Much has been written about India aligning its economic policies to boost private investment and Foreign Direct Investment (FDI), which is expected to pave the yellow brick road towards Viksit Bharat. However, the Indian government’s ambitious project risks being hindered by significant delays precipitated by ambiguity in our economic policy. While the State publicly advocates for FDI growth, its withdrawal from key investment frameworks — such as Bilateral Investment Treaties — has created an investment paradox: reformist ambition constrained by cautious regulatory shifts. This tension lies at the heart of India’s evolving economic regime. In sum, India’s investment posture reflects a conflicted identity — aspiring to global economic leadership while retreating from the very frameworks that sustain foreign investor confidence. This interplay between pro-investment aspirations and inward-looking policy recalibration attenuates the coherence of the State’s economic vision.
To understand the roots of this dilemma, one must return to India’s economic transformation in the early 1990s. By the time the Ninth Five Year Plan (FYP) was set to be promulgated, India found itself deep in a balance of payments deficit due to an over-reliance on exports. Remya Nair explains how the Gulf War had caused a sharp spike in oil prices that further reduced India’s foreign exchange reserves. With a significantly drastic foreign debt amassing on its hands, Prime Minister Narasimha Rao tasked Finance Minister Manmohan Singh with an array of industrial policies that would, in due course, expedite India’s long journey down the investment corridor. As Prabhash Ranjan noted in his book India and Bilateral Investment Treaties, “The 1991 industrial policy allowed investment through two routes—the automatic route (where no permission is needed from the government) and the approved route (requiring prior government permission).”
This historic transformation laid the groundwork for India’s investment narrative. However, three decades later, the story has grown complicated. According to the IMF’s 2024 Article IV Consultation Report for India, India's share in global FDI has sharply declined—falling from about 6.5 percent in 2020 to merely 2 percent in 2023. The report underscores the importance of stable policy frameworks, comprehensive structural reforms, and deeper trade integration—including tariff and non-tariff barrier reduction—in order to reverse this trend. This is reinforced by UNCTAD’s 2024 World Investment Report, which identifies policy predictability as a top-three determinant for emerging market FDI flows. Meanwhile, the World Bank’s former Doing Business report recorded India’s ranking improvement from 142 in 2014 to 63 in 2020, largely driven by business regulation reforms. Nevertheless, the report also highlighted persistent challenges in contract enforcement and cross-border trade—factors that continue to affect investor confidence.
Within this paradigm, Investor-State Dispute Settlement (ISDS) is examined through the prism of neoliberalism, a term made popular by classical liberal economist Milton Friedman. Stephen Metcalf notes that the “free market” itself is a human invention. In this context, self-governance is equated with the sovereignty of a democratically elected government, where government rules determine how the market operates—often at odds with ideals like Swaraj. Examining the effects of capital inflow under liberalism, a paper published by the IMF notes that “the increase in inequality engendered by financial openness and austerity might itself undercut growth”. The phenomenon, characterised as “Desovereignization,” illustrates a collision between the erosion of the state’s capacity to control economic structures and an upsurge in investment and development—where the latter tends to prevail.
This theoretical tension plays out in India’s retreat from ISDS mechanisms. On one hand, India seeks to protect sovereign regulatory space; on the other, its disengagement from international frameworks weakens the confidence of investors governed by neoliberal expectations of predictability and enforceability. This echoes the ‘regulatory chill’ argument, wherein States may refrain from enacting legitimate public interest regulations for fear of triggering costly international arbitration claims.
India’s cautious stance on ISDS must be seen in context of its broader regulatory restructuring. While past reforms—from WTO-aligned patent laws to arbitration and competition law overhauls—signalled openness to investment, recent shifts, including the 2015 Model BIT, reflect a desire to balance investor protection with sovereign policy space. This shift becomes more comprehensible when one considers the backdrop of certain contentious arbitral outcomes. A closer examination of the most frequently levied criticisms of India’s economic policy ambiguity—such as retrospective taxation in the Vodafone case, and inconsistent enforcement mechanisms as argued in White Industries—reveals the underlying motivations for India’s recalibration: the need to safeguard policy space while managing investor expectations more judiciously. Furthermore, India’s retreat from ISDS also parallels conservative theories like the Calvo Doctrine, historically invoked by Latin American countries, which favours granting Host States the right to regulate investment and settle dispute through domestic legal remedies while preserving regulatory autonomy.
Evidence of this causality emerges when we view India’s evolving approach to BITs in tandem with the IMF Article IV: India terminated over 60 BITs between 2016 and 2019, a period that coincided with a 32% decline in new greenfield FDI project announcements. Recent research cited in the same report suggests that India’s termination of BITs may have caused a reduction in investment inflows exceeding 30%. While BITs may not be the sole determinant of FDI, they play a meaningful role in bolstering investor confidence. Cross-country evidence also highlights that judicial reform, improved business regulation, and stronger financial resilience are essential complements to treaty-based investment protections.
Viewed against the backdrop of the IMF report, a clear and intentional pattern emerges—India’s withdrawal from its earlier BIT frameworks aligns directly with the broader stagnation in investment flows. As India moves forward, it may consider orienting itself toward a system that inspires trust, ensures predictability, and remains geopolitically non-hierarchical. Reclaiming investor trust will require not only a clear and sustained commitment to reform, but also structural coherence that thoughtfully balances sovereign priorities with international economic engagement.
