India's Progressive Approach to Bilateral Investment Treaties

Q: What explains India’s shift from a rigid 2016 Bilateral Investment Treaty (BIT) template to a more flexible and progressive approach?

India’s evolving BIT framework reflects a balance between investment protection and regulatory sovereignty. The 2016 Model BIT was formulated after India faced several treaty arbitrations, especially in taxation matters where foreign investors bypassed domestic judicial remedies. The model therefore narrowed definitions of investment, mandated exhaustion of local remedies, and limited the scope of investor-state dispute settlement (ISDS).However, as global investment dynamics evolved, India realised that an overly rigid template could constrain treaty negotiations. The present approach retains the 2016 framework as a base but allows calibrated modifications depending on bilateral requirements, as seen in agreements with the UAE and Saudi Arabia. These adjustments are made transparently with Cabinet approval, ensuring democratic legitimacy.Strategically, this flexibility signals that India is open to investment but not at the cost of policy space. It demonstrates maturity in treaty-making—recognising that BITs are tools of economic diplomacy rather than ends in themselves.

Q: Critically analyse India’s concerns regarding treaty arbitration, ultimate beneficial ownership, and Press Note 3 in the context of economic security.

India’s experience with investor-state disputes—particularly cases involving retrospective taxation—has shaped its cautious stance. Investors invoking international arbitration despite pending Supreme Court remedies raised concerns about undermining domestic judicial sovereignty. This led India to insist on exhaustion of local remedies and tighter treaty definitions.Similarly, scrutiny of ultimate beneficial ownership (UBO) under Press Note 3 is not country-specific but rooted in concerns about opaque capital flows, money laundering, and strategic acquisitions of distressed assets. Compliance with FEMA and FATF norms reflects India’s commitment to financial integrity. For instance, digital bidding for coffee estates in Karnataka raises questions about ownership of unique Indian assets.Critical perspective: While such safeguards protect national security and economic sovereignty, excessive regulatory uncertainty may deter genuine investors. The challenge lies in striking a balance between openness and vigilance.

Q: How do global uncertainties and domestic structural reforms shape India’s economic policy responses?

Global uncertainties—such as fluctuating tariff regimes, geopolitical tensions, and volatile capital flows—compel policymakers to adopt flexible and responsive strategies. As highlighted, tariff decisions may become outdated within hours due to shifting global dynamics. This necessitates a calibrated approach rather than abrupt policy shifts.Domestically, reforms such as AgriStack, banking-sector restructuring, and customs rationalisation aim to build long-term resilience. AgriStack, for instance, can enable precise fertiliser allocation and data-driven farm policies, potentially replicating the transformative impact of UPI in digital payments.Thus, India’s strategy combines short-term firefighting with long-term structural reforms, ensuring macroeconomic stability while preparing for its 2047 developed-nation vision.

Q: Examine the proposed banking-sector reform committee as a case study in timing and sequencing of reforms.

The proposed banking reform committee comes at a time when Indian banks have largely resolved the twin balance-sheet problem of stressed corporate and banking assets. This improved asset quality and capital adequacy provide a conducive environment for forward-looking reforms.The Finance Minister emphasised that recommendations must be workable and actionable, avoiding overly theoretical outputs. The objective is to prepare banks to finance India’s developmental ambitions by 2047, including infrastructure, green energy, and digital expansion.As a case study, this reflects the principle that structural reforms are best undertaken during periods of strength rather than crisis. However, implementation challenges—political economy constraints and regulatory coordination—will determine actual success.

Q: What are the underlying reasons for tepid private-sector investment and unspent scheme funds at the state level?

