Why in News?

• The Union Finance Ministry is reviewing India's 2015 Model Bilateral Investment Treaty (BIT) to make it more investor-friendly while safeguarding India's sovereign interests.
• The revised Model BIT is expected to be placed before the Union Cabinet soon.
• The review gains significance amid rising Overseas Direct Investment (ODI) by Indian firms, changing global investment patterns, and declining net Foreign Direct Investment (FDI) into India.

What’s in Today’s Article?

• Why the Model BIT is Being Reviewed?
• A New Dimension - Protecting Indian Investors Overseas
• What is a Bilateral Investment Treaty (BIT)?
• Key Issues in the Existing 2015 Model BIT
• FDI and ODI Trends
• Reasons Behind Declining Net FDI
• Significance and Challenges for India

Why the Model BIT is Being Reviewed?

• The government is reassessing the 2015 Model BIT based on the -
  • Experience from past investment treaty negotiations.
  • Global best practices in investment protection.
  • Increasing outward investments by Indian companies.
  • Need to attract higher-quality FDI without compromising regulatory autonomy.
• Unlike earlier years when India primarily sought to protect foreign investors, negotiations must now also safeguard Indian companies investing abroad.

A New Dimension - Protecting Indian Investors Overseas:

• According to the Economic Affairs Secretary, rising Overseas Direct Investment (ODI) has fundamentally changed India's negotiating priorities.
• Key implications:
  • Indian companies are increasingly investing in foreign markets.
  • Future BITs must provide investment protection for Indian enterprises abroad.
  • Certain investor-protection clauses, earlier viewed cautiously, may now be retained to secure Indian investments overseas.
• This marks India's transition from being primarily a capital-importing economy to one that is also a significant capital exporter.

What is a Bilateral Investment Treaty (BIT)?

• A BIT is an agreement between two countries to -
  • Promote and protect investments made by investors of each country.
  • Guarantee fair and equitable treatment.
  • Protect against unlawful expropriation.
  • Enable Investor-State Dispute Settlement (ISDS) through international arbitration when disputes arise.
• BIT vs trade agreement:
  • Under BIT, an investor can directly sue the host government through arbitration. However, disputes under trade agreements are settled between governments (State-to-State).
  • BITs focuses on investment protection, while trade agreements focuses on trade in goods and services.
  • BITs involve greater legal exposure for sovereign governments, while trade agreements provide greater diplomatic flexibility.

Key Issues in the Existing 2015 Model BIT:

• One of the most debated provisions is the Local Remedies Clause, which requires foreign investors to exhaust domestic legal remedies for five years before approaching international arbitration.
• Concerns:
  • Considered restrictive by several developed countries and foreign investors.
  • Has slowed India's ability to conclude new BITs.
  • Many countries have been reluctant to accept the existing Model BIT.
• The government is now reviewing not only this provision but several other clauses and is considering a negative-list approach.
  • Under this, only critical sovereign concerns would remain non-negotiable while greater flexibility is offered elsewhere.

FDI and ODI Trends:

• Gross FDI: Increased from $82 billion (2020-21) to a record $95 billion (2025-26).
• Net FDI: Declined sharply to nearly $44 billion (2020-21), and less than $1 billion (2024-25), while recovering to about $7 billion (2025-26).
• ODI: Indian companies' overseas investments increased substantially. For example, from $11 billion (2020-21) to $28 billion (2024-25), and further to $34 billion (2025-26).
• The fall in net FDI has also been driven by large-scale repatriation of foreign investments, exceeding $105 billion during 2024-25 and 2025-26.

Reasons Behind Declining Net FDI:

• According to Chief Economic Adviser V. Anantha Nageswaran,
  • Global supply-chain localisation has intensified.
  • Developed countries are promoting onshoring of manufacturing.
  • Indian firms increasingly invest abroad to establish a local presence rather than export alone.
  • Rising ODI reflects the growing competitiveness and global expansion of Indian businesses.
• Government's stand on enforcement agencies:
  • Responding to concerns that agencies such as the Enforcement Directorate (ED) discourage investment, the government stated:
    • Gross FDI has continued to reach record levels.
    • Enforcement actions are becoming more transparent and procedure-driven.
    • Frivolous or excessive actions are being curtailed.
    • Investors primarily seek stable policies, predictable regulation and attractive returns, all of which India aims to provide.
  • The government also emphasised the need for greater investor outreach to address any remaining concerns.

Significance and Challenges for India:

• Significance of revision:
  • Helps modernise India's investment treaty framework.
  • Improves India's attractiveness as an investment destination.
  • Protects growing overseas investments by Indian companies.
  • Supports India's long-term Balance of Payments (BoP) stability.
  • Balances investor confidence with regulatory sovereignty.
  • Strengthens India's integration into global investment and production networks.
• Challenges ahead:
  • Balancing investor protection with sovereign regulatory powers.
  • Making BITs acceptable to developed countries while safeguarding national interests.
  • Preventing excessive investor litigation under ISDS.
  • Reversing the decline in net FDI amid changing global investment patterns.
  • Ensuring policy certainty without compromising public-interest regulation.