Aaliya Waziri is an advocate based in New Delhi. She is the author of “In The Body Of A Woman: Essays on law, gender and society” published by Simon & Schuster.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com)
To understand the roots of this dilemma, one must return to India’s economic transformation in the early 1990s. By the time the Ninth Five Year Plan (FYP) was set to be promulgated, India found itself deep in a balance of payments deficit due to an over-reliance on exports. Remya Nair explains how the Gulf War had caused a sharp spike in oil prices that further reduced India’s foreign exchange reserves. With a significantly drastic foreign debt amassing on its hands, Prime Minister Narasimha Rao tasked Finance Minister Manmohan Singh with an array of industrial policies that would, in due course, expedite India’s long journey down the investment corridor. As Prabhash Ranjan noted in his book India and Bilateral Investment Treaties, “The 1991 industrial policy allowed investment through two routes—the automatic route (where no permission is needed from the government) and the approved route (requiring prior government permission).”
This historic transformation laid the groundwork for India’s investment narrative. However, three decades later, the story has grown complicated. According to the IMF’s 2024 Article IV Consultation Report for India, India's share in global FDI has sharply declined—falling from about 6.5 percent in 2020 to merely 2 percent in 2023. The report underscores the importance of stable policy frameworks, comprehensive structural reforms, and deeper trade integration—including tariff and non-tariff barrier reduction—in order to reverse this trend. This is reinforced by UNCTAD’s 2024 World Investment Report, which identifies policy predictability as a top-three determinant for emerging market FDI flows. Meanwhile, the World Bank’s former Doing Business report recorded India’s ranking improvement from 142 in 2014 to 63 in 2020, largely driven by business regulation reforms. Nevertheless, the report also highlighted persistent challenges in contract enforcement and cross-border trade—factors that continue to affect investor confidence.
Within this paradigm, Investor-State Dispute Settlement (ISDS) is examined through the prism of neoliberalism, a term made popular by classical liberal economist Milton Friedman. Stephen Metcalf notes that the “free market” itself is a human invention. In this context, self-governance is equated with the sovereignty of a democratically elected government, where government rules determine how the market operates—often at odds with ideals like Swaraj. Examining the effects of capital inflow under liberalism, a paper published by the IMF notes that “the increase in inequality engendered by financial openness and austerity might itself undercut growth”. The phenomenon, characterised as “Desovereignization,” illustrates a collision between the erosion of the state’s capacity to control economic structures and an upsurge in investment and development—where the latter tends to prevail.
This theoretical tension plays out in India’s retreat from ISDS mechanisms. On one hand, India seeks to protect sovereign regulatory space; on the other, its disengagement from international frameworks weakens the confidence of investors governed by neoliberal expectations of predictability and enforceability. This echoes the ‘regulatory chill’ argument, wherein States may refrain from enacting legitimate public interest regulations for fear of triggering costly international arbitration claims.
India’s cautious stance on ISDS must be seen in context of its broader regulatory restructuring. While past reforms—from WTO-aligned patent laws to arbitration and competition law overhauls—signalled openness to investment, recent shifts, including the 2015 Model BIT, reflect a desire to balance investor protection with sovereign policy space. This shift becomes more comprehensible when one considers the backdrop of certain contentious arbitral outcomes. A closer examination of the most frequently levied criticisms of India’s economic policy ambiguity—such as retrospective taxation in the Vodafone case, and inconsistent enforcement mechanisms as argued in White Industries—reveals the underlying motivations for India’s recalibration: the need to safeguard policy space while managing investor expectations more judiciously. Furthermore, India’s retreat from ISDS also parallels conservative theories like the Calvo Doctrine, historically invoked by Latin American countries, which favours granting Host States the right to regulate investment and settle dispute through domestic legal remedies while preserving regulatory autonomy.
Evidence of this causality emerges when we view India’s evolving approach to BITs in tandem with the IMF Article IV: India terminated over 60 BITs between 2016 and 2019, a period that coincided with a 32% decline in new greenfield FDI project announcements. Recent research cited in the same report suggests that India’s termination of BITs may have caused a reduction in investment inflows exceeding 30%. While BITs may not be the sole determinant of FDI, they play a meaningful role in bolstering investor confidence. Cross-country evidence also highlights that judicial reform, improved business regulation, and stronger financial resilience are essential complements to treaty-based investment protections.
Viewed against the backdrop of the IMF report, a clear and intentional pattern emerges—India’s withdrawal from its earlier BIT frameworks aligns directly with the broader stagnation in investment flows. As India moves forward, it may consider orienting itself toward a system that inspires trust, ensures predictability, and remains geopolitically non-hierarchical. Reclaiming investor trust will require not only a clear and sustained commitment to reform, but also structural coherence that thoughtfully balances sovereign priorities with international economic engagement.
Aaliya Waziri is an advocate based in New Delhi. She is the author of “In The Body Of A Woman: Essays on law, gender and society” published by Simon & Schuster.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com)
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