IR455 Economic Diplomacy (2015/16)
Assessed essay submitted in partial fulfilment of the assessment requirements for IR455
Exam Candidate Number: 10370
Number of Words: 1980
Till the last BIT: India’s new model
bilateral investment treaty
I have read and understood the School’s rules on plagiarism and assessment offences
and the work submitted is my own apart from properly referenced quotations.
Till the last BIT: India’s new model bilateral
investment treaty
10 March 2016
Introduction
For the last 12 years all India’s bilateral investment treaties (BIT) were based on the
model developed in 2003 with only minor changes throughout this decade. On December
28, 2015 India’s government introduced a radically different model. Surprisingly, the new
model of BIT turned out to be much less investor-friendly and more state-oriented. It
gives a new definition for an “investment”, limits national treatment, specifies with more
precision investor-state dispute settlement and emphasises the need for promotion of
sustainable investment, including environmental protection and fight against corruption.
Given the commitments of India’s prime minister Narendra Modi to liberalise foreign
investment policy and his initiative “Make In India” that aims to promote foreign direct
investment (FDI), the introducing of the BIT may seem confusing.
These changes can be divided into two broad groups. First introduces new provisions that
link investments to various domestic goals and second redefines ISDS. One of the
explanations for the first group might be the change in countries’ expectations. Now
governments tend to see BIT not only and to so much as a means for attracting investment
but rather as a tool to achieve national goals, such as protecting the environment or
reducing corruption. I argue that this shift in the India’s perceptions resulted in the
altering of its foreign investment policy. As for the introduction of a more accurately
defined ISDS, one of the most convincing explanations might be the fact that since 2010
India has started receiving claims regarding the violation of previously signed BIT and
lost first of its case to investors. I argue that this defeat together with other claims pending
were the main factors that made Indian government reconsider its approach towards
international investment treaties. This case study proves that governments are not purely
rational when signing BIT but rather follow the logic of the bounded rationality.
National goals and the perception of BIT
Since their appearance in 1959, BIT have been considered as a means to attract
investment. They allow countries that lacked strong institutions for making credible
commitments while developed countries use them to ensure investors’ rights to be fully
protected (UNCTAD, 2000). Given these goals, the provisions of the BIT were mainly
focused on protection from expropriation, dispute settlement, the right to compensation
and other topics directly related to investments (Bayne & Woolcock, 2011). Hence,
rationalists argue, countries were signing them mainly to attract as much capital as
possible competing with each other for the share of a total investment flow (Elkins,
Guzman, & Simmons, 2006). Though there are doubts about how rational the countries
were in this rush for the capital (e.g. see Poulsen, 2014), nevertheless their main goal
remained the same, as well as the substance of the agreements. In this sense, India was
not an exception. Since 1991, India has been singing bilateral investment treaties to attract
external finance which it needed to cope with balance-of-payments problems and achieve
the developmental goals it had (Gakhar, 2006). The model that India developed in 2003
was mostly based on the first BIT that it signed with the United Kingdom in 1994 and
reflected India’s national interest as a country attracting foreign capital. Since then and
up until 2009 the texts of all 76 treaties remained almost the same, without mentioning
anything that was not straightly related to investing process.
The first change occurred in 2009 when India signed BIT with Colombia. Article 6(2)d
of that agreement states: "actions and awards <...> applied or issued in public interest
including those designed to address health, safety and environmental concerns do not
constitute expropriation or nationalisation" ("Agreement for the promotion and protection
of investments between the Republic of Colombia and the Republic of India," 2009). This
became the first mention of non-investment issues in India’s BIT. The rest seven treaties
were framed in the same manner. This turn was the first signal of the country’s changing
attitude towards investment treaties. The next step was the introduction of the new model
which emphasised the need for sustainable investment, anti-corruption regulation,
environmental goals. Incorporating these provisions into BIT means a sharp turn in
India’s investment policy.
However, this turn is more than consistent with the general trend regarding more cautious
attitude towards foreign direct investment. On the one hand, doubts arise that the number
of BIT affects the overall volume of inward investments (UNCTAD, 2003). On the other
hand, countries are now paying “more heed to objectives other than the quantity of FDI
inflows” (Sauvant & Ortino, 2013).
This turn is best understood through the constructivist perspective: the change in
expectations can affect state’s preferences and will result in altering its foreign investment
policy. The need to pay more attention to domestic goals may also be understood through
the Putnam (1988) two-level game approach: political leaders while negotiating BIT on
Level 1, also have to care about providing of public goods for selectorate on Level 2 to
ensure their survival in words of de Mesquita (2003).
In India’s case the objectives might include reducing environmental pollution, sustainable
development, fighting corruption and money laundering and protecting public morals.
India is experiencing serious environmental problems: according to the WHO database,
India has 13 of 20 most polluted cities in the world (WHO, 2015b), “inadequate solid
waste management, poor sanitation and sewerage lead to pollution of the ground water”
(Sridhar & Kumar, 2012). The environmental problems have straight economic and social
implications. For example, air and water pollution accounted for the 36% fall in India’s
wheat yield in 2010 (Burney & Ramanathan, 2014; WHO, 2015a). Corruption also
constitutes one of the India’s major problems. India’s government is prone to rent seeking
and cronyism: according to the Economist, gains from rent-seeking for the past ten years
accounted for more than $80 billion (The Economist, 2014) and in 2011 a head of anticorruption commission, Polayil Thomas, was forced to resign due to allegations of
corruption (The Economist, 2011). Societal calls for changes resulted in the winning of
Bharatiya Janata Party (BJP) on general elections in 2014 as its candidate for prime
minister, Narendra Modi, promised to “purge India” (The Economist, 2014).
