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]