India’s Dollar Economy Part 2 —Why Did Rs 20 Lakh Cr ($230 bn) Flee BIT by BIT? | The Quint

[00:00:00] Hello, this is Raghav's Take. Now over the last six years India got $366 billion of fresh inward foreign direct investment, FDI. But an astronomical $230 billion were also repatriated or disinvested out of India. Now in part one we took an accommodating stance, accommodating, we called it perhaps a non-negative outcome.

[00:00:27] But why did such a massive outflow occur? And does it remain a non-negative when we dig deeper? Now India's economy was exuberant, euphoric for the first four years of Prime Minister Modi's tenure until about middle of 2018. Global crude prices crumbled from $100 a barrel to below $50 a barrel.

[00:00:53] And since the government did not lower pump prices, it reaped an unusual tax bonanza. Inflation contracted to 5%. FDI foreign direct investment inflows nearly doubled to $60 billion. Aadhaar created a public digital stack to make direct beneficiary payments into jandhan or people's wealth accounts.

[00:01:19] India's real GDP growth leapt to over 8%, the fastest among major economies. The non-cassiccading goods and services tax GST was steamrolled nationally. India's Goldilocks economy in those four years lulled everybody into a delightful exhilaration. The conflicts and nightmares inherited from the Manmohan Singh era were forgotten.

[00:01:47] No, no not forgotten. Hold on. The Indian state rarely forgets a defeat or defiance. Now let's go back to 2007. That's when Vodafone's Netherlands Holding Company had bought an $11 billion stake in Hutchison SR's Indian Telecoms operations. India's taxman slapped a penal demand saying Vodafone should have paid a withholding tax.

[00:02:17] Vodafone appealed and won in the Supreme Court. An irked government changed the law retroactively in 2012, initiating a fairly vicious action to disgorge $2.7 billion or 22,000 crore rupees from Vodafone. And then Vodafone, in their defence, invoked the 1995 India-Netherland Business Investment Treaty, BIT, at The Hague in 2014.

[00:02:48] India's tax authorities had tested blood and prowled for other prey. So therefore earlier, once again in 2006, UK-based Cairn Energy PLC had reorganised its business in India. Using the retroactive clause, the taxman seized Cairn's assets, slapping a $1.4 billion, that's 10,247 crores, that kind of demand.

[00:03:15] Cairn invoked the 1994 UK-India BIT to appeal at an international tribunal. And there's a third example. Deutsche Telekom invested $100 million to buy a 20% stake in Devas Multimedia, which had bought S-band spectrum for orbital satellites from Antiriksh.

[00:03:38] And Antiriksh was the commercial subsidiary of Indian Space Research Organisation ISRO, which is a state of authority. But a media campaign of alleged corruption terrified the Manmohan Singh government, which abruptly cancelled the deal. Deutsche sued under the India-Germany BIT at Geneva. The Modi government inherited these international treaty minefields.

[00:04:07] So it quietly instigated a fissure in India's global treaty architecture in December 2015, which was operationalised early the following year. So is called the 2016 Model BIT framework. Now the slim fault line, you know, which was highly technical and legally obtuse, it appeared bang in the middle of the first four years of a Modi euphoric economy. Therefore, it was barely noticed.

[00:04:37] But it's a law of nature that the most destructive earthquakes and tsunamis begin with a tiny crack, a small tremor somewhere on or in Mother Earth. To obviate a Vodafone or Cairn like challenge to the sovereign, the 2016 Model BIT framework virtually gave the government a divine right to tax. It was made non-justiciable under any treaty.

[00:05:06] Article 2.4 removes taxation laws and measures, including measures enforcing taxation obligations from treaty purview. The divine right extended to characterising and defining any disputed measure as a taxation matter, thereby making it unchallengeable. Article 15 of the model document stunned foreign investors.

[00:05:34] The government had ordained a five year limitation on invoking any overseas court. Practically, a foreign investor was condemned to sue and agitate his case against the Indian state only in an Indian court or an Indian tribunal for five years before he could escalate to a foreign body. Article 3.4.4. Article 3 defanged the foreign investor on fair and equitable treatment.

[00:06:05] Under earlier treaties, he could sue the Indian state for violating legitimate expectations, regulatory stability and fair conduct. These soft protections were now outlawed. Now a foreign investor had to prove hard infractions like denial of justice, fundamental breach of due process, targeted discrimination and manifestly abusive treatment.

[00:06:32] The threshold and burden of proof had moved infinitely higher. The odds of winning against the Indian state in an Indian court got materially worse.

[00:06:45] In an ironic sense, the government got vindicated a few years later because Vodafone, Cain and Deutsche Telekom, all three won their cases with resounding damages inflicted on India at international tribunals. Had they fought under the 2016 treaty model, their chances would have been whittled.

[00:07:11] A triumphal government had ensured that pesky litigants like them were disarmed. So the government could say, all's fair in love and war. So after aggressive legal drafting, it was time for coercive action on the ground. India swiftly moved to terminate 58. Yes, 58 global treaties whose initial terms had expired.

[00:07:40] These included major European countries, UK, Germany, France and the Netherlands, who had old time tested documents in force. Another 25 BITs, 25 BITs were killed in the following years. A major trading partner like the United States, who had been negotiating a BIT in the wake of the Eddie Nuclear Deal of 2008, pulled back.

[00:08:08] US was stung by the new treaty construct. It's perhaps a telling rebuke of the 2016 model BIT framework that no major country has signed on after the abrupt cancellations, despite a decade, a decade of tortuous negotiations.

[00:08:31] And the UAE recently agreed to a new treaty only after the government relented on the five year clause, replacing it with a three year clause on domestic limitation. India has now conceded that we will relook at the recalcitrant treaty model. But huge damage has occurred.

[00:08:57] Simon Hartman and Rox Pruke, they examined 44 BITs terminated by India between 2013 and 19. And hold your breath. Their studies showed that FDI fell by 30% from the countries adversely affected by the treaty change. So is there a grimmer reality to contend with here?

[00:09:19] Perhaps these fleeing foreign investors felt too unprotected, vulnerable and rudderless without earlier treaty safeguards. At least some of them chose to take the money out. A total, a total of 20 lakh crore rupees. That's equal to 230 billion dollars over six years.

[00:09:47] Instead of reinvesting that money in India. It's a sobering, withering thought for India's policy makers. Especially those who authored a somewhat cavalier and trenchant 2016 model BIT framework. This was Ragav's take today.