An effort to reset India’s model bilateral investment treaty (BIT) began last year with the budget noting the need to make it investor-friendly, streamline dispute resolution and protect outbound investments.
Foreign direct investment (FDI) is a significant driver of economic growth. Both the 2025-26 and 2026-27 budgets emphasized the need to ensure people-friendly and trust-based regulatory investment frameworks appropriate for the 21st century. This applies equally to domestic and foreign investments.
FDI is estimated to constitute only around 2% of India’s gross domestic product (GDP). According to World Bank estimates, gross fixed capital formation (GFCF) was 29.6% of GDP in India in 2024 and gross domestic savings were close to 30%.
While GFCF data would include investments by foreign-controlled domestic entities as well, what’s clear is that capital of domestic origin is higher in India and nurturing it is as important as attracting FDI.
Rationalizing regulations and creating single-window clearances for the grant of permits, apart from weeding out over-prescriptive requirements, inspections and needless compliances, particularly for manufacturing and infrastructure development, are all essential to attract investment from within India or elsewhere.
Investment promotion and facilitation, the availability and ease of access to finance and infrastructure facilities, regulatory issues governing competition, taxation and norms of corporate governance, and the speedy resolution of disputes also shape the decisions of both domestic and foreign investors.
In this context, BITs are important signalling instruments, but they alone won’t unleash foreign capital inflows. Policy stability, which is highly valued by investors, can be guaranteed only by internal reforms. India was party to over 80 BITs from the early 1990s till about 2016. Their mere existence did not enhance FDI flows; economic liberalization from the mid-1990s played a larger role. Similarly, the termination of most of our BITs in 2016 did not hurt FDI flows.
The key reason for the mass termination of most of India’s BITs was a rise in the number of high-stake disputes, with India losing some of them. The disputes arose because of a special dispensation given to foreign investors that allowed them recourse to foreign-seated tribunals. Called Investor-to-State-Dispute-Settlement (ISDS), this is perhaps one of the most controversial aspects of India’s BITs.
The model BIT of 2015, in its attempt to mitigate the risks of ISDS, doubled down on guardrails, an approach that has been criticized for over-correction. For example, four of the ISDS disputes were over India’s amendment of its income tax laws that made taxation of indirect share transfers applicable retrospectively.
The model BIT’s response was a complete carve-out of taxation measures. Most modern BITs preserve tax sovereignty, but do not carve them out entirely from the BIT discipline. Issues relating to narrow definitions of investment and the 2015 model’s five-year mandate for exhaustion of domestic legal remedies before ISDS can be invoked are also contentious.
Such an approach has led to protracted negotiations and digressed from the key question: what sort of model does India need to assure investor protection?
The Investment Cooperation and Facilitation Treaty model adopted in India’s 2020 agreement with Brazil presents the most sensible way forward. Brazil shunned traditional BIT models and ISDS, and the deal’s investment facilitation model has served it well. Instead of ISDS, it provides for prompt redressal of investor concerns through a time-bound ombudsman channel.
Bigger disputes can be escalated to a joint committee of the state parties bound by the agreement, and state-to-state arbitration exists as the final recourse. By UNCTAD’s global rankings of FDI destinations, Brazil rose to 5th place in 2025 from 7th in 2024, while India went up from 15th to 11th.
As signalling instruments, BITs can provide foreign investors greater confidence. However, ISDS need not be a part of BITs, as India’s experience with Brazil shows.
There is also no dispositive study demonstrating a causal link between ISDS and investment flows. ISDS places the assessment of a sovereign state’s actions before ad hoc foreign tribunals that may have a limited understanding of national laws and policies. Further, making ISDS available only to foreign investors discriminates against domestic ones.
The outcomes of ISDS proceedings can also be highly unpredictable, as seen in the over 15-year dispute between Antrix Corporation (a commercial arm of the Indian Space Research Organisation) and Devas Multimedia over the cancellation of a contract involving S-band spectrum transponder capacity on satellites.
Two ISDS arbitration proceedings were initiated and India lost both. Each of these ISDS tribunals refused to accept India’s defence that its actions were justifiable on grounds of national security. India is now facing enforcement action across several countries (including the US, UK, Canada, France and Australia) for tribunal awards that exceed $1 billion.
An argument that is sometimes raised is that ISDS is needed for increasing outbound FDI by Indian investors, but this lacks substance. India’s topmost destinations for outbound FDI are Singapore, the US, UAE, UK, Mauritius and the Netherlands—a clear indication of the diligence exercised by Indian investors in choosing destinations that have credible legal systems and rule of law to ensure protection.
Carefully negotiated contracts, including commercial arbitration, can effectively address private-sector concerns.
India needs an environment that says ‘welcome’ and BITs that enable the facilitation of investments and prevention of disputes. A revised model BIT should work towards that objective.
These are the authors’ personal views.
The authors are partners, Clarus Law Associates.