Tepid private investment can be attributed to global uncertainty, demand fluctuations, and cautious corporate sentiment. While the government offers policy and tax stability, capital flows are influenced by external macroeconomic forces beyond domestic control.At the state level, nearly ₹70,000 crore remains unspent in SNA accounts, partly due to political economy factors. States may prioritise schemes that yield electoral dividends, while reform-linked funds without immediate political mileage see fewer takers. This underscores how governance outcomes are shaped by incentives and narratives.The broader lesson is that economic reform is not merely technocratic but deeply political. Aligning fiscal transfers with accountability and performance metrics could enhance utilisation and developmental impact.

Finance Minister Nirmala Sitharaman discusses the evolution of BITs and India's investment strategies in a global context.

Surya

•February 26, 2026•6 mins read

Sitharaman outlines evolving investment strategy

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1. Evolution of India’s Bilateral Investment Treaty (BIT) Framework

India has moved beyond its rigid 2016 Model Bilateral Investment Treaty (BIT) template and adopted a more flexible, case-specific approach to investment protection agreements. While the 2016 model remains the baseline, modifications are being introduced transparently with Cabinet approval.

This recalibrated approach has enabled India to conclude or advance BITs with countries such as the UAE, Saudi Arabia, and potentially Oman. The government emphasises that treaty negotiations must reflect bilateral realities rather than a uniform template.

The shift reflects lessons drawn from earlier treaty disputes, particularly cases where foreign investors invoked international arbitration in taxation matters or bypassed domestic judicial remedies.

An adaptable BIT framework balances investor protection with sovereign regulatory space. Overly rigid treaties risk costly disputes, while excessive caution may deter investment inflows.

2. Reassessing the Role of BITs in Attracting FDI

The Finance Minister stated that BITs are no longer the decisive factor they once were in driving foreign direct investment (FDI). Several countries invest in India without demanding BIT protection, and Indian firms invest abroad in the absence of such treaties.

The government’s stance is pragmatic—neither “BITs with everyone” nor “no BIT at all.” Instead, it recognises that global capital flows are shaped by broader economic and geopolitical factors.

This reflects a changing international investment climate where supply chains, market size, policy stability, and geopolitical alignments increasingly influence investment decisions.

Investment treaties are facilitative instruments, not guarantees of capital inflow. Policy credibility, tax stability, and macroeconomic fundamentals ultimately determine investor confidence.

3. Treaty Disputes and Sovereign Concerns

India’s BIT recalibration is informed by past disputes where foreign investors initiated arbitration proceedings, particularly in taxation matters, even when domestic remedies were pending before the Supreme Court.

Such instances were viewed as “deal-breakers” in negotiations, highlighting concerns over treaty abuse and regulatory sovereignty.

The government seeks to avoid clauses that allow bypassing domestic courts or challenge legitimate public policy measures.

Preserving regulatory autonomy is essential for fiscal and developmental policy. If arbitration mechanisms override domestic judicial processes, it may constrain sovereign decision-making.

4. Press Note 3, Beneficial Ownership and Capital Scrutiny

On Press Note 3—which tightened scrutiny of investments from countries sharing land borders with India—the Minister clarified that concerns extend beyond any single country.

The emphasis is on identifying ultimate beneficial ownership, ensuring compliance with the Foreign Exchange Management Act (FEMA) and Financial Action Task Force (FATF) norms.

Concerns also arise when distressed domestic companies risk takeover by concentrated foreign shareholding blocks. Additionally, issues such as digital bidding for “unique Indian assets” (e.g., coffee estates) highlight sensitivities around strategic and heritage resources.

Capital openness must be balanced with national security and financial integrity. Weak scrutiny of ownership structures can expose economies to non-commercial or destabilising capital flows.

5. Global Uncertainty and Capital Flows

The Minister identified global uncertainty as a key constraint on investment momentum, including shifting tariff regimes and volatile global conditions.

On tepid net FDI, she noted that beyond policy and tax stability, capital movements are influenced by global macroeconomic forces beyond domestic control.

Domestically, monsoon variability remains a structural risk, influencing agricultural output and inflation dynamics.

