The India-United Kingdom (UK) free trade agreement (FTA) negotiations have missed their much-touted Diwali deadline for completion, though it featured prominently in the first conversation between Prime Ministers (PM) Narendra Modi and Rishi Sunak late last week.
Reportedly, several matters remain unresolved such as market access issues related to British whisky and automobiles and data localisation requirements. The political instability in the UK (and provocative comments by home secretary Suella Braverman on migration) made matters worse. Another critical issue on which the two sides seemingly disagree is investment protection. Since foreign investment often complements international trade and vice-versa, most comprehensive economic agreements — such as the Regional Comprehensive Economic Partnership Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership — cover both trade and investment. Foreign investment plays a key role in erecting global value chains through which the bulk of international trade takes place.
Given this inextricable economic linkage between trade and investment, it is not surprising that the UK is keen on having an investment chapter in the FTA. This chapter will contain provisions limiting the exercise of the State’s public power vis-à-vis foreign investment. Thus, foreign investment will be protected from unlawful expropriation, and enjoy non-discriminatory, fair and equitable treatment. In fact, the UK’s House of Lords has recommended that the British government not just have an investment protection chapter, but also include investor-State dispute settlement (ISDS) — a mechanism that allows foreign investors to sue host States for alleged treaty breaches before international arbitration tribunals — in its FTA with India. The fact that British firms such as Vodafone and Cairn Energy have been at the receiving end of a high-handed exercise of public power by India in the form of the imposition of taxes retroactively has only strengthened the belief in having an investment protection chapter.
Another reason for the UK’s eagerness to include an investment chapter in the FTA is India’s unilateral termination of the bilateral investment treaty (BIT) with the UK in March 2017. This termination created a vacuum in international law on foreign investment flows between the two countries. Consequently, any British or Indian investment made in each other’s territory after March 2017 does not enjoy protection under international law, exposing such investment to high regulatory risks.
The UK’s desire to include investment protection features in the FTA can also be corroborated by looking at its most recent trade treaties with Australia and New Zealand. Both these FTAs contain an investment chapter that comprises provisions such as expropriation, fair and equitable treatment, and so on. The UK’s other recent FTAs with countries such as Turkey, Vietnam, and Singapore do not contain an investment chapter. But unlike India, the UK has BITs with these countries. Thus, an international law framework to protect investment is available.
However, India’s stand on including an investment chapter in the FTA remains ambivalent. If India’s recent FTAs with Mauritius, the United Arab Emirates, and Australia are anything to go by, India is ostensibly not keen to include an investment protection chapter in the FTA with the UK. Since India was stung by several ISDS claims, the government has adopted an overly cautious approach toward investment protection. This needs to change for two reasons. First, the UK is the sixth largest exporter of foreign capital to India. To assuage its concerns over regulatory risks, India should include an investment protection chapter in the FTA, without which it risks losing some of this foreign investment. Second, the India-UK investment relationship is no more a one-way street. In 2020, the stock of foreign direct investment from India in the UK was £10.6 billion as against £14.9 billion from the UK in India. Indian companies operating in the UK need protection, too, under international law from potential capricious British regulatory behaviour.
Given the new global consensus on investment treaties, the UK will not insist on an investment chapter that prioritises foreign investment protection over the State’s right to regulate. Thus, India needs to shed its anxieties and negotiate with aplomb for a balanced investment chapter as part of the FTA. This will also be a step in the direction that the parliamentary committee on external affairs recommends the government take by establishing investment treaty relationships with major capital-exporting countries.
Prabhash Ranjan is professor and vice-dean, Jindal Global Law School, OP Jindal Global University The views expressed are personal