These issues together with the hesitations about the effectiveness of BIT in attracting
investments make India’s government seek unconventional ways of dealing with
domestic problems. Both constructivist and rationalist approaches may be used to
understand this change. On the one hand, it was the shift in India’s perception of BITs’
role that made it more willing to use them in a different way. On the other hand, India’s
policy-makers that are preoccupied with the idea of political survival might want to use
Putnam’s “synergic linkages” to gain the support of the selectorate.
Nevertheless, by formulating the national goals explicitly and subordinating the
investment policy to them, Indian government ensures that the FDI flows will certainly
help it to achieve these goals. Furthermore, it does not leave any room for hesitation in
its intentions: investors are informed that as long as they play by the clearly stated rules,
they will not have any troubles with the authorities. This confidence may help to enhance
the volume of investment much better than a simple signing of new BITs.
Dispute settlement and Bounded rationality
New India’s BIT model brings novelty concerning state-investor relations. It excludes the
most-favoured-nation principle and does not mention fair and equitable treatment while
mentions cases when the benefits can be denied. Another change is related to a long list
of general and security exceptions. Finally, it introduces a very extensive Investor-State
dispute settlement, which, among other things, includes provisions that oblige investors
first to “exhaust national remedies” before being able to appeal to international tribunal
and also limit their right to “review the merits of a decision made by a judicial authority”
("Model Text for the Indian Bilateral Investment Treaty," 2015). Overall, the new model
of BIT aims to reduce the number of cases eligible for dispute settlement and make the
process itself very costly and resource-taking.
From rationalist point of view, one should expect completely the opposite. Given the
growing stock of India’s outward FDI, one might expect it to be more concerned about
being able to secure its investment abroad. However, India’s current policy towards FDI
is effectively rational, while the previous policy is better understood through the concept
of bounded rationality. Poulsen and Aisbett (2013) argue that states do not act completely
rational when they sign for bilateral investment treaties. Though governments are rational
in terms of being goal-oriented, "policy learning is biased by cognitive shortcuts
consistently found in experimental studies on human judgements and decision-making”
(Poulsen & Aisbett, 2013). Applying this to bilateral investment treaties, they argue that
decision-makers do not fully understand the potential cost that the BIT might bring up
until the moment they are first hit by an investor’s claim. Poulsen (2014) also finds
evidence of it in the investment policy of South Africa. The theory of bounded rationality
should explain equally well recent changes in India’s BIT model.
In 2010 India received a claim from White Industries under the India-Austria BIT. The
country was accused of breaching most-favoured-nation treatment. In November 2011
the made a decision in favour of investor, leaving India to pay to White Industry a
substantial compensation as well as considerable legal costs ("White industries Australia
Ltd. vs. the Republic of India," 2011). It was the first the first time India was sued by the
investor under the provisions of previously signed BIT. Before this defeat, BIT seemed
to be a relatively costless way to attract FDI. Now India faces seven lawsuits totally
claiming for than $4 billion which means that BIT now lay very far from being costless
instrument (UNCTAD, 2015).
India’s policy seems to be largely consistent with the theory of bounded rationality.
During the four-year period prior to the first claim, India negotiated and signed 21 BIT
with only four agreement during the same four-year period after it had lost the case
(UNCTAD, 2015). This means that Indian government did realise the potential cost of
the agreement only after they were first sued by the investor. This defeat had an
immediate effect on the quantity of BIT while the process of changing their substance
took more time. Hardly there were other factors that could explain the sudden fall in the
number of BIT signed as well as the radical change of the whole model 4 years later. Nor
could rationalist theory clarify why in the presence of the growing amount of outward
investment the country seeks to restrict the ability of investors to challenge the state. The
theory bounded rationality, in its turn, emphasise that decision-makers learn
predominantly from their own past experience, which explains why, in spite of potential
high costs, they consider international investment treaties to be harmless until these
agreements are used to sue their own state. On the other hand, as India’s own experience
as a home state to dispute settlement is limited to only 1 case for the past ten years, it is
evident why the country is less concerned with the need to secure its outward FDI in
favour of limiting the grounds for potential lawsuits.
Conclusion
The recent change in India’s BIT model can be partly explained using rationalist theory
and Putnam’s two-level game. However, constructivist approach seems to be more useful
to address the issue of India’s changed perception of bilateral investment treaties.
Rationalist approach is also not entirely adequate to address the problem of complicating
investor-state dispute settlement, which is better understood through constructivist’s
bounded rationality. Overall, this essay demonstrates the effectiveness of employing
various approaches for assessing factors that shape a country’s foreign investment policy.
While there are cases when some tools might prove to be more efficient than others, a
comprehensive analysis requires the usage of all the analytical toolkit available for the
scholars of the economic diplomacy.
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