Is the government still undecided on how to balance the twin objectives of buttressing its sovereign policy space, and giving foreign investors the comfort they seek against potential policy volatility? A few provisions in the new bilateral investment treaty (BIT) with the UAE, which are slightly divergent from the revised model text for such pacts introduced in 2015, and which tilt towards the foreign investor, raise this question. Not more than half a dozen BITs have been signed by India since it made the model text “restrictive”, explicitly binding the foreign investor to exhaust local institutional and judicial remedies under a five-year window before resorting to international arbitration. The country was in no hurry to sign new BITs apparently because the last few years saw it losing out in high-profile arbitration cases with Vodafone and Cairn. In fact, even the trigger for mass cancellations of the treaties under the earlier format — 77 out of 80 such older BITs were repealed by India by 2016 — was the realisation that it was easier under it for the foreign investor to drag the Indian government to international arbitration.

To be sure, BITs by definition don’t offer any great concessions. The commitment is just that the foreign investor will be treated at par with the domestic one, under what is called “national” or fair and equitable treatment. The investor will be protected from expropriation (taking over of assets by the sovereign), (resource) transfers, besides being compensated for losses arising out of any “internationally wrongful act” by the sovereign. Put plainly, this is just safeguard against intrusive and hostile behaviour by the host state. Any additional incentives for foreign investors usually are given out through other means.

As for India, there are instances like indirect tax sops offered to Apple, import duty concessions for electric vehicle manufacturers, and production-linked incentives that are available to both domestic and foreign investors. Of course, easier foreign direct investment approvals, unrestricted foreign ownership, and ease of doing business are being offered. If the foreign investor is indeed keen, even policies that have coercive elements, like high import tariffs, may work. India has also been using free trade agreements to offer binding commitments to the investors from partner countries, by invoking “Mode 3” of service delivery (commercial presence), as defined under multilateral rules.

That said, there is scant evidence to suggest that developing countries receive higher FDI flows merely on account of the number of BITs they sign. Cross-border investments are a primarily function of commercial viability. As far as basic assurances are concerned, institutional capacity building is what would win the confidence of global investors, rather than treaty promises. Judicial delays in the country are frustrating, and enforcement of contracts cumbersome. Under such circumstances, by allowing UAE investors to seek international arbitration if Indian judicial system is unable to resolve a dispute in three years (as opposed to five years in model text), the government has exposed itself to the risk of more frequent and costly arbitration cases. UAE-India investment exchanges are now just $5-6 billion per year, with flows almost evenly balanced out. Yet, the West Asian kingdom is now India’s third largest trading partner after the US and Europe, which shows the huge untapped potential for bilateral capital exchange. However, the addition of portfolio investments under the new India-UAE treaty goes beyond the revised model text and is prone to risk.