pre-establishment' protections for foreign investors in the non-services sector. These protections may include safeguards against future political and economic risks affecting investors' activities before the establishment of the venture, likely facilitated through State-State Dispute Settlement (SSDS) mechanisms.
The Evolution of Investment Treaties
Traditionally, investment treaties have largely focused on post-establishment protections. However, in keeping with international trends and the emergence of global value chains, these agreements have increasingly incorporated pre-establishment elements. For example, the North American Free Trade Agreement (NAFTA) in 1994 included such provisions.
Sources suggest that India might transition from the existing Investor-State Dispute Settlement Mechanism, which has led to adverse arbitration rulings against the country. The focus would shift towards dispute resolutions through State-State mechanisms.
The bilateral treaties are expected to specify the sectors where investment commitments would receive protection, as opposed to a 'negative list' approach that assumes all sectors are liberalized except those explicitly excluded.
Despite efforts to finalize international investment agreements, India has had limited success. Existing FTAs with countries like Australia, Mauritius, and the United Arab Emirates lack comprehensive protection provisions, and standalone BITs with countries like Brazil, Belarus, and Kyrgyzstan have yet to be implemented. FTA negotiations with other major trading partners like the United Kingdom, the European Union, and Canada, including investment chapters, are still underway.
The Parliamentary Consultative Committee of India's Ministry of Commerce & Industry recently commented on the slow pace of new BITs and investment agreements since 2015, noting it as "inadequate and not commensurate with the growth of India's interest in this domain and her rising stature in global affairs."