It took 16 years of negotiations for India and the European Free Trade Association (EFTA) — comprising Switzerland, Norway, Iceland, and Liechtenstein — to clinch a free trade agreement (FTA). A crucial aspect that has generated immense buzz is that the FTA will bring foreign direct investments (FDI) worth $100 billion to India in the next 15 years. Furthermore, EFTA countries, through their FDI, shall generate one million direct jobs in India within 15 years of the FTA coming into force. While these are laudable objectives written into the text, the devil always lies in the details.
Does the FTA obligate the EFTA countries to invest $100 billion in India in 15 years? Not really. The obligation imposed on the EFTA countries, enshrined in Article 7.1(3)(a) of the FTA, is to “aim to” increase FDI to $50 billion within 10 years of the FTA coming into force followed by another $50 billion in the succeeding five years. Likewise, Article 7.1(3)(b) provides that the EFTA states shall “aim to” facilitate the generation of one million jobs. Furthermore, these objectives, captivatingly, are linked to India sustaining a nominal Gross Domestic Product (GDP) growth rate of 9.5% for the next 15 years.
In legal terms, these articles codify what is known as an obligation of conduct — an obligation to make an honest endeavour towards achieving a goal, notwithstanding the outcome or the result. This differs from an obligation of result, which would require achieving a specified outcome. The EFTA countries are only under a legal obligation to make an honest effort to invest $100 billion and generate one million jobs in India. They are not required to realise these outcomes. Nonetheless, incorporating such specified obligations of conduct in the FTA’s investment chapter is pathbreaking.
The other aspect that has created enormous excitement is that India can withdraw tariff concessions given in the FTA to the EFTA countries if the promise of $100 billion of investment and one million jobs does not materialise. While Article 7.8 recognises such rebalancing of concessions, it is not as straightforward as many suggest.
The FTA provides a mechanism to review whether the obligations of conduct mentioned in Article 7.1 are being complied with. This review will not be done by any judicial body but by an investment sub-committee (ISC) comprising government representatives of India and the EFTA countries. The ISC shall undertake the review in three stages — no later than five years, 10 years, and 15 years after the FTA comes into force. If, after 15 years, as provided in Article 7.7(6), “India considers” that “the EFTA States have not fulfilled the obligations to promote investments”, the former may request consultations with the latter. Using the word “considers” in Article 7.7(6) gives India the right to determine whether the agreement’s objectives have been satisfied unilaterally. However, in making this determination, India must answer whether EFTA states have made an honest endeavour to invest in India, not whether they have actually invested the said amount. The difficulty in determining whether a country has violated its obligation of conduct, as against an obligation of result, is the non-availability of benchmarking. It will be arduous to make a case that the EFTA countries have not tried to invest in India. What if India fails to maintain the required nominal GDP growth rate?
Furthermore, even if India makes a unilateral determination that the EFTA states have not tried to invest in India, withdrawing tariff concessions is not automatic. India and the EFTA states shall enter into consultations to resolve the differences through different graded mechanisms. As per the time periods provided for these consultations in Articles 7.7(6) to 7.7(12), it may take around five years. Only if these consultations fail, India has the right to take “temporary” and “proportionate” remedial measures in the form of withdrawal of tariff concessions given to the EFTA States. In short, any rebalancing of concessions can occur only after 15 years of the FTA coming into force and around five years spent diplomatically settling differences. This, too, is subject to several other requirements. Despite these limitations, provisions related to rebalancing concessions are a welcome development, and India should use such a template for its other FTA negotiations.
The final point is about investment protection. The India-EFTA FTA does not contain investment protection features. So, there are no provisions promising protection from unlawful expropriation, fair and equitable treatment, national treatment and most favoured national treatment. The lack of these promises assumes significance because India’s bilateral investment treaties guaranteeing investment protection to investors of countries like Switzerland and Iceland stand unilaterally terminated. Can India extract such large amounts of FDI from these countries without promising investment protection under international law?
Prabhash Ranjan teaches at the Faculty of Legal Studies, South Asian University. The views expressed are personal
