India and Foreign Investment: Recent Developments 1

Poor governance and lack of transparency obstacles to FDI in India; government decides to shun investment treaty arbitration 

In a recent report on India as a direct foreign investment destination, Ernst & Young notes that

“[t]he fundamentals that make India attractive to investors remain intact, [h]owever, our respondents continue to cite inadequate infrastructure and a lack of governance and transparency as major obstacles to investment.”

As noted in the report, this is reflected in the fact that whereas FDI into India rose by 13 percent in 2011, business confidence has declined over the past year as a result of slowing economic growth, corruption and policy paralysis. “Robust domestic demand, cost competitiveness and a cheap, ever-growing labour force” are cited as India’s major attractions for foreign investors. However, concerns about red-tapism, the sluggish pace of justice delivery, corruption and institutional inefficiencies remain as live and real as ever.

In light of this report and these facts, provisions in investment treaties and omnibus trade agreements granting a private right of action against the Indian state to foreign investors might be seen as a possible solution to the problem. This is because, by holding sovereign host states to “internationally accepted” standards of investment protection and security, these treaties and the arbitration process might inspire greater confidence, and thus could provide a way to overcome problems of accountability and transparency.

The Indian government, however, does not seem to think along these lines. A recent report in The Mint notes that the Indian Department of Industrial Promotion and Policy (DIPP) has decided to exclude investor-state arbitration clauses from the country’s future bilateral investment treaties. The report quotes a DIPP official:

“This is now the view worldwide that the state should not get drawn into private disputes,… That’s why we are cautioning to be more careful.”

From the report, it seems that the decision was inspired, in particular, by the recent chain of events involving Philip Morris Asia’s claim against Australia, in response to the plain packaging legislation for cigarettes in Australia. The PM-Australia plain-packaging arbitration is the latest poster-child for the detractors of the investment treaty arbitration system.  According to the Mint report, the concerns of the DIPP, however, do not seem to be shared by India’s finance ministry:

“With the growing clout of Indian companies investing in countries around the world, including the less stable countries in the African and South American regions, they need the protection of the local governments,” the finance ministry official said on condition of anonymity. “So, we are not in favour of reviewing this clause.”

The DIPP, however, seems to be sticking to its stance, and even plans on renegotiating India’s BIT’s with a view to excluding the ISDS provisions from them.

What could the reasons for India’s policy decision be? In light of the Ernst & Young report, the decision certainly seems incongruous. However, could this be yet another sign of the growing dissatisfaction with the present state of the international investment law landscape? It certainly provides another reason for a fresh look at the ITA system. It does seem to reflect the growing perception that the cons of ITA system have come to outweigh its pros, and that states are obviously becoming more concerned about issues of regulatory autonomy and the limitations imposed by BITs and investment arbitration.

[This post is a part of the series "India and Foreign Investment: Law and Policy", which aims at noting the latest developments in the area] 

FDI in Retail: A short perspective on India from Dasgupta

Not strictly international law, but quite relevant and timely nevertheless: The Vale Columbia Center on Sustainable International Investment has published a short perspective titled “FDI in retail and inflation: The Case of India” by Nandita Dasgupta, a teacher at the University of Maryland – Baltimore County and a visiting professor at Johns Hopkins. Dasgupta identifies several factors that “unfavorably affect agricultural supply, create a supply-demand gap and help raise food prices.” The piece then lists out the main features of the Government of India’s proposed FDI in retail policy, and notes the main concerns against it:

Despite the regulatory provisions to ensure domestic competition and protect the domestic retail industry and farmers, the policy has received stiff opposition. Concerns include the possibility of monopoly power of foreign entrants over both farmers and consumers, predatory pricing strategies of the entrants, manipulation of prices for the entrants’ own benefit and a fall in income, employment and the eventual destruction of the unorganized indigenous retail sector dominated by small family-run outlets.

The short piece then goes on to mention the experience of other economies:

But it is important to remember that other countries like Argentina, Brazil, Chile, China, Indonesia, Malaysia, Russia, Singapore, and Thailand have allowed 100% FDI in multi-brand retail since the 1990s and many of them have had encouraging experiences. China, for one, permitted FDI in retail as early as 1992. It has since attracted huge investments in the retail sector without affecting either small retailers or domestic retail chains. Since 2004, the number of small outlets rose from 1.9 million to over 2.5 million in China. Employment in the retail and wholesale sectors increased from 28 million to 54 million from 1992 to 2001.

In conclusion, the author notes:

Favorable experiences of other emerging markets suggest that the appropriate implementation of FDI in multi-brand food retailing, with effective checks designed to protect indigenous small and medium-size enterprises,will eventually alleviate the supply-side impediments to agricultural production. It will transform the way perishable agricultural produce is acquired, stored, preserved, and marketed — and thus help control India’s persistent food inflation.

On another note, I would also like to add that the FDI policy, and the objections to it, raise issues of international investment law, as well. I will try and come back to them at some point.

FDI News: India

• On FDI between India and Pakistan, a recent report notes:

“Pakistani companies may soon be able to invest in India as the government plans to strike off the country from a negative list that debarred investments from across the border.”

• From a recent news report on the declining FDI inflow into India:

“FDI inflows to India declined 31% to $25 billion in 2010, a UN report said on Wednesday. This is worse than even Pakistan, where also FDI fell, but just 14% to $2 billion in a year when FDI to all other major destinations rose. In the same year, inflows to mainland China rose 11% to $106 billion and that to Hong Kong (China) an even sharper 32% to $69 billion. Bangladesh, which is yet to rid itself of the least developed country (LDC) tag, enhanced its status as a low-cost production location, especially for low-end manufacturing, by posting a 30% increase in FDI inflows to $913 million.”

On the last report, it would be nice to have a specific study on whether BITs/ISDS provisions in FTAs could help India. Any leads?