India weighs friendlier investment treaty rules as Cabinet nod nears: DEA Secretary
The Department of Economic Affairs (DEA) indicated that a revised Bilateral Investment Treaty (BIT) framework is likely to be placed before the Union Cabinet soon, as part of an ongoing review to make India's investment treaty regime more investor-friendly
The review includes reassessing the "negative list" of sectors/measures currently excluded from treaty protection, with the aim of expanding the scope of protections offered to foreign investors
The government is also examining whether to relax the timeline within which foreign investors must exhaust local legal remedies before pursuing international arbitration
Private investment is reported to be growing steadily, aided by sustained increases in public capital expenditure, with the treaty revamp intended to reinforce stability and predictability for international capital amid global economic uncertainty
India's Model Bilateral Investment Treaty (2016)
India adopted a new Model BIT in 2016 after terminating most of its earlier-generation BITs (largely modelled on a 1993 template), following a wave of investor-state arbitration claims — most notably the White Industries v. India (2011) and Vodafone / Cairn disputes — that exposed the older treaties' broad, investor-favourable protections as a sovereign risk. The 2016 Model BIT recalibrated the balance, narrowing investor protections and preserving greater regulatory space for the state.
Key Details
- The 2016 Model BIT adopts an enterprise-based definition of "investment" (requiring incorporation and substantial business operations in India), replacing the broader asset-based definition of the earlier template
- It excludes taxation measures, government procurement, and subsidies from the scope of protected disputes, and does not include a Most Favoured Nation (MFN) clause
- Investors must exhaust local remedies in Indian courts/tribunals for five years before initiating investor-state arbitration, one of the treaty's most-criticised provisions for deterring foreign investors from using the international arbitration route
- India has since negotiated newer BITs with shorter exhaustion periods — three years — in its treaties with the United Arab Emirates and Israel, signalling the direction of the ongoing review
The Cabinet-bound revamp reported here is aimed precisely at this five-year exhaustion-of-local-remedies clause, among other investor-unfriendly features of the 2016 Model BIT, to make the framework more attractive while still retaining India's post-2016 sovereign safeguards.
Investor-State Dispute Settlement (ISDS) and Exhaustion of Local Remedies
ISDS is a mechanism under investment treaties that allows a foreign investor to bring a claim directly against a host state before an international arbitral tribunal (commonly under UNCITRAL or ICSID rules), bypassing domestic courts. India's 2016 Model BIT conditions access to ISDS on first exhausting local judicial and administrative remedies, a departure from most global BIT practice where such exhaustion is either not required or capped at a much shorter period.
Key Details
- The exhaustion requirement runs from the date the investor acquired (or should have acquired) knowledge of the disputed measure and the resulting loss, per the 2016 Model BIT text
- A "futility exception" allows investors to bypass exhaustion if they can show no domestic remedy could reasonably provide relief
- Arbitration under the Model BIT requires a 90-day notice period for amicable/consultative settlement before a claim can be filed
- Longer exhaustion periods reduce the treaty's practical utility for investors, since capital seeking quick, predictable dispute resolution may be deterred by a multi-year domestic litigation prerequisite
Shortening this timeline — as India has already done bilaterally with the UAE and Israel (three years) — is central to the "friendlier" investment treaty rules the DEA is preparing to place before the Cabinet, and is a long-standing demand of trade partners such as the UK and the EU with whom India has pending BIT/FTA-linked investment chapters.
Public Capital Expenditure and Private Investment Crowding-In
Sustained public capital expenditure (capex) by the Union government is a fiscal policy tool used to "crowd in" private investment by building infrastructure that lowers the cost of private economic activity, a strategy central to India's post-pandemic growth approach.
Key Details
- Union Budget capital expenditure has risen substantially over recent years, forming a growing share of total budgeted expenditure, with capex-to-GDP ratio treated as a key fiscal indicator
- The crowding-in effect is distinguished from "crowding-out," where government borrowing/spending raises interest rates and displaces private investment
- A stable and predictable investment treaty regime is considered complementary to capex-led growth, since it lowers the perceived regulatory/dispute risk for foreign capital co-investing in infrastructure and manufacturing
The DEA's reference to private investment growing on the back of public capex places the BIT reform in the broader context of India's investment-led growth strategy, where treaty predictability for foreign capital is presented as a complement to domestic capital formation.
- India's current Model BIT: adopted 2016, replacing the 1993-template treaties following disputes such as White Industries v. India (2011)
- Exhaustion-of-local-remedies period under the 2016 Model BIT: 5 years (reduced to 3 years in recent BITs with the UAE and Israel)
- Pre-arbitration notice period for amicable settlement: 90 days
- Sectors/measures excluded from Model BIT protection: taxation, government procurement, subsidies
- No Most Favoured Nation (MFN) clause in the 2016 Model BIT
- Pending BIT-related negotiations referenced: with the United Kingdom and the European Union