India-UAE Bilateral Investment Treaty (BIT) Strengthens Economic Relations

India-UAE Bilateral Investment Treaty (BIT) Enhances Economic Cooperation

The Bilateral Investment Promotion and Protection Agreement (BIPPA) between India and the United Arab Emirates ended on September 12, 2024, and was replaced on August 31, 2024, by the Bilateral Investment Treaty (BIT). The goal of this new BIT is to improve economic cooperation with the UAE, which has invested $19 billion between 2000 and 2024 and accounts for 3% of India’s total foreign direct investment.

This move comes as India faces a lull in bilateral treaties since the introduction of the 2016 model BIT. Despite contesting several BIT claims and facing unfavorable outcomes in high-stakes disputes, the model BIT has been criticized for its rigid, one-size-fits-all approach, resulting in the termination of 68 out of 74 BITs by 2015. This rigidity has contributed to a 24% decline in FDI equity inflows and a 15.5% overall contraction in FDI between April 2023 and September 2024.

With aspirations for a $5 trillion economy, the Indian government pledged to revive economic ties in its 2024 Interim Budget. The India-UAE BIT is an important step in this direction, showing a more flexible approach by amending some provisions from the Model BIT. For example, the five-year requirement for investors to seek local remedies before resorting to international arbitration has been reduced to three years under the new treaty. The change could affect the ongoing negotiations, particularly with regard to a free trade agreement with the UK.

Another significant development was the introduction of a negative covenant preventing investors from using third-party funds for disputes. Historically, third-party financing was viewed unfavorably under colonial legal principles, but recent changes in legal interpretations and expert panel recommendations have begun to change this perspective in India. Thus, a ban on third-party financing in investor-state conflicts may conflict with emerging practices.

The BIT also broadens the scope of trade by including portfolio investments, which were previously excluded under the model BIT. This inclusion allows investors with financial holdings to seek resolution under the BIT, potentially exposing India to more disputes regarding financial instruments, which may not significantly aid economic development.

Ultimately, time will tell whether the agreement successfully balances foreign investment incentives with the state’s regulatory rights. Current discussions on free trade agreements with the UK, the European Union and countries such as Hong Kong, Australia and Saudi Arabia indicate a serious pursuit of trade relations. Given India’s current challenges with treaty enforcement and geopolitical issues, these developments should be viewed positively as efforts to build a robust cross-border economic framework, one BIT at a time.