India’s Investment Treaties: Reforming the BIT Framework to Attract FDI

03 Oct 2026

Tags: Economy   Planning & Growth   Economic growth

Source: The Indian Express

Context: India’s foreign investment policy faces a contradiction: despite recognising the importance of foreign capital, delays in reforming the 2016 Model Bilateral Investment Treaty (BIT) and the restrictive investment-protection framework may be affecting investor confidence.

• The article argues that India needs to replace policy uncertainty and procedural obstacles with predictable, internationally consistent investment rules.

Why the Model BIT Needs Revision

• India adopted the Model BIT, 2016 with the objective of balancing investor protection with the State’s right to regulate in the public interest.
• A major provision required a foreign investor to exhaust local remedies for five years before initiating international arbitration.
• This is substantially longer than the three-to-six-month consultation/cooling-off periods commonly found in international investment treaties.
• The five-year requirement has also been criticised because litigation in domestic courts may not necessarily result in a final judicial determination within that period.
• According to the article, India had repeatedly sought a review of this approach, but the process of revising the Model BIT has remained delayed.

Post-2016 BIT Network

• The 2016 Model BIT marked a significant shift in India's investment-treaty policy, but the subsequent treaty network has also been considerably reduced.
• India's treaties in force reportedly declined from 73 in 2015 to 29 in 2017, 16 in 2019 and only 8 by 2021, with several others continuing only for limited periods.
• More recent treaties, including those with the UAE (2024) and Israel (2025), reduced the investor holding-period requirement to three years.
• The article notes that even three years remains substantially longer than the international norm of approximately three to six months for consultation before arbitration.
• Some recommendations favour reducing the period to two years, but the article questions why India should not consider the shorter consultation periods prevalent internationally.

India’s FDI Numbers: Gross vs Net

• India recorded a gross FDI inflow of $94.5 billion in 2025–26, but the headline figure does not fully capture the country's net foreign-investment position.
• Foreign investors repatriated/disinvested $53.6 billion, leaving about $40.9 billion after this outflow.
• Indian companies invested approximately $33.3 billion abroad, resulting in net FDI of only $7.65 billion, equivalent to about 0.18% of GDP.
• Although this represented an improvement from 0.02% of GDP in 2024–25, it remained the second-lowest net FDI level in three decades, according to the article.

Reinvested Earnings: An Important Component

• Reinvested earnings are profits earned by foreign companies operating in India that are retained and reinvested rather than repatriated to the parent company.
• These amounted to around $25.6 billion in 2025–26, more than three times net FDI.
• However, the article cautions that reinvested earnings should not automatically be interpreted as new foreign investment commitments, because they represent profits generated by businesses already operating in India.
• On the older definition of FDI used by India until 2000–01, the article notes that India had recorded a net direct-investment outflow of roughly $18 billion, illustrating how definitions can influence headline investment figures.

Equity Market Signals

• Foreign investors also withdrew about $17.7 billion from Indian equities in 2025.
• Up to August, Indian equities were down about 9.1% in dollar terms, while emerging markets had risen around 20.6%, indicating a substantial relative performance gap.
• The article cites stronger equity-market performance in countries such as South Korea and Taiwan, while noting that another $10.5 billion had left India.
• Thus, both FDI flows and portfolio flows are presented as signals relevant to assessing India's attractiveness to foreign capital.

FDI vs Portfolio Investment

Foreign Direct Investment (FDI)

• FDI involves a lasting interest in an enterprise in another economy and generally provides the foreign investor with a meaningful degree of influence or control over business operations.
• It is associated with relatively longer-term participation in productive assets and businesses.

Foreign Portfolio Investment (FPI)

• Portfolio investment generally involves investment in financial assets such as equity or debt securities without the level of managerial influence associated with FDI.
• Portfolio flows can therefore be more sensitive to market conditions, interest rates, exchange rates and investor sentiment.
• The article disputes any attempt to classify investments as FDI merely because they have been held for a particular number of years, arguing that duration of holding is not the defining characteristic of direct investment.
• The OECD Benchmark Definition of Foreign Direct Investment, an international statistical standard, does not define FDI simply by the length of time an investor holds an asset.

Why Reclassification Alone May Not Solve the Problem

• The article questions proposals to classify certain long-held portfolio investments as direct investments, arguing that reclassification would not itself create additional foreign capital.
• Changing statistical categories cannot substitute for addressing the underlying factors influencing investors' decisions.
• The larger concern is therefore not merely how India measures FDI, but whether its policy framework creates sufficient incentives for fresh and sustained foreign investment.

Investment Treaties and Investor Confidence

• Bilateral Investment Treaties (BITs) establish rules governing investment between two countries and commonly provide protections relating to expropriation, fair treatment and dispute settlement.
• They can provide investors with greater legal predictability when investing abroad.
• India’s restrictive approach to investor-state dispute settlement and the prolonged local-remedy requirement may influence the perceived attractiveness of the Indian investment environment.
• At the same time, investment treaties must preserve the State’s regulatory space to pursue legitimate public objectives.

Trade Agreements and Investment

• The article links investment treaties with India's broader trade-policy choices, including negotiations with major economies such as the United States.
• It argues that the relevant question is not simply whether foreign investment enters India with or without a treaty, but whether the presence of a predictable treaty framework could generate additional investment that might otherwise not occur.
• The focus should therefore be on the investment forgone because of policy uncertainty, rather than merely counting existing inflows.

Way Forward

• Review the 2016 Model BIT: Align investor-protection provisions with international practice while retaining India's legitimate regulatory space.
• Reduce excessive procedural delays: Reconsider the unusually long local-remedy and consultation requirements where they discourage investment or delay dispute resolution.
• Improve policy predictability: Stable and transparent investment rules can reduce uncertainty for long-term investors.
• Look beyond headline FDI: Policymaking should distinguish between gross FDI, net FDI, reinvested earnings, FPI and outward investment rather than relying on a single headline number.
• Focus on fresh capital formation: Statistical reclassification should not substitute for policies that encourage new productive investment, technology transfer and employment generation.

 

Model BIT, 2016 India's Model BIT provides a framework for negotiating future bilateral investment treaties. It seeks to balance investment protection with the government's right to regulate. A key feature was the emphasis on exhaustion of local remedies before an investor could pursue international arbitration. Investor-State Dispute Settlement (ISDS) ISDS allows a foreign investor to bring certain disputes against the host State before an international arbitral mechanism, subject to the applicable treaty. It is intended to provide investors with an avenue for dispute resolution outside the domestic legal system. India has adopted a relatively cautious approach towards ISDS, reflecting concerns about regulatory autonomy and excessive litigation/arbitration exposure. FDI and FPI  FDI: relatively lasting interest + significant influence/control. FPI: investment in financial securities without equivalent managerial control. Reinvested earnings: profits retained and reinvested by existing foreign investors; they are distinct from entirely new capital entering the country. Net FDI: broadly reflects inflows after accounting for relevant outward/disinvestment flows, and can therefore differ sharply from gross FDI inflows.