India-EFTA investment chapter: A new beginning
On March 10, 2024, 16 years, and 21 formal rounds of negotiations later, India and the European Free Trade Association (EFTA) member states signed the INDIA-EFTA Trade and Economic Partnership Agreement (TEPA). The deal, which marks a significant incremental step in the long-standing relationship between India and the EFTA states (which include Switzerland, Iceland, Norway and Liechtenstein), is also a major step forward for India in its approach to bilateral trade agreements.
The chapter on investment promotion and cooperation (Investment Chapter) in the TEPA is a first-of-its-kind, wherein a partner country has undertaken a unilateral commitment towards promoting foreign direct investment (FDI) and facilitating job creation in India by a certain specified quantum. The commitment from EFTA is to promote investments to increase the FDI stock from EFTA countries in India by $50 billion over the first 10 years and another $50 billion in the following five years. Additionally, it will aim to create one million direct jobs in India through such investments.
In the same spirit, India and the EFTA states have also agreed to cooperate on skill development, vocational and professional training, and technology collaboration in areas of mutual interest. These include, for example, earth science, telemedicine, STEM (science, technology, engineering and mathematics), healthcare, biotechnology, digital technology, renewable energy, clean technology and sustainable metal making.
Free Trade Agreements (FTAS) have traditionally helped private enterprises benefit from increased, transparent and predicable access to markets and conditions of operation, to enhance exports, consumer base, scale and profits, and to facilitate investments. The commitments to provide such access and protection are undertaken by the governments on either side, and there is no commitment from private enterprises on trade or investment on the basis of the FTA. The routine investment treaties (commonly known as the Bilateral Investment Treaties or BITS) that the world has seen since they were first conceptualised in the mid-1900s are also devoid of any specific outcome on investment.
In contrast, with the Investment Chapter of the INDIA-EFTA TEPA, a novel attempt has been made for the first time to set out concrete steps towards materialising the economic benefits of a bilateral trade agreement, including with commitments directly related to efforts by private enterprises. While the commitment to nudge investors has been taken by the EFTA governments, the targets on investment and job creation are to be met by FDI flows from private enterprises of EFTA countries into India. The commitments do not include investment from sovereign wealth funds (SWFS) since there is political sensitivity around the deployment of these funds. However, a lack of obligations on SWFS does not preclude them from participating and getting counted in the overall targets.
EFTA governments have committed to promoting investments, and facilitating job creation (as a result of such investment), as well as cooperating on technology collaboration between EFTA and India, by nudging their private investors to look towards India, aligned with the spirit of the TEPA. India has agreed to attempt to ensure that its investment climate is conducive to such activities, and to set up dedicated liaison desks for investors from EFTA countries to be able to discuss any issues they face with their proposals and investments in India. However, India has not committed to binding obligations on its investment policies or regulatory framework.
Another notable feature of this chapter is on the dispute settlement procedures. The chapter does not provide access to the state-to-state dispute settlement mechanism of the TEPA, which is a bilateral mechanism set out to resolve disputes under the FTA. Such an exclusion specifically precludes involvement of third parties in discussions on matters related to the chapter, including through the establishment of arbitration panels or tribunals. Since no investment protection benefits are being offered to the investors, the standard investorstate dispute settlement (ISDS) process, a mechanism by which investors can take legal recourse against the Indian government, has also not been included in this chapter.
Instead, progress on the investment and employment targets will be monitored at five-year intervals by government representatives from both sides. The review process will also account for any force majeure events to provide EFTA states the comfort of reasonableness of expectations. A grace period, as required, has also been built in to allow EFTA states an additional opportunity to meet targets.
A three-tier government-to-government consultation mechanism, involving senior officials on both sides, with its final tier at the level of the ministers, has been included, to find a mutually agreeable solution in case targets have not been met. In this circumstance, India will be able to suspend concessions given to EFTA states in trade of goods, proportionately, and with a view to rebalance the concessions provided to EFTA states over this period. India’s ability to take such remedial measures unilaterally is unprecedented.
Both sides understand that governments cannot make definite commitments for investment on behalf of private investors. This is not India’s expectation from this chapter, either. However, the intent of any TEPA is to increase trade and investment, in line with the benefits offered by the TEPA. In this context, it is definitely possible for governments to promote investments by sufficiently nudging investors to actively increase investments in line with the spirit of the TEPA. This is the shared idea of this chapter.
The inclusion of such commitments in an FTA indicates a new approach by India in its trade and investment relations with partners. With this chapter, India sends out the message to other partners that it is looking at negotiating balanced trade agreements with its partners, and will seek to ensure that there is sufficient economic benefit to it from any future bilateral agreements. At the same time, EFTA states have also exhibited an acknowledgment of need for this balance, and a willingness to collaborate on innovative outcomes with significant and trusted trading partners to ensure that their FTAS are balanced in benefits to both sides – heralding a new beginning of international treaty making.