India Suffering a Quiet Decline in Foreign Direct Investment – The Diplomat

This month, India signed a rare free trade agreement with four countries in Europe that make up the European Free Trade Association (EFTA). Coming after 16 painful years of negotiations, the deal will see India lift most import tariffs for industrial products from Switzerland, Norway, Iceland and Liechtenstein. In return, the EFTA countries will invest $100 billion in India over the next 15 years.

The announcement comes on the back of flagging foreign direct investment (FDI) into India in recent years. Between April and September of last year, India pulled in just a little over $10 billion in FDI — the lowest tally for the first half of a financial year since the 2008 global recession, according to data from India’s central bank, the Reserve Bank of India (RBI). That comes on the back of an overall decline in FDI inflows as a percentage of GDP under Prime Minister Narendra Modi.

There are several well-recorded factors for why foreign investment into India has been so tepid in recent years: bureaucratic red tape, a poor record in contract enforcement, and relatively low labor productivity. But an even more significant factor is simply that India hasn’t been signing enough deals to facilitate foreign investment.

In the mid-1990s, amid the push to liberalize its economy, India initiated a series of bilateral investment treaties (BITs) to promote investment from companies abroad. The idea was to codify a set of rules and norms to ensure that the concerns and interests of foreign investors are protected, especially through international arbitration.

The result was a barrage of claims and disputes by foreign businesses operating in India. In 2011, White Industries, an Australian foundry business, took India to international arbitration for breaching its obligations under the India-Australia bilateral investment treaty. The litigation was successful and India was ordered to pay White Industries over $4 million. That was followed by another successful arbitration effort by the British oil company, Cairn Energy, which secured a $1.2 billion award against the Indian government on a 2015 tax complaint.

In 2016, the Modi government decided to revisit India’s bilateral investment treaties. It introduced a new model treaty which, among other things, made it harder for foreign investors to take recourse to international arbitration. Then, New Delhi terminated as many as 76 of its 83 investment treaties with a plea to renegotiate them on the basis of the new model treaty. The result was almost immediate: Since 2016, net FDI inflows have fallen as a percentage of GDP from about 1.7 percent to a little over 0.5 percent, according to the RBI.

This has run in parallel with heightened trade protectionism. According to the Global Trade Alert database which tracks trade policy interventions worldwide, India has imposed the highest number of import restrictions of any country since 2014 — a sharp increase compared to the period between 2009 and 2014 when India was fourth on the list.

A similar suspicion of treaties and agreements has hamstrung India’s trade profile as well. Between 2017 and 2022, India’s imports from partners with whom it has signed free trade agreements increased by a striking 82 percent.

Meanwhile, exports to those countries only increased by 31 percent. India has consequently sat out of major trade blocs in the Indo-Pacific — most notably walking out of the Regional Comprehensive Economic Partnership (RCEP) talks in 2019. Last year, India’s Commerce Minister Piyush Goyal disparaged its trade deal with the Association of South East Asian Nations (ASEAN) as “ill-conceived.”

There are some slight signs that Modi now wants to rectify this — if only very cautiously. In the lead-up to this month’s deal with the EFTA, India had also signed trade deals with Australia and the United Arab Emirates. New Delhi now hopes to finalize another deal with the UK.

Yet, even in those trade negotiations, India has been relatively less liberal than in the era predating Modi — angling for more state control over sundry policy issues and seeking to limit the exposure of many of its sectors to foreign competition. If India wants to attract foreign investment, it might have to change tack.