Bilateral investment treaties: From why to how
by Shubho Roy and Ajay Shah
Business Standard, 6 July 2026
Why bilateral investment treaties
The economics community has woken up to the errors of our ways on bilateral investment treaties (BITS). In essence, it's efficient for the Indian state to pay out a chunk of money every year in exchange for stabilising very large sums of money involved in foreign investment (see this reasoning from 2021). It is in India's best interests to offer deep protections to foreign investors, even greater than those promised to domestic investors. The numbers we are looking at are perhaps payments of $20 billion a year, to aggrieved foreign investors, in exchange for the present stock of foreign investment of $2 trillion with the desire for much higher values in the future. An Indian state which faces payouts for its own institutional failures is also one that will be more inclined to undertake policy reforms, which would yield outsized gains for society.
Why do countries sign investment treaties at all? Nobody demands a treaty before building a business in Germany. German courts, German administration and German politics inspire confidence on their own. Investment treaties exist because developing countries have poor state institutions. The treaty is rented credibility, a way to attract capital today while the domestic institutions are as yet weak. Before capital arrives, a government has every incentive to offer good terms, but there is a credible commitment problem. After the capital is sunk in a solar farm or a mine, the bargaining power reverses, and the same government has every incentive to revise the terms. Investors know this in advance. A government that cannot make its promises binding will find that investors demand higher required returns. This makes many projects unviable, and investment fares poorly.
With these basics in place, we should pursue two questions. How do we avoid a repeat of problems like the White Industries case? And, how quickly will private investors respond to better BITs?
How to do payouts better?
Rented credibility is not a free lunch. Consider what actually happened in the case of White Industries. An Australian firm won a routine commercial arbitration against a public-sector company. Enforcement then sat in Indian courts for nine years. An international tribunal held that this delay breached our treaty obligations, and the Indian state paid. In conventional Indian reasoning, this is seen as a treaty malfunction. It was the opposite. The tribunal precisely served the function of the treaty: It attached a price to the failure of our domestic institutions. The award was a feature, not a bug. The Indian state response was to shoot the referee.
When we go back to treaties, we should think more about how this will work out in future events. It will help to have a pre-funded, ring-fenced pool to honour adverse awards. This ensures prompt payment so that investors don't need to threaten to attach Indian assets abroad in order to collect what a tribunal has awarded. And it works as a bond: Because every drawdown is visible and must be replenished from the Budget, every breach acquires an immediate fiscal cost that Parliament and the Press can see, rather than a litigation liability buried for a decade.
At a conceptual level, all of us need to understand that there will be a regular flow of payments, owing to BITs, which is the insurance premium that is required to achieve the privilege of inbound foreign investment.
The journey to acceptance by investors
A treaty must convince two parties in sequence. First the counterparty government, and, second, that country's private investors. The first is an easy hurdle. Governments sign treaties for many reasons, including diplomatic ones. But capital does not follow signatures. A well-drafted treaty gets India past the first audience. The second audience does not read the treaty text; it cares about the track record.
The track record of the Indian state is not good. We amended tax law retrospectively, reaching back half a century, to reverse a Supreme Court judgment. We withdrew from 75 treaties after losing cases under them. We upended settled tax positions. We changed duties in ways that rewrote the economics of investment already made. Each decision was individually defensible to someone in a hurry. Together they form a pattern, and investors have priced that pattern. Credibility is cheap to keep and expensive to rebuild.
Put yourself in the investor's chair. A new treaty is on offer. What comfort does it give when the next revenue emergency arrives, or the next court ruling goes against the government? The investor remembers that retrospective tax was repealed in 2021 only after enforcement actions abroad made it untenable. A retraction under pressure signals much less than a promise never broken. The investor also remembers that the last set of treaties did not survive contact with adverse awards. The new treaty will be read against this history, not in place of it.
What would change the calculus? We need to do a genuine BIT text that promises deep protections and not a niggardly text, so as to portray sophisticated policy capabilities. And we should fund the compensation pool. This machinery should hum along for a decade without friction, with a steady flow of insurance payouts that are free of nationalism or outrage. We will build credibility through deeds that match the words of the BIT, for years on end. Investors will only gain confidence slowly. It will take decades of good behaviour to reduce the Indian risk premium materially.
The journey to a better Indian state
This approach to bilateral investment treaties is useful in a steady state even when there is zero progress on state building in India. By giving foreigners liquidated damages against expropriation, we attract more foreign investment, which is good for economic growth.
If the Indian state engages in a flow of reforms, this insurance cost would actually go down. This requires work on taxation, contract enforcement that concludes within a commercial lifetime, and predictable regulation. None of this can be done by the finance ministry alone. Treaty promises are made by one corner of the Union government, but they are broken across the Indian state: By tax administrations, by independent regulators, by state governments whose electricity distribution companies sign the power-purchase agreements with a solar farm. A treaty places the Union government in the position of being an insurance provider, while using all its powers to foster an economic reforms process in parallel.
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