In an interconnected global economy, capital flows are cyclical and sensitive to geopolitical shocks. Domestic resilience mechanisms must complement external engagement.

6. Agricultural Reforms and the AgriStack Initiative

The government highlighted the AgriStack initiative as a transformative reform with potential to replicate the success of the Unified Payments Interface (UPI).

AgriStack aims to provide granular data on fertiliser requirements, ensuring availability while tracking usage patterns. This could improve efficiency, reduce leakages, and enhance transparency in subsidy delivery.

The initiative reflects the broader push towards digital public infrastructure in agriculture.

Data-driven agriculture enhances productivity and subsidy targeting. Without digital integration, input inefficiencies and leakages may persist.

7. Banking Sector Reform and Post-Twin Balance Sheet Recovery

A new committee on banking-sector reforms has been announced in the Budget, with an emphasis on actionable and implementable recommendations.

The Minister stated that Indian banks have emerged strongly from the “twin balance-sheet problem,” making this an opportune moment to discuss the next phase of reforms in the context of India’s 2047 developed-nation goal.

The focus is on ensuring that banks are adequately positioned to finance long-term development while maintaining macroeconomic stability.

Strong financial intermediation is central to sustained growth. Without forward-looking banking reforms, credit expansion may fall short of developmental aspirations.

8. Customs Reform and Calibrated Tariff Rationalisation

The government aims to reduce tariff barriers gradually, ensuring domestic industry is not adversely affected. Tariff rationalisation is described as item-by-item, based on sectoral readiness.

Industries that have enjoyed protection for 20–30 years without achieving competitiveness may face greater openness to imports.

This signals a calibrated shift from protectionism towards competitiveness-driven integration.

Trade liberalisation must balance consumer welfare with industrial development. Abrupt tariff cuts may harm domestic sectors, while excessive protection undermines efficiency.

9. Centre-State Fiscal Dynamics and Reform Incentives

Approximately ₹70,000 crore remains unspent across about 50 schemes in state-level Single Nodal Agency (SNA) accounts. The Minister linked utilisation to political incentives and state-level narratives around reforms.

The variation in reform uptake reflects differing political priorities and perceptions of electoral gains.

However, pre-Budget consultations with State Finance Ministers were described as “purposeful,” with ideas such as rare earth industrial corridors emerging from discussions.

Fiscal federalism requires cooperative alignment of incentives. If political considerations hinder reform uptake, public resources may remain underutilised.

10. Public Sector Enterprise (PSE) Policy and Private Investment

The 2021 PSE policy should not be viewed solely through privatisation metrics. Opening sectors such as space and atomic energy to private participation marks structural reform.

Slow progress in large disinvestment cases reflects market conditions and strategic considerations.

On private-sector investment, the government seeks clearer articulation of industry needs, while addressing political criticisms surrounding incentives.

Structural reform includes regulatory liberalisation, not just asset sales. Sustained private investment requires policy clarity, political consensus, and predictable market conditions.

Conclusion

India’s economic policy stance reflects calibrated pragmatism—flexible investment treaty negotiations, cautious capital scrutiny, gradual trade liberalisation, and forward-looking banking reforms. At the same time, digital transformation initiatives like AgriStack and sectoral liberalisation indicate structural ambition.

Balancing investor confidence with sovereign autonomy, and openness with strategic caution, will be central to achieving the long-term goal of a developed India by 2047.

Quick Q&A

Everything you need to know

India’s evolving BIT framework reflects a balance between investment protection and regulatory sovereignty. The 2016 Model BIT was formulated after India faced several treaty arbitrations, especially in taxation matters where foreign investors bypassed domestic judicial remedies. The model therefore narrowed definitions of investment, mandated exhaustion of local remedies, and limited the scope of investor-state dispute settlement (ISDS).

However, as global investment dynamics evolved, India realised that an overly rigid template could constrain treaty negotiations. The present approach retains the 2016 framework as a base but allows calibrated modifications depending on bilateral requirements, as seen in agreements with the UAE and Saudi Arabia. These adjustments are made transparently with Cabinet approval, ensuring democratic legitimacy.

Strategically, this flexibility signals that India is open to investment but not at the cost of policy space. It demonstrates maturity in treaty-making—recognising that BITs are tools of economic diplomacy rather than ends in themselves.

Global capital flows today are influenced by multiple variables—market size, growth prospects, policy stability, supply-chain integration, and geopolitical alignments—rather than merely the existence of a BIT. As the Finance Minister noted, several countries invest in India without demanding a BIT, and Indian firms also invest abroad in the absence of such treaties.

This suggests that economic fundamentals and strategic interests often outweigh formal treaty protections. For example, India’s large consumer base and digital economy attract technology and manufacturing investments despite limited treaty coverage. Conversely, countries with multiple BITs have not always ensured sustained FDI inflows.

Implication for India: The government need not rush into signing BITs indiscriminately. Instead, it can prioritise quality of investment, safeguard against treaty abuse, and maintain policy autonomy—especially in sensitive sectors like taxation, digital assets, and strategic infrastructure.

India’s experience with investor-state disputes—particularly cases involving retrospective taxation—has shaped its cautious stance. Investors invoking international arbitration despite pending Supreme Court remedies raised concerns about undermining domestic judicial sovereignty. This led India to insist on exhaustion of local remedies and tighter treaty definitions.

Similarly, scrutiny of ultimate beneficial ownership (UBO) under Press Note 3 is not country-specific but rooted in concerns about opaque capital flows, money laundering, and strategic acquisitions of distressed assets. Compliance with FEMA and FATF norms reflects India’s commitment to financial integrity. For instance, digital bidding for coffee estates in Karnataka raises questions about ownership of unique Indian assets.

Critical perspective: While such safeguards protect national security and economic sovereignty, excessive regulatory uncertainty may deter genuine investors. The challenge lies in striking a balance between openness and vigilance.

Global uncertainties—such as fluctuating tariff regimes, geopolitical tensions, and volatile capital flows—compel policymakers to adopt flexible and responsive strategies. As highlighted, tariff decisions may become outdated within hours due to shifting global dynamics. This necessitates a calibrated approach rather than abrupt policy shifts.

Domestically, reforms such as AgriStack, banking-sector restructuring, and customs rationalisation aim to build long-term resilience. AgriStack, for instance, can enable precise fertiliser allocation and data-driven farm policies, potentially replicating the transformative impact of UPI in digital payments.

Thus, India’s strategy combines short-term firefighting with long-term structural reforms, ensuring macroeconomic stability while preparing for its 2047 developed-nation vision.

The proposed banking reform committee comes at a time when Indian banks have largely resolved the twin balance-sheet problem of stressed corporate and banking assets. This improved asset quality and capital adequacy provide a conducive environment for forward-looking reforms.

The Finance Minister emphasised that recommendations must be workable and actionable, avoiding overly theoretical outputs. The objective is to prepare banks to finance India’s developmental ambitions by 2047, including infrastructure, green energy, and digital expansion.

As a case study, this reflects the principle that structural reforms are best undertaken during periods of strength rather than crisis. However, implementation challenges—political economy constraints and regulatory coordination—will determine actual success.

Tepid private investment can be attributed to global uncertainty, demand fluctuations, and cautious corporate sentiment. While the government offers policy and tax stability, capital flows are influenced by external macroeconomic forces beyond domestic control.

At the state level, nearly ₹70,000 crore remains unspent in SNA accounts, partly due to political economy factors. States may prioritise schemes that yield electoral dividends, while reform-linked funds without immediate political mileage see fewer takers. This underscores how governance outcomes are shaped by incentives and narratives.

The broader lesson is that economic reform is not merely technocratic but deeply political. Aligning fiscal transfers with accountability and performance metrics could enhance utilisation and developmental impact.